subject: Knowing Your Business More With Accounting [print this page] All businesses regardless of size and shape, use accounting for their financial system. Maintaining a simple check and balance system will go a long way in helping your business.
Managing the accounting aspect of your business can be fun once you start appreciating the challenges that go along with it as well as the benefits derived from the exercise. Good accounting will help you be on top of things on your business.
If you feel hiring an accountant would be a bit too much since you are just starting, then it's time for you to familiarize yourself with accounting for your own use. Accounting will give you a good grasp of the flow of financial information within your business. And in the process, it will help you make sound decisions in relation to your operations.
The difficulty in using accounting is that first you have to be familiar with its vernacular. Thus, it entails some effort on your part to learn something new and unfamiliar. Accounting is basically known for its double entry accounting system wherein for every entry comes in pairs: debit and credit. For every value received (debit to assets), there is a value given up in exchange for that (credit to cash or liabilities).
To start a simple accounting of your business, you have to keep a book. This is called bookkeeping in accounting terms. It means you have to make a record of all your business transactions whether buying something for the shop, paying bills or selling appliances from the your store. Some use a ledger or a record book for this purpose.
Now that you've got your "book", its time to learn about the three basic elements for accounting:
1. Assets - these are things of value owned by your business. Examples are cash (from sales), accounts receivables, inventory, land, building, and equipment.
2. Liabilities - these are debts of your business to other people, businesses or financial institutions like banks or lending companies. The system recognizes these accounts with words followed by "payable" like accounts payable and loans payable. This also includes taxes and insurance payments.
3. Owner's Equity - this is the amount the business owner is entitled to receive of whatever is left of the assets after the liabilities have been taken. It is sometimes called net assets.
All three elements form the accounting equation:
Assets = Liabilities + Owner's equity
And since the equation must always be balanced, in the end of the books the amount of the assets should be equal to the owner's equity. If you cannot balance it, you must have missed something or your business assets are being funneled to the wrong account.
If this accounting work sounds too tedious for you, you can buy software that can do the record keeping of your business. Some offer the full accounting service in their programs, from trial balances to printing financial statements. However, you still have to manually type in the accounts on your computer. If you do have a basic knowledge of accounting, your program can still give you the wrong information.
Accounting is a necessary tool for any business. The more you understand about how it works, the better it can help you improve your business.
