Running a business is a lot more than just being able to find customers and get them to buy some product. You also need to be able to network with other businesses around you, talk to suppliers and other wholesalers to secure good deals on whatever products you intend to sell, effectively manage a potentially large and diverse workforce, and most importantly, you need to be knowledgeable and capable in dealing with your business’s finances.
Fundamentals of Business Accounting
Even if you would prefer to hire people to deal with all your accounting and bookkeeping needs, it’s still very important for you to have a basic understanding of how both accounting and bookkeeping work in regards to your business. And if you’re curious as to why bookkeeping and accounting aren’t being labeled as one thing, that’s because there is actually a fine distinction between the two.
Related, Yet Different
You can consider this resource from Shopify to be your accounting 101 lesson in how bookkeeping and accounting can be seen as two sides to the same coin. They are irrevocably connected, functioning together to accomplish the goal of providing you with all the financial information you need to effectively run your business. But they are separate in the way they actually work to provide that information.
According to Find Law, bookkeeping is the first step. It’s the process of actually recording each and every financial transaction your business deals with, both outgoing and incoming. Additionally, bookkeeping is also responsible for taking those records and extracting the critical numbers and information needed by accounting to figure out how well your business is doing.
Once all the information has been pulled out of the records, accounting takes over and works on interpreting and analyzing that information so you can see exactly how well your business is doing financially. Using those analyses, you can look over daily, weekly, monthly, and quarterly reports to see the progress of your business’s finances over time, and then plan out a course of action to continue growing and expanding your business.
What to Record and Where
Before you can start looking at reports and planning out a course for your business, you need to have the financial records in the first place. And to get those financial records, you need to organize and set up the proper accounts and systems. While you can just use a single recording system to record all your business’s financial transactions in one place, you’ll quickly see how massive that one ledger could get and how complex it may become. As such, it’s a great idea to separate all your transactions into separate accounts and ledgers to make recording everything easier and clearer.
Score gives an excellent list of ten of the most common account and ledger types you should definitely spend some time looking into. This list encompasses accounts for;
- Payroll Expenses – A business’s single largest expense is in payroll, you want to keep a close eye on this stuff to ensure nothing gets screwed up.
- Owner’s Equity – If you don’t invest any of your own, personal money into your business, then you don’t need an account to record any of that. But if you do, or if you’re a co-owner and others do, this helps track that info.
- Inventory – It’s kind of hard to sell something when you don’t know what you have in your stockroom.
- Cash – Many places split the cash account into Cash Receipt and Cash disbursement accounts to further separate and organize bookkeeping.
- Accounts Payable – Aren’t bills fun? Well, they’re even more fun for your business, and you’ll need to keep a close eye on them all.
- Loans Payable – While loan payments are technically bills in their own right, it’s always a good idea to track loan information separately to ensure you keep on top of it.
- Retained Earnings – This sort of account is for keeping track of all the profits that get put back into the business for further growth and expansion.
- Accounts Receivable – You’ll only need to deal with an account like this if your business has to deal with delayed payments and giving customers credit.
- Sales – It doesn’t matter how many sales you make if you don’t know the numbers.
- Purchases – Tracking all your business purchases is important if you want to ensure you have everything you need.
There are other accounts you may want to look into, but they’re rather minor compared to this list. Regardless of which you think you’ll need, it’s a great idea to spend some time talking with your bank to figure out all the fine print and minor details.
Flying Solo or Hiring Help
Dealing with your personal finances and business finances, which you should definitely keep separate, can seem like a huge undertaking, and in truth it is. So when it comes to your business bookkeeping and accounting, it may be for the best if you hire some professional help.
Don’t just get an accountant or a bookkeeper, get both. Entrepreneur describes the need for both as akin to how building a house needs an architect and a carpenter. Regardless of whether you decide to hire help or not, seeking professional aid for consulting or advice is always a fantastic idea, especially when dealing with areas you’re unsure of.
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