Essential Accounting Basics for Organization and Profitability

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When your business’s finances are in check, typically, this leads to better organization and improved profits. But what if the world of accounting is new territory for you? There’s no cause for concern, as long as you follow tax budgeting advice and take steps to become better acquainted with accountancy. By investing time in learning the basics of accounting, you’ll soon see the benefits.

What is Accounting?

Let’s start from the beginning. Accountancy is the practice of recording financial transactions of a business or organization and then categorizing and analyzing them. By doing this, an accountant can give business owners a better idea about the state of their company’s finances. An accountant can tell you all about your business’s cash flow, profits, and losses.

Bookkeeping is the same as accounting, right? Wrong. There are distinct differences between the two. Bookkeeping is the act of recording transactions and is just one of the elements that make up accounting. Accounting is so much more than just recording financial information. It involves analysis and reporting back.

Why Accounting Matters for Every Business

An accountant has recorded, analyzed, and reported back to you about your business’s financial transactions. So what? Why this information matters to businesses is that with an accountant’s report, better financial decisions can be made in the future. For example, an accountant’s report can tell a business what it is doing right and any issues that threaten the company’s future.

Aside from predictions and informing decisions, accounting is a useful tool for tax purposes. Improper record-keeping can lead to noncompliance with tax regulations. The company may then face heavy penalties. Instead of a last-minute scramble before the tax filing deadlines, accountants can help to keep a business’s transactions properly filed and compliant.

Learn Six Basic Financial Terms

Whether you are a small business carrying out your accounting yourself or part of a large company dealing with accountants, you need to know the basic terminology. A lack of understanding may result in mistakes or miscommunication.

Revenue

This is the money or income earned from selling products or services.

Expenses

To run a business and receive revenue, you need to spend on salaries, supplies, and rent. These form part of the expenses.

Profit

When you subtract all the expenses from the revenue, the profit is what remains.

Assets 

Everything the business owns is an asset. Examples include resources like artwork and equipment.

Liabilities

These are debts or outstanding payments that a business owes to an outside party.

Equity

If you subtract the liabilities from the assets, this is the equity. It is all that remains once a company is liquidated. The equity is returned to the company’s shareholders.

How to Set Up an Organized Accounting System

Now that you know the basics, it’s time to understand how to set up an organized system for your accounts. Even if you are getting an external accountant on board to help keep your business’s finances tracked, it pays to understand the processes and the part you play in them.

Open a Business Account

The phrase “don’t mix personal with business” couldn’t be more relevant here. Even if you run a small, part-time business, using the same bank account for both business and personal transactions can cause confusion. 

For one, having a separate business account simplifies the accounting process. Secondly, it keeps your personal finances safe, should your business be sued or face debts. Thirdly, if you plan to grow and need to take out a business loan or seek investors, having a separate business account conveys credibility and professionalism.

Choose a Type of Accounting 

Which should you choose: cash vs. Accrual accounting? For smaller businesses that want to record expenses and revenue as the transactions happen, cash accounting is perfectly acceptable. 

With accrual accounting, the cash transaction doesn’t have to have taken place for it to be recorded. This method is more suitable for businesses with long-term contracts and that provide products or services on credit. Accrual accounting offers more complexity and gives a clear idea of a business’s overall financial health.

Select a Type of Accounting System

Next, choose a type of accounting system, be it manual or paper-based, computer software, or cloud-based. Although traditionally, all businesses relied on manual, paper-based accounting systems, this is no longer the most commonly used form of accounting. For very small businesses, manual systems may suffice.

Most businesses tend to go for the other two types. Computer software and cloud-based accounting system services are favored as they simplify tasks like invoicing and payroll. There are also useful tools included that help with financial tracking and reporting.

When to Hire a Professional Accountant

Once your small business begins to scale up, keeping track of finances and making smart budgetary decisions becomes a little more complicated. This is the perfect time to call in expert help. 

For busy businesses, there is often little time to record and track transactions, let alone compile a report to inform future decision-making. An accountant can take the lead on these matters, freeing up your time to concentrate on other areas of the business.

Also, if the deadline for filing your business’s taxes is looming and your recordkeeping leaves a lot to be desired, hiring a professional can help you avoid costly mistakes and penalties. Whilst it is essential to learn the basics of accounting, it is also important to know when to seek expert guidance.