The Basics of Business Accounting

blue piggy bank on calculator, understanding the basics of business accounting

Estimated reading time: 5 minutes

When a person has a business idea and decides to become an entrepreneur, they soon find out it’s a lot of work. Yes, they get to be their own boss and work their own hours – often long hours – but there are many accounting-related tasks and responsibilities that they might not be prepared for. These include running financial reports, maintaining accurate financial books, paying bills and employees, reconciling bank statements, paying taxes, and mapping out future investment plans.

Accounting isn’t the most exciting aspect of owning a small business, but it is essential and needs to be appropriately managed. Accurate books help companies to make critical financial decisions; they are also required when filing taxes. So if you own a business, understanding the basics of accounting can help you stay on top of your finances. Keep reading this blog article from Balboa Capital to learn more.

What is business accounting?

Before diving into the ins and outs of business accounting, it is essential to explain it. Business accounting is the process of recording, reporting, and analyzing financial information and transactions within a company. It is an important tool businesses use to measure their performance against past results and adjust business goals when needed. It also provides a platform to identify areas where costs can be reduced or revenue increased.

In summary, accurate and up-to-date financial reports and bookkeeping reveal a business’s cash flow position, indicate whether a business is making or losing money, and show the amount, in dollars, of its assets and liabilities.

The business accounting cycle.

The accounting cycle records all business transactions into your company’s record-keeping system, also referred to as a general ledger. Let us use an independent bookstore to illustrate how the cycle works. In the last three months, the bookstore sold $17,000 worth of books, purchased $4,000 worth of inventory, and incurred $9,700 in expenses. The bookstore’s accountant recorded these transactions chronologically in the company’s bookkeeping software, which was then posted to the general ledger.

As a result, the accountant was able to provide the bookstore’s owner with an accurate report for the quarter. In addition, all of the credits and debits matched and were error-free, which made it easy to finalize the revenue expense reports for the quarter. Then, the revenue and expense accounts were closed and zeroed out for the upcoming accounting cycle that was about to begin.

Main types of accounting.

There are several different types of accounting to be aware of. For example, financial accounting is used to report your business’s financial performance; managerial accounting is used to make decisions about your business’s future; cost accounting helps to determine the cost of products and services, and tax accounting keeps track of all financial documents, so they are ready when tax season rolls around. All these types are important in helping you manage your finances and budget your capital accordingly.

Financial accounting

This is the process of recording, summarizing, and reporting the financial transactions of your business. It involves the preparation of financial statements that provide information about your assets, liabilities, equity, revenue, expenses, and cash flow. Financial accounting measures your business’s performance and provides information for strategic growth initiatives. It also helps assess your business’s financial health by providing accurate and timely information about its financial position.

Managerial accounting

This focuses on providing financial information to you, your managers, and other internal stakeholders for strategic and investment purposes. It differs from financial accounting, which focuses on providing information to external stakeholders such as investors and creditors. Managerial accounting provides detailed information about the costs associated with producing the products or services you offer and the profitability of each product or service. This information can be used to decide pricing, production levels, and other aspects of your business operations.

Cost accounting

This form of managerial accounting focuses on the costs associated with producing goods and services. It is used to analyze the cost of production, track expenses, and determine profitability. Cost accounting can help you evaluate pricing, inventory management, and budgeting, among others. It also provides information for financial reporting purposes. By understanding the costs associated with producing goods and services, you can make data-driven decisions about allocating financial resources to maximize profits.

Tax accounting

This is the process of preparing financial statements and records for tax purposes. It involves analyzing and interpreting financial data to determine the amount of taxes owed or refundable. Tax accounting also includes preparing tax returns, filing them with the appropriate government agency, and ensuring compliance with applicable laws and regulations. Tax accountants must be knowledgeable in business accounting principles and taxation laws to prepare financial statements for tax purposes accurately. If you don’t have an accountant on staff, it is wise to hire a certified accountant to prepare your tax return.

Basic financial statements.

The three main types of financial statements are the balance sheet, income statement, and cash flow statement. The balance sheet provides information on what your business owns (assets) and owes (liabilities), while the income statement shows the amount of money your business earned or lost over some time. Finally, the cash flow statement shows where money is coming in and going out of your business.

Cash method vs. accrual method of accounting.

The two most commonly used accounting methods in business are the cash and accrual methods. Both methods have advantages and disadvantages, so it is vital to understand which is best for your business. The cash method focuses on recording transactions when cash is received or paid, while the accrual method records transactions when they occur, regardless of when cash changes hands.

The impact of technology on accounting.

Technology is revolutionizing the way businesses manage their finances. For example, cloud-based accounting software makes it easier for businesses to keep track of their financials. As a result, it is no longer a tedious process that requires manual data entry and analysis. Instead, cloud-based software automates mundane tasks such as bookkeeping, budgeting, and forecasting so business owners can focus on more strategic tasks. Plus, with cloud-based accounting software, businesses can store all their financial information in one place and access it from anywhere with a secure Internet connection.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.