Accounting Basics for Small Business By Monica Rankin
I talk to small business owners all the time who are frustrated and overwhelmed by the both the idea of and the task of keeping their books. This is an effort to bring some clarity to that frustration and present helpful ideas.
#1 Accounting information must be relevant to the user. There are many reasons to track financial information, the most regular reason is your annual tax return. Other than that a bank may need financial statements to consider a loan, partners or vendors may request the same. But most importantly, you, the business owner, needs a financial report that shows information you care about.
Accounting software comes with a canned chart of accounts that can be customized to show exactly what you want to see. To put it in real world terms, if you’re a construction company you may want to see new construction income versus remodeling income. Go a step farther and you may want to also see the expenses associated with that income. That information can be invaluable when making decisions about the main emphasis of your business.
#2 Accounting information must be reliable. Companies report information that is not biased towards an objective, such as getting investors to invest in its stock. The reality is that your accounting information must be based on bank information, loan statements, vendor invoices, payments from customers etc. In this day of automation most of that information can easily be incorporated electronically into your accounting software.
#3 Financial reports must be understandable. That means your business must use the same accounting practices it has for prior periods to remain consistent and allow for comparison. The same is true for allowing comparison to other companies – using the same general accounting principles makes the comparison meaningful and useful.
Understanding how to read your balance sheet and income statement (P&L) are critical for many reasons:
Ability to make business decisions based on profitability
Determine whether to purchase equipment or hire employees;
Ability to set up a budget for the next year;
Explain your business to a potential investor or banker.
If you need help with any of these basics, we at Paragon Accounting and Business Services are able to give you practical and budget-friendly ways to meet your company’s needs. We’d love to sit down and learn about your business, give me a call at 330-575-2291 or email [email protected].
