Business accounting is complex, but it can’t be ignored. Partnering with a professional accounting firm helps, but all small business owners should understand the basics. Small business owners who understand the big picture (and partner with a professional for the areas they don’t know) win.
What Is Business Accounting?
Business accounting is the gathering, recording, and reporting of all financial information pertaining to a business, arriving at a taxable income or loss number for a given period of time.
Business accounting is more than just balancing a checkbook. It entails systematic procedures and the 500+ year-old practice of double-entry bookkeeping, where every transaction has an equal debit and credit.
Business accounting differs from personal finance. Personal finance doesn’t aim to determine your taxable income, focusing instead on spending and wealth building. While you have personal assets and liabilities, few people outside of accountants keep a personal balance sheet or perform proper double-entry accounting for each transaction. Personal finance usually records cash inflows and outflows, compares budgets, and reports net worth.
How Does Business Accounting Help My Business Run Better?
Provides clear picture of business health
Appearances can be deceiving. A business that appears successful may be on the brink of bankruptcy. The only way to know is to compile financial statements, including the balance sheet, profit and loss, and cash flow statement.
Identifies areas for growth
One aspect of business accounting is proper recording of different revenue streams and their associated costs. This allows a business owner to analyze which revenue streams are profitable and which are not, and should push them to make changes that will improve the underperforming areas of their company.
While not guaranteed due to collusion and other factors, business accounting can highlight fraud. Small businesses often lack proper internal controls and segregation of duties due to their size. This opens up opportunities for fraud. However, business accounting and the double-entry bookkeeping system means everything is recorded. If not, something will be out of balance and the books won’t tie out. Multiple payments for the same invoice, unknown vendors, and more will appear when reviewing your business accounting.
Prepares owners for tax time
Business accounting arrives at a final number, which is the taxable income or loss. Consistently accounting and compiling financial statements each month allows the owner to know where they are, project where they’re going to be at the end of the year, and make strategic decisions to lower their taxable income.
What Are The Primary Tools For Business Accounting?
Fundamental #1: Completeness & Accuracy
Whether you use software or record everything on paper, you will need a system to ensure the completeness and accuracy of your data. These systems range from cheap to expensive, and will require owners to build the reporting architecture and designated employees to own each step of the process. An alternative is partnering with a small business accounting firm, outsourcing for a fraction of the cost.
Fundamental #2: Assets = Liabilities + Equity
Your accounting system must be able to compile financial statements, including the balance sheet, profit and loss, and cash flow statement. The balance sheet reports your assets, liabilities and equity at a point in time. The profit and loss statement reports your income and expenses over a period of time. The cash flow statement reports the cash inflows and outflows over a period of time. The cash flow balance should tie to the balance sheet cash. The net income from the profit and loss statement should tie to the balance sheet equity net income. For more information on financial statements, click here.
Fundamental #3: Management is Responsible
Accounting & Tax Expert
If you’re not an expert, you need to partner with one. Professional accountants can help you analyze the numbers, calculate important ratios that provide even greater insight, and provide tax saving strategies you’d otherwise miss.
Even if your accounting software can compile financials, you must always beware of the old adage: garbage in, garbage out. Your financial statements may be completely wrong due to accounting mistakes, leading you to make the wrong choices that then get you in trouble when discovered, either by your bank, the State, or the IRS. Let’s say you traded in some equipment. What were your debits and credits? Did someone tell you to do a 1031 exchange? Did you research how the 1031 exchange rules changed in the latest tax bills?
You are responsible as the owner, and the excuse that you didn’t know probably won’t help. At a minimum, look for an accounting firm that offers affordable consulting to scan your self-prepared statements and returns for glaring issues.
Working With Haworth & Company, Ltd.
We want to work with you in whatever capacity makes the most sense. We wear many different hats for our range of small business clients through the Twin Cities and Rochester with the same goal in mind: helping you succeed. Whether you have the internal software and staff and need a trusted advisor, or you’re going it alone with manual ledger sheets and could use an affordable outsourced accounting and tax solution, we have proven programs to benefit you. Check out our services page for more information, or contact us today for a free consultation!