Accounting For Small Businesses
When you think of accounting, what comes to mind? Do you think of numbers and equations, or do you think of the finance industry as a whole? In reality, accountancy is so much more than just crunching numbers and balancing books. It’s an essential component of any successful business. So, what is accounting, and how does it work? Well, keep reading to find out.
How Accounting Work?
Accounting is the process of recording, classifying, and summarizing financial transactions to provide helpful information in making business decisions. It’s an analytical function in any business, and it’s essential to understand the basics of accounting if you want to be successful in your business.
Businesses can keep track of their finances by keeping good records. Every transaction must be recorded and categorized appropriately. Remember to save receipts, canceled checks, update expense reports, and store bank statements in an organized manner. This will help substantiate claims in case of an IRS Audit.
If you need help, Bookkeepers and Accountants can be very helpful. We make sure all transactions are recorded correctly to have an accurate snapshot of your financials.
What makes up an Accounting and Bookkeeping System?
The foundation of Accounting and Bookkeeping lies between a set of accounts and the rules that follow. These accounts are details of your business, and it gives you an overview of what goes on in your company.
Owning a company with a well-organized set of accounts allows you to generate financial statements. These reports, such as the income statement, statement of cash flow, and balance sheet, must rely on accurate information to be valid. To produce factual statements, you must also be familiar with Generally Accepted Accounting Principles.
Generally Accepted Accounting Principles (GAAP) provide guidelines for financial statements. These standards are required to produce fair reports from investors/compatriots and companies looking to expand globally.
What is an Account in Accounting?
An “account” in business-speak refers to the transactions of all money coming in and going out of your company. Accounts are used to keep track of transactions to have a clear-cut of cash flow, assets, liabilities, equity, and more.
As a business owner, you can make decisions by creating financial statements that show the ins and outs of each account! A great example is the Statement of Cash flow, which allows forecasting as it helps make decisions based on cash inflows and outflows.
In Accounting, you’ll commonly see the term “chart of accounts.” The chart of accounts is a group of “accounts” forming an organizational tool. It provides an easy-to-use breakdown and timeline for all financial transactions carried out by one company during a specific accounting period.
Accounting and its rules
There are several Rule of Thumbs businesses need to be aware of with Accounting. Before we get into the rules, let’s start with the three types of accounts in Accounting: the Real Account, Personal Account, and Nominal Account.
What is a Real Account in Accounting?
A real account is a permanent, never-ending balance in the general journal that doesn’t close at the end of the period. This means these accounts stay open and allow their balances to accumulate overtime for as long as the company exists.
In Accounting, real accounts are the most current and accurate version of your company’s financial status. These accounts carry over into the following year. Reports can be found on the balance sheet at the end-of-year. It will show assets or liabilities for that period along with any equity raised from investors.
Managers should review each account’s change of balance throughout the period. By doing so, you’ll catch any inconsistency, errors, or red flags spotting financial changes that may cause harm to your business. The accounts can be reviewed by comparing a particular asset’s initial amount and final remaining numbers.
Real accounts can be either tangible or intangible. Tangible assets such as real estate are types of assets that have physical properties like land and buildings. Intangibles include more abstract concepts such as goodwill that are not physical but still provide value to the company.
What are Personal Accounts in Accounting?
A personal account is a kind of financial instrument that anyone can use. It’s related to an individual, company, or firm. It could include natural people (i.e., human beings), artificial ones (like corporations), and representative figures in society such as group associations.
Personal Accounts usually exist when multiple parties have joint control over a business and share decision-making powers.
What are Nominal Accounts in Accounting?
Nominal accounts relate to income, expenses, and losses or gains for the company. It is also wage accounts which include salaries earned from employees on the payroll and rent expense reports displaying how much was spent on the business’s rental property’s address.
Nominal Accounts relate to financial transactions that affect your day-to-day operations. These accounts are key, as you can use this information for tax purposes.
Now let’s get back to the rules of Accounting.
What are the Rules of Accounting?
The “Golden rules of Accounting” are the holy grail of Accounting. It is used as a guideline to help record accurate transactions. The most important thing to remember about accounting is that it must balance. With every debit, there must be a credit; This is what you call a double-entry accounting system.
The “Golden” rules are:
- Debit what comes into your company and credit what goes out
- Debit the receiving account and Credit the giver
- Debit all expenses and Credit all income
Why are the Rules of Accounting Important?
The golden accounting rules are essential because they help ensure that your business financials are in line with GAAP. These principles help the company’s books remain balanced, and they include using proper terminology and accurately recording transactions.
Inconsistent books are bad for business. You may get in trouble with the IRS, which could be costly and time-consuming to fix. Not to mention the negative effect it may have on your bottom line! If you need help maintaining accurate financials or recording transactions correctly, it’s best to hire an accountant or bookkeeper to ensure everything is on track.
Conclusion
Accounting is the process of tracking financial transactions and creating reports about them. It can be used to assess a company’s financial health, make decisions about investments, and much more.
Accounting is more than just crunching numbers. It consists of accounts called the Chart of Accounts (COA). Chart of Accounts is a complete list that organizes all financial transactions for an entire year in one table. It provides easy access and understanding to how your money moves through the company, which can be helpful when creating financial statements like the balance sheet, income statement, statement of cash flow, and statement of shareholder’s equity.
Accounts, along with Accounting principles, are the backbone of any business. They keep finances in order which can be relied on when providing accuracy. Accounts are always a balance between reported income and expenses. You can ensure the most precise accounting by following the golden rules of Accounting and the Generally Accepted Accounting Principles.
Do remember,
- Debit what comes into your company and credit what goes out
- Debit the receiving account and Credit the giver
- Debit all expenses and Credit all income
If you need help with Accounting needs, please visit our service page. Pro Accounting Srvcs offers Tax & Accounting services to businesses all over the United States.
