So many business owners are great at what they do–creating products, services, sales, customer services, etc. However, many of them probably wouldn’t pass a test of basic bookkeeping. Some business owners think that they know the basics of bookkeeping that have learned over the year, but it is much more than just entering an expense or income.
Business owners must understand the types of “accounts” that a bookkeeper uses to organize a business’s finances in order to measure the success/failure of the business
Being adept in real estate, for example, isn’t enough if you don’t have a clear financial picture of your business. This will lead to cash flow problems down the road.
When buying a property, you have an inspector check the property, you wouldn’t ask him to only check one room. You want a full inspection. It’s the same with the financial aspects of your business. You need to know everything about your business’s finances, not just your bank account balance.
Here are 10 bookkeeping basics every business should know.
All your business transactions pass through the Cash account, which is so important that often bookkeepers actually use two journals, cash receipts, and cash disbursements, to track the activity.
- Accounts Receivable
If your company sells products or services and doesn’t collect payment immediately, you have “receivables,” or money due from customers. You must track Accounts Receivable and keep it up to date so that you send timely and accurate bills or invoices.
Unsold products are like money sitting on a shelf and must be carefully accounted for and tracked. The numbers in your books should be periodically tested by doing physical counts of inventory on hand.
- Accounts Payable
All money sent out from your business passes through Accounts Payable. Concise bookkeeping helps assure timely payments and avoid paying someone twice! Paying bills early can also qualify your business for discounts.
- Loans Payable
If you’ve borrowed money to buy equipment, vehicles, furniture, or other items for your business, this account tracks payments and due dates.
The Sales account tracks all incoming revenue from what you sell. Recording sales in a timely and accurate manner is critical to knowing where your business stands.
The Purchases Account tracks any raw materials or finished goods that you buy for your business. It’s a key component of calculating “Cost of Goods Sold” (COGS), which you subtract from Sales to find your company’s gross profit.
- Payroll Expenses
For many businesses, payroll expenses can be the biggest cost of all. Keeping this account accurate and up to date is essential for meeting tax and other government reporting requirements. Shirking those responsibilities will put you in serious hot water.
- Owners Equity
It tracks the amount an owner (or owners) puts into the business. Also referred to as net assets, owners equity reflects the amount of money an owner has once liabilities are subtracted from assets.
- Retained Earnings
The Retained Earnings account tracks any company profits that are reinvested in the business and are not paid out to the owners. Retained earnings are cumulative, which means they appear as a running total of money that has been retained since the company started. Managing this account doesn’t take a lot of time and is important to investors and lenders who want to track how the company has performed over time.
For many business owners, bookkeeping is a dreaded shore that gets put off to the last minute. ‘sBut when one can understand and effectively use the data that a bookkeeper collects, bookkeeping can be your company
Many business owners think bookkeeping is a dreaded chore, but if you understand and effectively use the data your bookkeeper collects, bookkeeping can be your business’s best ally.