Business accounting is the process of recording the day-to-day financial dealings of a business. The records are then used to prepare the financial statement of the business. Business accounting helps a business to keep track of its inventory, assets, liabilities, and other records. Working on this information the business heads take informed decisions towards expansion and growth of the company, protection of its assets, and securing new investments. There are three types of Business Accounting: Cost Accounting, Finance Accounting, Managerial Accounting.
To manage business accounting it is not necessary to hire an accountant for small businesses. However, you can hire an accountant if your budget permits you to do so. This will help in evaluating the accounting software, reviewing internal controls, receiving tax advice, and others. Accountants are usually needed when small businesses wish to get their financial statements reviewed or audited to get a bank loan, apply for grants, and others.
Did you know that with the knowledge of accounting and bookkeeping, you can manage your small business accounts by yourself.
What is business accounting?
Be it start-ups, small or large businesses, they all go through teething trouble in their initial stages. Adopting effective accounting policies from the beginning is the best way to steer the business clear of problems arising from insufficient capital, debts, tax issues, and others. If a well-planned accounting system is put in place, it can benefit the business immensely. Small business accounting is exactly this process that analyses the financial status, finds the scope of progress, and helps solve the problems which arise from time to time.
In small business accounting the financial data is collected, analysed, and financial statements are prepared to show the outflow and inflow of finances. A track is kept on all financial dealings like purchases, payments, salary, and obligations.
New businesses can with the help of small business accounting realize the financial status and the worth of the business. They can take informed decisions for short-term and long terms goals.
Business Accounting Basics
In order to operate the business smoothly one should be acquainted with the business accounting basics. It must not be ignored or the true financial status of the business will not be clear. This will hinder the process of steering the business on the path of growth. Some important principles and accounting terms are:
Accounts Receivable is a creditable asset. It is the money which the customers are legally bound to pay to the company in return for the goods purchased or services received.
Accounts payable is the amount the business / company owes to the vendors and creditors. These are liabilities since the company is legally obliged to pay.
Everything with value owned by the company is an asset. Accounts receivable, inventory, equipment, furniture, bank accounts, and real estate are referred to as assets.
Any financial obligation like a debt, income tax, wages, accounts payable, loans, and others are termed as liabilities.
Accrual Basis Accounting
Accrual basis accounting is an accounting method under which expenses and revenues are recorded as and when they occur.
Cash Basis Accounting
It is the practice of recording revenue when cash has been received, and recording expenses when cash has been paid out. The cash basis is commonly used by individuals and small businesses as it involves the simplest accounting method.
Under this bookkeeping method, two entries are made for each transaction. The two corresponding sides – listing debits and credits (which must be equal) are recorded.
Profit and Loss statement
The Profit and loss statement or the income statement reflects expenses, earnings, and net profits for a specific period.
The balance sheet is a financial document that gives a clear picture of a company’s financial status. It mentions the assets, liabilities, and shareholders’ equity in a business.
Accounting reports for businesses
Keeping records and preparing accounting reports is an important part of business accounting. The records need to be updated for the purpose of tax payments. These accurate records and reports can also be used in planning for future growth and expansion od the business. Following are some accounting reports that every business owner must create for a small business.
Profit and loss statement
A profit and loss statement or Income and expenditure statement is a very important record. It shows the amount of profit a business makes, the inflow of money, and how it is spent. Small businesses in order to be well informed should create and analyze this report on a regular basis. This will enable the management to find out what is working fine and what is inadequate in the business.
The balance sheet provides a true picture of the business’s assets and liabilities. It shows information regarding bank accounts, investment accounts, and account receivables or the amount owed by customers for purchases made on credit. It also shows the value of the assets of the company and liabilities.
These liabilities occur due to certain events like product warranties, unconcluded investigations, potential lawsuits, and others.
Accounts payable aging reports
These reports assist the company to make payments to the vendors within the stipulated period. These reports keep you updated about the names of the vendors to whom you owe money and also the amount to be paid. By making payments within the due date the company can avoid late fees, and other associated costs, and avail of the early payment discount. This also enhances the company’s reliability.
Accounts receivable aging reports
Small business owners have to send invoices for all the work they do. Also, it must be ascertained that all payments are made and collected. The A/R aging reports ensure that all outstanding dues are cleared in time and there is no financial strain on the company.
Revenue by customer
The customer revenue report shows the amount of revenue the company made from each customer during a fixed period of time. This helps in recognising reliable sources of revenue, boost conversions, increase the return on investments, and others.
Advantages of Business Accounting
Business accounting is beneficial in many ways for small, medium and large businesses. The advantages of business accounting are mentioned below:
- Maintaining business records
- Preparing financial statements
- Comparing results
- Decision making
- Used as evidence in legal matters
- Providing information to related parties
- Used in taxation matters
- Valuation of the business
The most important accounting report for a business is the profit and loss statement or the income statement. This statement shows how much money the business is making as well as other vital data.
We hope this article has been of help in providing information about business accounting. It is a process of systematically recording, analyzing, interpreting, and preparing of financial reports. It is the process by which businesses keep track of their operations. Business accounting help businesses to know their financial standing and to take informed decisions.
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