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Accounting
& Financial Management
Few topics in small business are as confusing as
accounting, especially to the new business
owner (also known as "bookkeeping" or
"doing the books"). This section is dedicated
to helping the small business owner understand accounting
and provides
some helpful resources.
What is Accounting?
The dictionary lists accounting
as "A precise list or enumeration of financial transactions." For
the most part, that's all that accounting is, a list
of financial transactions in your small business.
It's a method for you to track the money coming
into your business and the money going out.
Why
is Accounting Important?
Obviously, accounting is important because you want
to know if your business is making a profit. Also, the
small business owner wants to be able to look at sources
of income and expenses and make decisions based on that
information. Using accounting software, the business
owner can generate reports on "profit and loss",
"cashflow", the "balance sheet"
and dozens of other reports that can help him/her get
an overall picture of how the business is doing now
or in the past.
Also, many Federal and State forms require tracking
of money for sales taxes, payroll and income tax purposes.
In fact, a good accounting system can make the
filing of these government forms much easier and less
time consuming.
How do I Setup My First Accounting
System?
| NOTE:
We always recommend you speak to an accountant
or bookkeeper,
especially when initially setting up your accounting
system. This way, they can help you
setup your accounting system properly the first
time so you don't make mistakes that will need
to be corrected later in the year when filing taxes
or other government forms. Our Recommended
Resources section below includes resources
for finding an accountant nationwide.
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Pick
An Accounting Method
The first decision to be made is which type of accounting method to choose,
there are 2 choices:
The Cash Method (or
Cash Basis) - this means that you count income
when you actually receive it (either as cash, credit
card charges or check) and your expenses are counted
when you actually pay them. This is the most common
method for small businesses, especially those that take
immediate payment for a product or service (credit card,
check, cash, etc.)
The Accrual Method (or Accrual Basis) - this
means that you count income when a sale is made (regardless
if you actually receive the money for it) and expenses
are counted when you actually receive the good or service
(instead of paying for it immediately). This method
is common for larger businesses or small businesses
that utilize "invoicing" and frequently deliver
a product or service before being paid for it.
Choosing a Method
You are free to pick either
method provided you have less than $5 million in annual
sales OR you maintain inventory (in that case, then
you must use the accrual method).
The accrual method is generally considered to give
you a more accurate picture of your company's financial
situation but requires you to take extra steps like
maintaining accounts receivable and accounts payable
records. The cash method is generally easier to
maintain and is the preferred method for small businesses.
Choose a Method for Recording Transactions
After you've decided on an accounting method, the
next step is to decide how you are going to record
transactions.
You have basically 2 choices:
Hand-Recording Transactions - you actually
hand-write each transaction in a ledger.
Software - you enter transactions in a software program
which then automates many routine tasks.
By far the most popular method is software. There
are dozens of accounting software packages and most
of them will help you maintain your books as well as
automate things like payroll and reports.
Recommended Software
- QuickBooks Pro
- by far the most popular and most user-friendly
accounting software. (amazon.com) - SPECIAL: You
can get a FREE Copy of QuickBooks Pro with
any approved Merchant Account -
click here to learn more.
- Simply Accounting - not as user-friendly
but includes many of the same features as QuickBooks
Pro at a lower price. (amazon.com)
- PeachTree Accounting
- entry-level product that
provides the basics of accounting at a low price.
(amazon.com)
Setup Your "Chart of Accounts"
After choosing a method for recording transactions,
it's time to setup your "chart of accounts".
A "chart of accounts" is simply a listing
of all the various accounts in your accounting system.
There are income accounts, expense accounts, asset
accounts, etc.
As noted above, an accountant can be of great assistance
in setting up your initial chart of accounts. Also,
QuickBooks Pro and some other software programs include
a "wizard" that will customize a "chart
of accounts" for your business.
Learning and Maintaining Your Accounting System
Once you've chosen your accounting system, the next
step is learning and maintaining your accounting system. Learning the system will obviously depend on what
solution you've adopted, but maintaining the system
is accomplished primarily by 2 things:
1. You Have to Use the System - once you've
taken the time and energy to setup an accounting system,
you have to actually utilize it properly. This
means entering every transaction, check, bill, charge
or refund.
2. Reconcile Your Bank Statement - the best
way to maintain your accounting system is by reconciling
your bank statement with your accounting system every
month. This means that you compare each transaction
from your bank account or accounts with your accounting
system and make sure that they balance. This process
alone will force you to properly account for the company's
money.
Recommended
Resources We hope we've given you a good overview of accounting
and accounting systems; below we've listed some additional
resources that may be helpful to you.
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