There are two types of accounting systems or methods available to business owners: cash accounting and accrual accounting. These two accounting methods are important to understand, because a business is required to use one or the other consistently in recordkeeping for tax purposes. Here’s a definition of each:

Cash Accounting

In the cash accounting method, debits and credits are recorded to accounts only when money actually changes hands. For example, if a business sells a product today for $100, but the customer doesn’t have to pay for it for 30 days, the business wouldn’t alter their cash account records until the money is actually received.

Benefits of Cash Accounting

1. Working under a cash accounting model can be easier for small business owners in the sense of time spent.

2. It’s easier to determine actual cash on hand, instead of just money owed to the business.

3. It’s often also easier for small business owners to understand basic cash flow, as opposed to asset and liability accounts. (more…)

Recordkeeping is vital for all businesses, especially when it comes to financial records. Good financial business records are needed for a variety of reasons, including taxes, getting financing, and evaluating the company’s financial position when updating the business plan to move forward.

Important Financial Records for Accounting

There are a few common types of financial records that business owners will need for accounting purposes, most notably for taxes. These are often called “source documents,” and include:

1. Receipts for purchases.
2. Invoices and purchase orders.
3. Employee time sheets and payroll information.
4. Contracts.
5. Any other record that could back up the claim of a business expense if audited. (more…)

Most areas of business accounting would be difficult to understand without first grasping the concepts of assets and liabilities. Essentially, all money going in and out of a business will fall into different “accounts.” Those accounts are classified as asset accounts, liability accounts, or equity accounts (such as owner’s equity or shareholder equity, basically meaning what’s invested into a business). Assets and liabilities are the most common classifications between accounts.

What are Assets?

An asset is anything a person or company actually owns that has some kind of future value. Something fluid like cash is an asset for a business, as are property, equipment, accounts receivable (money owed to the company), investments, and even intellectual property rights such as copyrights, trademarks, and patents.

Here’s an example when thinking of a wholesaler: Some of their assets would include their products, any money owed to them by retailers ordering in bulk but paying later, and their vehicles for transporting goods to buyers, assuming they do that independently. (more…)

Balance sheets are one of the most basic business accounting tools, and understanding balance sheets is a good thing for any small or online business owner to grasp before diving into the financials of running a business.

What is a Balance Sheet?

Balance sheets are generally brief financial statements that give a general overview of the financial state of a business, including factoring in assets, liabilities, and equity. Balance sheets cover very specific periods of time, such as a company’s fiscal year.

Assets = Liabilities + Owner’s Equity

The “balance” part of the term balance sheet comes from the fact that a business owner’s assets should equal their liabilities plus owner’s equity, thus creating a balance in the company’s financial records. (more…)

One of the most fundamental, and often most confusing, aspects of basic business accounting is the distinction between debits and credits. In accounting, the ultimate goal is to have your financials balance (such as on a balance sheet). In order to balance financial records, every business transaction has both a debit and credit (if money is being added to one account, it has to be coming from somewhere else, and vice versa).

Debit and Credit Confusion

For those new to accounting, and just learning the basics for their small or online business, the terms credit and debit may only be familiar through things like credit cards or debit cards through a bank. This causes confusion, because it sometimes leads to the assumption that debits are “bad” (such as a debit card taking money from a bank account) and that credits are “good” (such as a credit card giving someone extra finances). In fact, neither debits nor credits are “good” or “bad” at all. They’re simply opposite sides of the same coin, used to balance the books. Here’s how: (more…)

Accounting is a foundation of business. It doesn’t matter if your business is a one-man operation or a multinational corporation. There is a serious need for effective accounting practices. Accounting takes a certain amount of knowledge and skill to be done effectively, and it is not an area to cut corners.

The government has certain guidelines that must be followed in tax preparation, year end reports and any number of other financial documents. It’s crucial to find the absolute best software or firms or individuals to suit your business needs. (more…)