As a business owner, you’re likely responsible for overseeing the financial side of things, from bookkeeping and budgeting to tax preparation and financial planning.
But do you know everything there is to know about accounting? Even if you don’t have time to become an expert accountant yourself, learning the basics will help you make better decisions for your business and avoid potential financial disasters.
So if you’re looking for a crash course in accounting basics, keep reading. We’ll outline some of the most important concepts that every small business owner should know.
The Purpose of Accounting:
Most business owners know that accounting is vital for tax purposes. But there’s a lot more to it than that. Accounting is the process of recording, classifying, and summarizing financial transactions to provide information that can be used to make reasonable business decisions.
In other words, it’s a way of keeping track of all the money coming in and going out of your business, so you can see where you’re making and spending money and identify areas for improvement.
There are two main types of accounting: financial accounting and managerial accounting. Financial accounting focuses on the historical financial statements of a company.
In contrast, managerial accounting provides information used internally by managers to decide how to run the business. As a small business owner, you’ll need to be familiar with both types of accounting to make logical decisions about your business.
Businesses nowadays prefer hiring professionals that meet CPA requirements because these individuals have the required skill set and are updated with the latest changes in tax laws.
However, this does not mean that business owners should not have any accounting knowledge. Business owners must at least be aware of the basics of double-entry bookkeeping, which is the most common method of recording financial transactions.
Reasons Why You Must Have Basic Accounting Knowledge:
There are several reasons why every business owner needs at least a fundamental understanding of accounting. Here are just a few:
Gives Insight on Various Costs:
As a business owner, you need to be aware of all the costs of running your business. It includes everything from the cost of goods sold (COGS) to administrative expenses.
Knowing where your money is going will help you make informed decisions about cutting costs and how to allocate your resources.
Imagine a situation where your business is not doing well. You need to make tough decisions like firing employees or reducing their salaries.
In such a situation, understanding fixed and variable costs will come in handy as it will help you make decisions that will not further hurt your business.
Helps You Stay Organized:
Businesses can turn from lucrative to non-functional if they are not organized. It is especially true when it comes to finances.
To make sound decisions, you need to have a clear picture of where your money is sourced from and where it’s going. It is only possible to keep accurate records of all your financial transactions.
To whom you owe money, if your debts are all clear or not, and how much you have in the bank are only some of the things you need to be aware of as a business owner.
Enables You to Understand Financial Statements:
You realize that you need to keep a check and go through your business’s financial statements from time to time, don’t you?
To understand what these documents are trying to convey, you need to have at least a basic understanding of accounting.
Financial statements can be confusing, but if you know the basics of accounting, you’ll be able to interpret them and use the information to make better decisions for your business.
Allows You to Make Informed Decisions:
Your typical day as a business owner is filled with decisions, from big ones like whether to expand your product line to small ones like what type of paper to use for your business cards.
Many of these decisions have financial implications, so you must have the accounting knowledge to make informed choices.
For example, let’s say you’re considering whether to lease or buy new office space for your business. You’ll know that leasing is often the better option if you understand accounting principles because it’s considered an operating expense. At the same time, buying is viewed as a capital expenditure.
This knowledge can help you save money and make other financial decisions in your business’s best interest.
Backs Up Your Tax return Claims:
The IRS is very particular about the documentation they require for tax returns. If you have a basic understanding of accounting, you’ll know what records you need to keep and how to organize them so that you can easily find them when it’s time to file your taxes.
It can save you time and aggravation and the risk of financial penalties for incorrect or incomplete tax returns.
Make it Easier to Get Investments or Loans:
Before investors or lenders give you money, they need to learn about you. And that means getting your books muddled up in the process.
If you’re hoping to get investments or loans for your business, it’s essential to have a strong understanding of accounting to present your financial information in the best light possible.
When applying for a loan, it’s typically necessary to submit your company’s financial statements to the bank. They may get information about your profitability this way.
It will give you a better chance of getting the money you need to grow your business.
Holds You Accountable:
If you run a small business with shareholders, you know how crucial it is to demonstrate rather than tell. Accounting accomplishes this.
Your investors keep an eye on your company’s success and growth by inspecting your accounting documents.
Another thing to consider is that accounting can assist you in holding your workers accountable. Keep track of things like reconciling bank statements and performing trial balances so you may discover fraud before it becomes too costly to your company.
Helps You Avoid Audit:
The IRS audits companies every year, but some businesses are more likely to be audited than others. If you have a basic understanding of accounting, you can help minimize your chances of being audited by keeping accurate records and ensuring that your financial statements are in order.
Many reasons exist for why a company is audited, including tax form errors, being “too charitable,” and excessive write-offs.
While there’s no assurance that you’ll never be audited, having a thorough knowledge of accounting will aid you in avoiding one.
No one ever claimed to be a business owner was a piece of cake. But with a bit of accounting knowledge under your belt, you can make the job a lot easier.
You might even start liking crunching numbers! Pave your paths to success by learning accounting today. It’s never too late to start making informed decisions for your business.