Financial Accounting for Small Businesses: The Basics
You should never ignore your financial accounting requirements as a small business owner. No matter the business or kind of entity, understanding the fundamentals of financial accounting is crucial.
As your small business grows, several fundamentals and words can help you comprehend the most important financial accounting concepts.
Our staff at Your Part Time Accountant believes that every small business owner should be familiar with the following financial accounting basics.
Accounting Terminology for Small Business Owners
Here are some key accounting phrases for you to understand before we continue:
Using single-entry or double-entry accounting, bookkeeping involves keeping track of every transaction a business makes.
The transactional data to create a balance sheet and an income statement is found in a general ledger.
- Test of Balance
Every general ledger account and its balance are listed via debit and credit columns in a trial balance.
- Revenue Statement
Small business revenue and expenses are displayed in an income statement.
- Sheet of balances
Assets, equity, and liabilities for a small business are displayed on a balance sheet.
Fundamentals of Financial Accounting for Small Business Owners
Today, we’ll go over three fundamentals of financial accounting. The two accounting techniques, how to use a balance sheet, and how to create an income statement.
Understanding the distinctions between accrual and cash accounting can be extremely helpful when managing your small business.
If using the accrual accounting approach, you should record costs and income as soon as a transaction takes place. When you pay an expense, you should record it. And if you earn money, you should record it.
When using the cash accounting system, expenses and income are recorded in different ways. When your small business pays an expense, you should record it as an expense. And when your small business receives cash, you should track it as revenue.
A Balance Sheet Is What?
Three financial items of information are condensed in a Balance sheet:
Your balance sheet is made up of assets, liabilities, and equity, each of which also offers important information.
The term “assets” can refer to property, goods, and equipment that your business possesses. On the balance sheet’s left side, your assets will be listed.
Current assets and noncurrent assets are the two types of assets. Current assets are those that you’ll use within the next 12 months. You can classify a variety of current assets, including:
- Payables receivable
- Cash and its substitutes
A long-term asset is one that you won’t use, which you will keep for a while, may include:
- Fixed resources
- Non-tangible assets
A business incurs expenses in order to revenue. There are two categories of costs:
- Operating expenses are costs associated with running a business. Like rent and administrative costs.
- Non-operating costs: Expenses unrelated to operations., such as interest or borrowing fees.
The costs that a company owes to other parties are liabilities. Monthly bills, rent, and employee wages are a few examples of liabilities for small enterprises. Liabilities are divided into two categories, similar to assets: current and long-term.
You pay current liabilities during the current fiscal year. These obligations will be in the order of their due dates. Current obligations may consist of:
- Amount of long-term debt currently owed
Payable Payroll Wages
Liabilities that are due after the current fiscal year are long-term liabilities. These consist of:
- Defeated tax obligation
- Continuing debt
- Responsibility for pension funds
An Income Statement Is What?
Your equity and revenue are in this statement.
Following the deduction of assets from obligations, equity, or the net worth of your small firm, is what’s left. Your equity and liabilities will be on the right side of the balance sheet.
Income derived from business operations is referred to as revenue. Operating and non-operating revenue are the two different categories of income. Sales of goods or services by small businesses provide operating revenue.
Revenue from secondary sources is non-operating revenue. Donations, rental income, and royalties are a few types of non-operating revenue.
The Essentials With Your Online Accountant
Understanding the fundamentals of accounting will set you up for success as a small business owner. If you ever need to engage with an online accountant, knowing the fundamentals can be helpful.
When your company needs an online accountant, consult experts. For your small business accounting needs, work with an online accountant at Your Part Time Accountant.