Most entrepreneurs admit they don’t know a thing about double-entry accounting. What’s more, they don’t want to know. If you are charged with the company bookkeeping, you must know what you are doing. An inaccurate grasp of your financial situation, leads to uninformed decisions.
“But I have QuickBooks, I don’t need to understand bookkeeping.”
Software makers like Intuit and Xero claim their programs make managing your finances so easy anyone can do it. They certainly help but the data taken from these programs is only as accurate as the data put in.
If you are going to go it alone, you must understand the following principles.
1. Double-entry accounting – Every transaction is recorded in at least two places because every transaction is an exchange of one thing for another.
2. Chart of Accounts – A list of accounts used to track each transaction made in your business. These are some accounts common to most
- Current Assets
- Accounts Receivable (money due to you).
- Accounts Payable (money you owe to others).
- Revenue (money earned from selling products/services).
- Purchases (supplies you buy for your business).
- Payroll Expenses (staff salaries and other costs).
I can’t stress how important it is to use the right accounts from the moment you begin operations.
3. Balanced Books – This means that the accounting equation ALWAYS holds true.
Assets = Liabilities + Equity
What is OWED = What is OWNED
If at the end of an account period, the books don’t balance, errors must be corrected prior to preparing financial reports.
4. To have a complete understanding of your financial health, there are three key financial statements to be reviewed at the end of every accounting period.
The BALANCE SHEET mirrors the accounting equation discuss previously and must always be in balance. This report is a snap shot of your business on any given date.
The INCOME STATEMENT lists the balances of each account indicating what you owe, what is owned, and what is left over.
The CASH FLOW STATEMENT is based primarily on the cash account. It answers the question where your money came from and where it went.
The income and cash flow statements report changes of a specified period.
Keeping accurate books can be a complex process. It can quickly become overwhelming.
It can also be the difference between success and failure.
If you have questions or are ready to let a professional number crunchers get your financials on track, please call Nailed It Business Services. Together we can nail your numbers!
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