Paul Simonson is a Florida-certified public accountant. He has also been a member of the Florida Institute of Certified Public Accountants since 1998.
This article will provide accounting tips and pointers for small business owners starting out on their entrepreneurial journey, including an overview of common accounting terms.
Starting a small business requires a significant investment of time and money. In the formative stages of any enterprise, founders tend to focus on product development and business strategy. Nevertheless, it is crucial for founders to gain a solid grasp of accounting basics to create a firm financial foundation upon which to grow their business.
The history of accounting stretches back thousands of years. In the modern world, accounting is most closely associated with a business’s financial reporting. Although everyone can benefit from an understanding of accounting basics, this knowledge is particularly valuable for small business owners.
Accounting involves systematically recording, interpreting and analyzing a business’s financial information. Accounting is vital in various operational aspects, enabling business owners to meet their legal obligations, track the financial health of their business, and make smarter business decisions.
When it comes to accounting, business owners have two choices. They can either outsource their accounting needs, relying on a trusted third party to handle their finances for them, or learn to deal with it themselves.
Like many careers, an accountant’s role involves a mix of tactical and analytical tasks. Accountancy is about much more than just recording transactions. Rather, it is about assessing financial information from the perspective of regulators, agencies and tax collectors. Accounting involves more than crunching numbers and collecting receipts: it is a process of gathering and reporting financial information. The business then uses these financial reports to communicate its financial position, cashflows, and performance.
An accountant oversees a business’s financial records, ensuring that all of the data contained in them is correct. They then use this data to create financial documents, budgets, and reports. Examples might include an income statement or cashflow statement for an upcoming board meeting.
Accountants also attend meetings, providing advice or looking into legal issues. Other common activities undertaken by accountants include:
- Reviewing and updating records
- Collecting new financial data
- Computing taxes
- Collecting evidence for legal proceedings and audits
- Ensuring tax payments are made on time
- Checking on compliance with relevant laws
- Risk assessments and forecasting
Great accountants boast a range of soft skills and technical competencies, drawing on these aptitudes to help maintain the financial health of the companies they serve. Accountants need sound listening, organizational, time management, and critical thinking skills, enabling them to gather information and communicate their findings clearly to stakeholders. A basic understanding of how the business works is also vital in order to contextualize financial information.
While math skills are important, data and systems analysis are also critical to success in this role. As accounting often involves a reasonable amount of investigative work, curiosity and deductive reasoning skills can also be extremely helpful.
Although the terms ‘accounting’ and ‘bookkeeping’ are often used interchangeably, the two processes are distinct. While bookkeeping is a tactical role that involves recording and organizing financial data for a business, accounting is more strategic. Accountants analyze financial information, advising business leaders about their findings and offering valuable insights into taxes, legal concerns, and business growth. They also prepare audits and reports to communicate financial data. These insights can be used by businesses to help prepare for unexpected shifts that can occur as a business grows.
Basic accounting terminology includes:
- Accounting Period, i.e., the length of time covered by a financial statement
- Assets, consisting of items of value or resources owned or controlled by the business
- Capital, meaning any asset or resource that can be used by the business to generate revenue
- Credits, which increase the company’s liabilities or decrease its assets
- Debits, which increase the business’s assets or decrease its liabilities
- Dividends, a portion of profits paid by the company to its investors
- Equity, the amount of money that would remain if the business sold all of its assets
- Gross profit, which defines the value of products and services sold by the business before deducting the cost of goods sold
- Liabilities, which occur when the business owes money to an individual or organization
- Revenue, which describes the income generated by the business by selling products or services
- Variable Costs, which are expenses that can change depending on the volume of sales generated by the company
Learning business accounting may seem a daunting endeavor for founders already weighed down by the colossal task of launching and growing their new business. Nevertheless, irrespective of which industry the enterprise operates in, business owners need to adequately record and report all transactions, generating financial reports for analysis. Accounting is crucial in terms of gaining a greater understanding of a business’s financial health, enabling leadership to use that information to make smarter choices about the future of the business.
