Entrepreneurs of small business are creative masters of their products and services. They build the effective teams needed to win over customers. While they shine in this capacity, a majority of them would most likely fail basic bookkeeping 101.
Odds are you wouldn’t go to a doctor and be happy your annual physical consisted only of the doctor examining your legs. You would want to know more about the rest of you. Well this is the case with bookkeeping. It involves more than just knowing what your cash flow is.
You will need to know everything about your business’s finances. It will not only support your decision-making down the road, but it will also save you time, definitely in fraud prevention or especially if a government audit comes to light.
Let’s look at a few basics of bookkeeping, you should be aware of.
1] Cash
The most basic of tips here. It is important to track your cash in and out activities. This is known as tracking your Cash Receipts (incoming) and Cash Disbursements (outgoing).
2] Accounts Receivable
If your business sells anything that you haven’t immediately collected the money for, you will have “receivables” (money that’s due from customers). You will need to track these Accounts and stay up to date with them with accurate invoices and bills to your clients or customers.
3] Inventory
Your products that are sitting on the shelf must all be carefully accounted for (includes tracking them). Unsold products sitting idle are money waiting to be made. The inventory numbers in your books will need to be periodically compared with a physical count of the inventory on hand.
4] Accounts Payable
If you owe money you will need an area in bookkeeping that accounts for these payments. This is where your Accounts Payable section is. Good bookkeeping here will ensure you pay who needs to be paid on time so not to incur any late fees and may save you money for paying early.
5] Loans Payable
Similar to accounts payable but this concerns any money you’ve borrowed, for instance to buy equipment, furniture, or other big-ticket items for your business. Payments and due dates are the major things you want to track here.
6] Sales Account
This will track all incoming revenue from what you have sold. Ensure this done in a timely and consistent manner in order to know where your business stands at any time.
7] Purchases
This will track any raw materials or finished goods you have purchased for your business. It is the major component of “Cost of Goods” (COGS) which when subtracted by Sales, gives you your company’s gross profit.
8] Payroll Expenses
For mot businesses, payroll expenses can be the greatest cost of all. It is essential then that his account stays up to date at all times. You must also meet all tax and governmental reporting requirements. Do not let this one slide.
You will be in serious legal problems if you do. Using an accounting and payroll software will help you manage these processes for a better overall experience for you and your employees.
10] Owner Equity
This tracks the amount that a business owner (or owners) puts into the business. Quite often, it is also referred to as net assets. Owner equity is the reflection of money an owner has once the liabilities have been subtracted from the assets.
11] Retained Earnings
This is where you track any profits from the company that do not get paid out to the owners. These can be cumulative and will appear as a running total of the money since the beginning of the company. This is important to investors or lenders who would like to track how the company has been performing over time.
Final thoughts
While this may seem like a dreaded chore understanding and effectively using the data your bookkeeping skills collects and manages, will make this part of your company knowledge obligations, become your best ally!
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