Bookkeeping and Accounting Basics

Bookkeeping and accounting certainly won't be the most fun aspects of running a business, but they will be among the most necessary. And while you may decide to hire an accountant or bookkeeper to take care of these duties, you'll need to at least understand bookkeeping and accounting in order to maintain financial control of your business.

Accounting

The first thing you should do is determine your accounting method. An accounting method is the way you report income and expenses not only in your own books, but on your income tax returns as well. You can choose from two different methods

- Cash method. You report income as you receive it, and you deduct expenses as you pay them. Is the cash method right for you? Most businesses that provide services, such as construction businesses, usually choose the cash method.
- Accrual method. With the accrual method, you report income as you earn it, even if you receive it later. For example, your business may sell electronics. You would report the income when the person bought the item, even though they may pay you later. On the expense side, with the accrual method you deduct expenses as you incur them, regardless of when you pay them. Is the accrual method right for you? Businesses that carry inventory often choose the accrual method.

If the thought of digging out pencil and paper and keeping track of these things is too much, then don't worry! There is plenty of accounting software out there on the market that can help you, regardless of the method you choose. These programs are very easy to use and require minimal knowledge of bookkeeping and accounting. Try your local office supply store or any other store that sells computer software for good accounting programs.

Keeping Books

In order for either one of these methods to work, your business is going to have to keep records. This is called bookkeeping. Your bookkeeping system should be devised to accomplish four goals:

- Prepare financial statements.
- Keep track of your business's progress.
- Tell you whether receipts apply to taxable or nontaxable income.
- Support the information you report on your tax return.

Basically, that means keeping track of each and every one of your business transactions. This can best be accomplished by keeping journals and ledgers. What's the difference? Journals are books in which you record every business transaction, including purchases, expenses, taxes, payroll, etc. Ledgers are books that contain the totals from your journals. They are usually organized into different accounts. Your ledgers might be broken down into categories such as business checkbook, daily cash receipts, monthly cash receipts, check disbursements, and employee compensation. Remember to keep all of your supporting documentsâ€”receipts, etc., in a file folder where they can be easily accessed.

Important Accounting Forms

There are three forms that are integral to your accounting process. These are:

- The income statement.
- The balance sheet.
- The cash flow statement.

The income statement tells you what your bottom line is, in other words your net income, at the end of the day. Sometimes referred to as net profit, the formula for arriving at net income is really very simple. Basically, you take all of the revenue from your business, then subtract all the expenses you incur running your business. What do you have in the end? Net income! For your own purposes you'll just need a very simple form. For income tax reporting, you'll need to keep track of many different expense categories.

The balance sheet shows where a company is financially at a given point in time. It also shows a business's assets, as well as its liabilities. When you subtract liabilities from assets, you arrive at the company's net worth. This represents the business's total equity.

One of your company's most important assets is its cash. Well, your business's cash flow statement keeps you apprised of what is happening to your cash. If you have great profits and a good balance sheet but still don't have enough money to pay your bills, your cash flow statement will show you what has happened to your cash over a specific period of time. Since cash flow is so important to whether a business sinks or swims, you may need to follow it weekly, or even daily.

Remember, good bookkeeping and accounting practices are very important to the success of your business. While you can hire an accountant or bookkeeper to take over these duties, you should know the basics of your business's bookkeeping and accounting methods in order to keep financial control over your business.-------------------------------------------------------------------------------------------------------------If you are a business owner get listed at Best Repair Site, part of Localwin Network.