Whether you’re starting up a part-time side hustle or you're fully invested in an operational small business, accounting plays a major role in the day-to-day and long-term affairs of your company. If you want to know whether your business can successfully grow or whether you should discontinue one of your services, you will be able to find the answer within your accounting statements.
TL;DR (Too Long; Didn't Read)
The purpose of accounting in any organization is to collect and report on financial information as it relates to the business, which includes the company’s performance, cash flow and financial position.
The Role of Accounting in Business
Businesses use a number of documents to keep track of their accounts. Regardless of the kind of business you run, it’s important to use in your accounting procedures an income statement, balance sheet, statement of cash flows and a statement of retained earnings. These documents are developed based on guidelines known as the generally accepted accounting principles, or GAAP, which are commonly used in the United States. The foundational equation used in accounting is assets = liabilities + owner's equity. Both sides of the equation must balance.
Double-entry bookkeeping is the base for financial accounting. This means that you need to record each transaction in opposite columns of the accounts that are affected by the exchange. The debits and credits need to add up to make zero, and if they don’t, this means there is an error in the accounts.
In order to run a successful business, you need to have well-organized accounting systems. This can range from complex accounting software to simple Microsoft Excel spreadsheets depending on the needs of your business. One of the key roles of accounting is to maintain a complete and accurate record of all transactions that happen within a business. This includes sales, purchases, income and expenses.
Businesses can use their accounting records to create budgets, which help them plan ahead for future transactions. For example, if your business is looking to develop a new product line, you may need to have the cash flow available to purchase new supplies to make your products. Having an accurate picture of your company’s cash flow will help you to plan for your business’s future needs.
Benefits of Understanding Finance and Accounting
One of the key benefits of understanding finance and accounting is that it helps businesses to make important decisions. When you know how much money is coming in and going out, you are better informed about the status of your business. This can help you to make critical decisions about certain products and services in order to maximize your profits. Accounting can also help your business to figure out whether you require financing in order to grow. Having a clear picture of your accounts can help you decide whether to discontinue certain products or services if they are underperforming or to decide whether to increase stock of certain products based on high sales.
Accounting helps businesses to clearly understand their financial position in the market. Through their accounting procedures, businesses can see whether they are allocating funds effectively within the different areas of the business. Accounting shows you whether your business owes money, such as through a loan from a bank. The amount of cash, inventory and other assets your business has available will also become clear through accounting practices.
Working with a Professional Accountant
In many cases, businesses choose to work with professional accountants. Because businesses are required by law to keep accurate financial records, some companies hire a full-time accountant on staff, while others keep their own books and consult an outsourced accountant to help prepare financial statements. Accountants are usually specialized in an area of their field and are part of a professional association, such as the American Institute of Certified Public Accountants. Depending on your small business’s accounting requirements, it’s best to consult a professional when possible so you can ensure you’re keeping a complete and accurate record of your company’s financial information.
- QuickMBA: Financial Accounting
- AccountingTools: The Purpose of Accounting
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- QuickMBA: Double Entry Bookkeeping
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Anam Ahmed is a Toronto-based writer and editor with over a decade of experience helping small businesses and entrepreneurs reach new heights. She has experience ghostwriting and editing business books, especially those in the "For Dummies" series, in addition to writing and editing web content for the brand. Anam works as a marketing strategist and copywriter, collaborating with everyone from Fortune 500 companies to start-ups, lifestyle bloggers to professional athletes. As a small business owner herself, she is well-versed in what it takes to run and market a small business. Anam earned an M.A. from the University of Toronto and a B.A.H. from Queen's University. Learn more at www.anamahmed.ca.