As an online business, blogger, apps and more, it is important to at least get the basics of accounting understanding. Regardless if you turn it all over to an accountant. It will guide you in business in many ways.
The definition of accounting given by the American Institute of Certified Public Accountants (‘AICPA’) clearly brings out the meaning of accounting. According to it, accounting is
“the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof”. The definition brings out the following as attributes of accounting :
(i) Accounting is an art. Accounting is classified as an art, as it helps us in attaining our aim of ascertaining the financial results, that is, operating profit and financial position through analysis and interpretation of financial data which requires special knowledge, experience and judgment.
(ii) It involves recording, classifying and summarizing. Recording means systematically writing down the transactions and events in account books soon after their occurrence. Classifying is the process of grouping transactions or entries of the same type at one place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger), understandable and useful to management and other interested parties. This involves preparation of final accounts namely profit and loss account and balance sheet.
(iii) It records transactions in terms of money. All transactions are recorded in terms of common measure i.e. money which increases the understanding of the state of affairs of the business.
(iv) It records only those transactions and events which are of financial character. If an event has no financial character then it will not be capable of being measured in terms of money ; it will not be, therefore, recorded.
(v) It is the art of interpreting the results of operations to determine the financial position of the enterprise, the progress it has made and how well it is getting along.
Every business needs to maintain good records to track how much money they have, where it came from, and how they spend it. These records are maintained using an accounting system.
These records are essential because they can answer such important questions as:
• Am I making or losing money from my business?
• How much am I worth?
• Should I put more money in my business or sell it and go into
• How much is owed to me, and how much do I owe?
• How can I change the way I operate to make more profit?
In this video Jared Eliseo, a licensed CPA, answers your questions about basic accounting for small business. We cover a variety of topics including accounting for entrepreneurs, basic accounting for small business, bookkeeping for entrepreneurs, taxes for entrepreneurs, tax savings for entrepreneurs, inventory for entrepreneurs, tax tips for entrepreneurs, inventory for taxes as well as cogs for entrepreneurs. We discuss when to hire an accountant for small business and tax planning for small business. Finally, we discuss small business record keeping process, accounting tips for small business, bookkeeping as well as record keeping for small business in general
Jared’s email firstname.lastname@example.org website eliseocpa.com
Even if you do not own or run a business, you will be asked to provide the valuable information needed to assist management in the decision making process. In addition, these records are invaluable for filing your organization’s tax returns.
Accounting is the system a company uses to measure its financial performance by noting and classifying all the transactions like sales, purchases, assets, and liabilities in a manner that adheres to certain accepted standard formats. It helps to evaluate a Company’s past performance, present condition, and future prospects.
Before any recording can take place, there must be something to record. In accounting, something consists of a transaction or event that has affected the business. Evidence of the transaction is called a document.
In almost any business, these documents are numerous and their recording requires some sort of logical system. A recording is first carried out in a book of original entry called the journal. A journal is a record, listing transactions in a chronological order.
At this point, we have a record of a great volume of data. How can this data best be used? Aside from writing down what has occurred for later reference, what has been accomplished? The answer is, of course, that the accountant has only started on his task. This great volume of data in detailed listings must be summarized in a meaningful way.
When in business you turn to this data to answer questions like:
• What were the total sales this month?
• What were the total expenses and what were the types and
amounts of each expense?
• How much cash is on hand?
• How much does the business owe?
• How much are the accounts receivable?
Every business has a unique method of maintaining its accounting books. However, all accounting systems are similar in the
• Business documents representing transactions that have taken place. (A business transaction occurs when goods are sold, a contract is signed, merchandise is purchased, or some similar financial transaction has occurred).
• Various journals where the documents are recorded in detail and classified
• Various ledgers where the details recorded in the journals are summarized
• Financial reports where the summarized information is presented Where variations exist, they have to do with the way the business
transaction is assembled, processed, and recorded.
Basically, two types of accounting are used
Cash System of Accounting: It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. In other words, it is a system of accounting
in which revenues and costs and assets and liabilities are reflected in the accounts in the period in which actual payments or actual receipts are made in cash. It may not treat any revenue to have been earned or even sales to have taken place unless cash is actually paid by customers. It has no relevance whether the receipts pertain to previous period or a future period. Similarly, expenses are restricted to the actual payments in cash during the current year and it is immaterial whether the payments have been made for the previous period or a future period.
Cash basis of accounting is incompatible with the matching principle of income determination. Hence, the financial statements prepared under this system do not present a true and fair view of operating results and financial position of the organization. However, the cash system of accounting is suitable in the following cases:
- Where the organization is very small or in the case of individuals, where it is difficult to allocate small amounts between accounting periods; and
- Where credit transactions are almost negligible and collections are uncertain e.g. accounting in case of professionals i.e. doctors, lawyers, firms of chartered accountants/company secretaries. But while recording expenses, they take into account the outstanding expenses also. In such a case, the financial statement prepared by them for determination of their income is termed as Receipts and Expenditure Account.
Accrual System of Accounting: This is also known as a mercantile system of accounting. It is a system in which transactions are recorded on the basis of amounts having become due for payment or receipt. Accrual basis of accounting attempts to record the financial effects of the transactions, events, and circumstances of an enterprise in the period in which they occur rather than recording them in period(s) in which cash is
received or paid by the enterprise. It recognizes that the buying, selling and other economic events that affect an enterprise’s performance often do not coincide with the cash receipts and payments of the period. The purpose of accrual basis accounting is to relate the revenue earned to cost incurred so that reported net income measures an enterprise’s performance during a period instead of merely listing its cash receipts and payments. Accrual basis of accounting recognizes assets, liabilities or components of revenues and expenses received or paid in cash in past and expected to be received or paid in cash in the future. The following are the essential features of an accrual basis:
– Revenue is recognized as it is earned irrespective of whether cash is received or not;
– Costs are matched against revenues on the basis of the relevant time period to determine periodic income, and
– Costs which are not charged to income are carried forward and are kept under continuous review. Any cost that appears to have lost its utility or its power to generate future revenue is written off as a loss.
The accounting system uses Accounts to keep track of information. Here is a simple way to understand what accounts are. In your office, you usually keep a filing cabinet. In this filing cabinet, you have multiple file folders. Each file folder gives information for a specific topic only. For example, you may have a file for utility bills, phone bills, employee wages, bank deposits, bank loans etc.
A chart of accounts is like a filing cabinet. Each account in this chart is like a file folder. Accounts keep track of money spent, earned, owned, or owed. Each account keeps track of a specific topic only. For example, the money in your bank or the checking account would be recorded in an account called Cash in Bank. The value of your office furniture would be stored in another account. Likewise, the amount you borrowed from a bank would be stored in a separate account.
Each account has a balance representing the value of the item as an amount of money. Accounts are divided into several categories like Assets, Liabilities, Income, and Expense accounts. A successful business will generally have more assets than liabilities. Income and Expense accounts keep track of where your money comes from and on what you spend it. This helps make sure you always have more assets than liabilities.
As a child care provider, I have to keep track of tons of paperwork and records. The most daunting task is always entering expenses and filing paperwork before it piles up into a giant mountain. Many people put it off until the start of the new year and then have to spend a ton of time getting everything in order, only to most likely lose out on deductions due to too much time passing leaving people forgetful of what they purchased. In this video, I share seven tips to make this year a much better year for keeping track of your tax documents so when next year rolls around, you can relax while others are scrambling
In order to track money within an organization, different types of accounting categories exist. These categories are used to denote if the money is owned or owned by the organization. Let us discuss the three main categories: Assets, Liabilities, and Capital.
An Asset is a property of value owned by a business. Physical objects and intangible rights such as money, accounts receivable, merchandise, machinery, buildings, and inventories for sale are common examples of business assets as they have economic value for the owner. Accounts receivable is an unwritten promise by a client to pay later for goods sold or services rendered.
Assets are generally listed on a balance sheet according to the ease with which they can be converted to cash. They are generally divided into three main groups:
A Liability is a legal obligation of a business to pay a debt. Debt can be paid with money, goods, or services, but is usually paid in cash. The most common liabilities are notes payable and account payable. Accounts payable is an unwritten promise to pay suppliers or lenders specified sums of money at a definite future date.
Capital, also called net worth, is essentially what is yours – what would be left over if you paid off everyone the company owes money to. If there are no business liabilities, the Capital, Net Worth, or Owner Equity is equal to the total amount of the Assets of the business.
One of the first steps in evaluating a business is determining your break-even point. This is the number of units of your product, which must be sold for income to equal all expenses incurred in producing the merchandise. Logic would dictate that if you are in a high rent area and need to sell half your stock of art objects each month in order to break even, you have started a losing business.
Assuming your product or service is a worthwhile one, the control of your overhead is the key to your profit.
Overhead consists of fixed costs, such as rent, insurance, and payment on bank notes, etc., which will not vary if your production increases. It also includes variable and semi-variable costs. Variables mean such items as commissions to salespeople, purchases of raw materials; and other overhead, which increase in direct proportion to changes in production volume. That is to say, if a company that has been making 10,000 toy cars per month, for example, doubled production to the 20,000 level, then purchase of raw materials, sales commissions, and other expenses would also increase. Semi-variable costs will vary with volume, but not in direct proportion. The cost of lighting and power will increase with greater production.
Each unit produced should provide some margin for fixed costs and profits. Or expressed a different way, at no point should the direct cost, not the fixed cost, of producing a unit be greater than its sales price. Your fixed cost per unit will vary inversely with changes in volume. Since your fixed overhead will not increase as a result of greater production, and semi-variable costs will increase by a percentage considerably lower than the rate of increased production, it follows that your cost per unit will lessen as greater quantities are produced.
The experienced businessman uses his break-even charts to indicate profit margins at a given rate of production. However, the chart is useful only when fixed costs remain the same, when variable percentage can be plotted with reasonable accuracy, and when a company produces only one item.
Knowing these basics will give you a good idea of what accounting does for you.