Accounting and Bookkeeping

Accounting

The importance of accountants goes beyond the simple filing of taxes. It is often called the language of business and involves recording, classifying, reporting and analyzing financial data.

Balancing the Books

Accounting is all about the debits and credits. As money comes into and out of the business, accountants track this flow. A balance sheet contains all the transactions and is a good indication of a business’s financial position. The total assets of the company can be summarized as the owner’s equity minus the liabilities.

Accountants

When looking for an accountant, you want to think long term. This is a relationship that will provide more than tax forms. Your accountant should provide ongoing financial advice and guidance as your business grows.

Because of the important roll an accountant will perform for your business, do your research before selecting an accountant. Find one that has experience working you’re your type of business, or in your industry. Follow up with their references.

You should narrow down your list to several accountants and then interview them, as you would with any other important hire. They should instill a sense of trust in you. After all, they’ll be handling your finances – the lifeblood of your business. You must trust them not only to act in your best interest, but also to keep your confidentiality.

Also, ask them about their ongoing training. Regulations change continuously. You want to make sure they not only know the laws, but understand how they can work for you.

Bookkeepers

While an accountant handles the overall financial picture, a bookkeeper keeps track of the day-to-day finances. If your business is very small, you may be able to handle this function yourself. It will save you the money that would go to the bookkeeper, allow you to keep an eye on the financial aspect of your business and also maintain your privacy.

But this bookkeeping task will take a lot of your time. Entering all your financial transactions may not be the best use of your time, especially when your business is at such a crucial stage of growth.

When deciding whether or not to hire a bookkeeper, estimate the number of hours it will take him or her to maintain your books on a monthly basis. It will not usually be a full-time position. Ask other business owners whom they use for bookkeeping. Or inquire at your local industry association or chamber of commerce. Your accountant may be a great source of bookkeeping references, or may even have someone on staff who can perform that service.

The Accounting Cycle

To properly manage business finances, one must complete each step of the accounting cycle. It is the process of recording and reporting data thoroughly, so that it can be accurately assessed and also so it facilitates tax filing.

Recording Transactions

Every day, businesses keep track of all transactions that happen in journals. Often this process in nearly effortless if it is automated on computer, but some businesses still do this on paper.

Posting Debits and Credits

The balance of all the journals is transferred to the general ledger. When up-to-date, the ledger shows the current balances in accounts payable, accounts receivable, owners’ equity and any other accounts that the business has.

Adjusting the General Ledger

Not every financial event gets recorded in a daily journal. For example, making the decision to write off bad debt doesn’t happen in a journal. Yet it needs to be recorded in the general ledger. This step keeps the ledger accurate.

Closing the Books

Once all revenues and expenses are tallied, any profit needs to be posted into the owners’ equity account. The revenues and expenses must total zero before a new accounting cycle can begin.

Creating Financial Reports

Financial reports summarize all the activity of the accounting period they cover, giving numbers that are useful in analyzing financial trends and making decisions. Cash-flow statements, balance sheets and income statements are all financial reports.

These reports allow business owners to chart the course of their company, project profits and plan for the future. They also help identify trouble spots and places where expenses can be streamlined.

If the business has stockholders, reports help them value their shares of stock. Banks also use these reports to make lending decisions.

Finally, reports are very useful in preparing tax returns and reporting required information to the IRS.

Financial Report Examples

Income Statement

An income statement is a representation of the company’s bottom line. It lists the revenues and expenses by category during the accounting period. The difference between revenues and expenses is the company’s net profit or, if the amount is negative, net loss.

Statement of Capital

Once the business’ profit or loss is known, the business owner must decide what to do with the profits (if there are any). He or she can reinvest profits in the business, take the profits as personal income or some combination of the two. The Statement of Capital will reflect these decisions, specifying any change in the owner’s capital.

Balance Sheet

The balance sheet represents a business’ financial position at a specific point in time. It lists all the company’s property (assets), everything owed (liability), and the value of the owner’s stake in the company (equity or capital).

Cash-Flow Statement

A cash-flow statement shows all the places money comes from, and all the places it goes to within the accounting period. Since is a representation of whether the cash flow is increasing or decreasing, and specifically where it is flowing from or to, is very useful to manage cash flow bottlenecks.