Accounting for Small Business Owners
Book PrefaceAccounting for Small Business Owners
Accounting is a large and multifaceted field that encompasses many business activities. It serves a fundamental role in businesses of all types, from multinational corporations to nationwide chains to mom-and-pop neighborhood stores. In this book we’re going to break it all down at the level of the small business owner. We’ll discuss what accounting is and the industry rules that govern how accountants operate. You’ll learn about financial statements—what they are and how to use them. We’ll cover stock, payroll, borrowing, and employee benefit and tax payments. Then we’ll go over production and inventory, as well as paying bills and expenses.
After reading this book you should have an understanding of some basic principles of accounting and be able to set up your first set of books for your small business. You’ll be able to prepare your own financial statements and determine whether or not your business is making a profit. You’ll also be able to better predict the ups and downs of your business and make more informed decisions, which will keep your enterprise healthy and growing.
WHAT IS ACCOUNTING?
Accounting is the process of recording business transactions, summarizing that data in financial statements, analyzing it, and then reporting the findings to owners and investors. Owners of small businesses need to know if their sales, costs, and expenses are increasing or decreasing, and if they are making a profit or a loss during a specified time period. A business owner can’t improve the business unless they know what is and isn’t working.
As a small business owner, you will need to monitor cash flow so you’ll know if you have enough to cover your upcoming expenses. You’ll also need to keep an eye on receivables and payables so you know if customers are paying you on time, and that you’re paying your vendors timely as well. You’ll need to monitor your sales and expenses to make sure you are earning a profit. If you’re losing money, there’s not much point to being in business!
WHO GOVERNS THE ACCOUNTING INDUSTRY?
The Federal Accounting Standards Board (FASB) is the governing body that establishes and issues the standards to which all certified public accountants (CPAs) must adhere. FASB standards, known as generally accepted accounting principles (GAAP—pronounced “gap”), consist of a set of guidelines that govern how the accounting industry performs its duties. The goal is to ensure credibility and transparency within the industry.
The basic accounting principles include:
• Cost principle. Accountants use the term cost for the amount originally spent, so amounts shown on financial statements are referred to as “historical costs.”
• Economic entity assumption principle. Accountants consider the business and its owner as separate entities.
• Full disclosure principle. If certain information would be relevant to an investor or lender, it should be disclosed in the financial statements. The information is usually included in the form of footnotes.
• Going concern principle. Accountants act on the assumption that the business will keep operating indefinitely.
• Matching principle. Accountants try to match revenue to expenses (i.e., post them in the time period, month, or quarter in which they were earned). This principle is used in the accrual method of accounting.
• Revenue recognition principle. Accountants recognize revenue as it is earned, not as cash is received. This system is also used in the accrual method.
A few of these principles are specific only to the accrual method of accounting, as opposed to the cash method. The accrual method recognizes revenue when it is earned (when the product is shipped or services are performed) and expenses when they are incurred (purchases made), not necessarily when money is exchanged. This method allows the business owner to keep the revenue and expenses for products sold or services performed reported in the same time period, such as over a 30-day period.
That said, most small businesses use the cash method, which is acknowledged by governing agencies as an acceptable alternative. This method stipulates that revenue be recognized when the cash is received and that expenses be posted when the bill is paid.
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|Epub||November 22, 2016|
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