Accounting Basics for Your Small Business

Accounting is the process of recording, reporting, interpreting and analyzing financial information. Small businesses may face tough financial decisions such as, the kind of employees to hire, how much they need to pay in salaries, ensure there is enough work and most importantly how much the company can afford to spend to hire new employees. Some of the things that may be helpful in making these kinds of decisions include; understanding your profit margins and your current financial obligations such as debts and expenses.

A small business risks making bad decisions if it does not understand how money is flowing in and out of the business and can lead them to failure. The business also risks tax consequences by missing out on business deductions that can save money.

A reliable accounting process includes recording, reporting, interpreting and analyzing. The first step of the process is to record every transaction the business does. There are five major transaction types which are revenue, expenses, assets, liability and equity. The most fundamental part of accounting is recording and placing each transaction into these categories. This is called book keeping.

Once your book keeping is complete you should be able to prepare a financial report that depicts the financial status of the business. The three major accounting reports are; income statement, balance sheet and cash flow statement.

Financial reporting is meaningless if it cannot be interpreted and there are multiple ways of breaking down financial reports to derive specific information. In many cases you can apply ratios to certain pieces of your financial statement in order to understand what is really happening in the business.

It is important for a small business to establish a good accounting system as it helps to make decisions to grow the business, prevent financial mismanagement that can result in financial stress or closure of the business.