Getting To Know How Business Accounting Works
Business Accounting plays a vital role in determining the success of any small business enterprise out there today. Matters regarding the finances of a small business should never be taken for granted. It is, therefore, imperative that entrepreneurs properly understand how business accounting works. A Proper understanding of this important concept allows for optimal utilization of company funds, correct allocation of resources, better management of profits as well as effective decision making. Here is a quick glance into how business accounting works.
Three main elements go into the formulation of a business accounting plan for a small business enterprise. These features which include a balance sheet, profit and loss log and a cash flow statement are vital in any business accounting structure. The balance sheet details the total worth of a business enterprise by listing the various assets and liabilities attached to the firm. The profit and loss log shows the total profit or loss incurred by a small business enterprise throughout the course of a financial period. The fiscal period can be calculated monthly, quarterly, half-yearly or annually.
The cash flow statement’s work is to show how much money has been spent in the past and also to predict how much cash balance is required to operate the small business enterprise in future. In simple terms, the cash flow statement will dictate the capital or funding requirements of a small business for future purposes.
There are two main accounting methods used by most small companies and most CPA firms out there today. The first accounting method is the cash based business accounting method where cash receipts are seen as the income that the small business has acquired. While bill payments are recognized as the expenses, the small business has incurred. This business accounting model is the most popular because it is simple and very easy to implement as it requires minimal resources and input.
The other business accounting model is known as the accrual method which involves keeping financial records in accounting books. Records for sales made by the small business are usually recorded into the accounting books as ‘accounts receivable’. The goods or services sold do not necessarily have to be paid for by a customer or client, but they can still be recorded as sold in the accounting records. When cash is received for goods sold, the details recorded in the ‘accounts receivable’ are then updated to reflect the change. The same applies for expenses incurred by the small business where all expenses are recorded in the accounting books and do not have to pay immediately as long as the records are there to show what was spent and when. Bills can, therefore, be paid for a specified duration of time when profits have been achieved. This method is common with small businesses that deal in production or manufacture of goods in large scale.
To aid in either model of business accounting, small businesses make use of unique business accounting software to make the work of managing financial matters easier and more convenient. Business accounting software helps in storing financial data, performing complex calculations and generating reports that can quickly show the progress of business. When this work is done manually a lot of time and effort goes to waste which makes it critical that every small business enterprise out there today makes use a good business accounting software to keep money matters in order.
Getting a quality and affordable business accounting software is not that hard. A quick search on the web should reveal quite some options for entrepreneurs to choose from.