Few Basic Accounting Rules for Small-Business Owners

Here are a few concepts which will help you understand and can further help you make smarter financial decisions in the long run and day to day. Do thoughts like, ‘We didn’t get into business to be an accountant, so why do you need to know basic accounting principles?’ crosses your mind? Understanding them can help you better predict your company’s future based on past trends in sales and costs. This enables you to make smarter financial decisions that’ll save you time and money — two of your most valuable resources as an entrepreneur. It’s important to have a foundational understanding of these concepts so that you can have productive conversations with your financial advisor.?

Here are a few important accounting concepts small-business owners should know.?

1. Accruals?

There are two main accounting methods that you can use: accrual basis and cash basis accounting.?

Accrual basis: Financial statements match income and expenses to the periods in which they are incurred. For example, the accrual method would factor in accounts receivable as soon as an invoice is sent out — it doesn’t matter when the invoice is actually paid.?

Cash basis: Financial statements only reflect income and expenses when they are received or paid. For instance, this method wouldn’t factor in accounts receivable. Instead, income would only be recorded once an invoice is paid.?

Many small businesses start out with cash basic accounting, but accrual basis financial statements give you a much better understanding of your business’s financial position.2.?

?2) Consistency?

The consistency concept says that once you choose an accounting method (accrual or cash), you should stick with it for all future financial records. This allows you to accurately compare performance in different accounting periods.?

Consistency helps every business in the long run, you should keep a solid record of every single transaction from day 1 to the end so it’s easier for you to tackle your profit and loss ratio at the end of the year.??

3. Conservatism?

Under the conservatism concept, revenue and expenses are treated differently. Businesses should record revenue only when there’s reasonable certainty that it will be recognized, for example by purchase order or signed invoice.?

However, businesses should recognize expenses sooner, when there’s even a reasonable possibility that they will be incurred. This weighs in favor of more conservative financial statements. It’s better for cash flow purposes to overestimate your expenses rather than your income.?

4. Going concern

The "going concern" concept says you should assume that your business is in good financial condition and will remain in operation for the foreseeable future. This sometimes allows companies to defer the recognition of certain expenses into future accounting periods.?

Of course, the accountant or auditor is free to come to a different conclusion if there’s evidence that the business can’t pay back its loan or meet other obligations. In that case, the company might need to start considering the liquidation value of assets.?

5. Entity assumption?

This accounting concept states that you should avoid mixing business and personal funds. Business financial statements should reflect only business transactions. For example, you should avoid putting personal expenses on a business credit card.??

Failure to follow this concept can make your online bookkeeping much more difficult and even land you in legal trouble if you’re a corporation or limited liability company. In those cases, you can preserve limited liability protections only by separating business and personal finances.?

6. Materiality?

Businesses should record any financial transactions that could materially affect business decisions. Even if this results in minor transactions being recorded, the idea is that it’s better to give a comprehensive look at the business — this is especially important in the event of an audit.??

7. Matching

This concept says that you should record revenue and expenses related to revenue at the same time to reveal any cause-and-effect relationships between income and purchases. For example, let’s say you pay a commission to a salesperson for a sale that you record in March. The commission should also be recorded in March. Every transaction, whether daily or annually should match your business transaction account. A single mismatch can cause chaos in the initial days.??

I hope these few tips helped you in some way or another, if this feels like a lot for you, I have a solution for that as well. Get these services online through a trusted resourceful team of professional Accountants from WizPro who will handle everything from scratch.

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