Many startup entrepreneurs and small business owners have mastered creating excellent services and products, building teams, and attracting customers. However, a great deal of them would fail an introductory bookkeeping class. If you are a business owner and don’t have a good working knowledge of the types of “accounts” used by your bookkeeper to organize finances and measure your company’s success, then all efforts could end up futile in the end. So, let’s take a look at the bookkeeping basics you can’t afford to ignore.
Bookkeeping Basics You Can’t Afford to Ignore
There’s no doubt that you’ve probably at least heard of the following terms, but do you know what each of them means? If not, keep reading because these are bookkeeping basics you really need to understand as a business owner.
Any unsold products sitting on a shelf have monetary value for your company, so they must be tracked carefully. For this reason, you should conduct physical inventory counts periodically to see if the actual amounts match the numbers in the computer.
This is the most basic of all accounts. Every business transaction passes through this account, which is why most bookkeepers use two journals, Cash Disbursements and Cash Receipts, to track activity.
Let’s face it, no one likes paying bills, but when the Accounts Payable system is managed properly, it’s a little less painful. Not only does it ensure all invoices are paid on time, but it also helps avoid paying the same bill twice. So here’s a pro tip: To save money on Accounts Payable, try to determine which bills can be paid early to avoid interest and obtain discounts.
Any uncollected money your company earns through the sale of goods or services is known as “receivables.” This money is the total outstanding that’s due from customers and should be carefully tracked and managed. Using a receivables report is the easiest way to see upcoming payments and those that are also past due.
The sales account is responsible for tracking the revenue from all streams. Recording sales in an accurate and timely fashion is essential in helping know where your business stands financially.
This account tracks any profit that is reinvested into the company and not paid out directly to the owners. Retained earnings are cumulative, and they appear as a running total of earnings retained since the beginning. The good news is that this account doesn’t take much time to manage, but it’s important for lenders and investors who want to see the company’s performance over a period of time.
The owner’s equity account sure sounds nice, right? This account is rather basic as it just tracks money that the owner(s) put into the company. You may also hear this account called net assets, and the purpose is to show the owner’s investment into the company after liabilities have been subtracted from the assets.
Just as the name implies, the purchases account is for tracking finished goods or raw materials that are purchased for the business. This is important because it’s a component used to calculate “Cost of Goods Sold,” which is found by subtracting purchases from sales to find the gross profit.
This is one of the highest costs for most companies. So, keeping this account updated and accurate is essential for taxes and other types of government reports. Failing to keep up with this account can get a company in serious trouble.
The last of our bookkeeping basics you can’t afford to ignore is the loans payable account. This account is vital for companies that borrow money to purchase vehicles, equipment, furniture, or other items for the business. In addition, using this account allows you to track due dates and payment amounts for each loan.
In the end, you don’t have to know how to manage each account by yourself, but you should at least know the purpose of each one. Though there are many different types of accounts in the world of accounting, these are the bookkeeping basics you can’t afford to ignore.