Streetwise Tips on Basic Accounting
* Not just a measuring unit
Accounting is not just a yardstick to figure out how much money you made last year or what your tax liability is. Used properly, accounting also helps you identify trends in sales and expenditures. The ability to track and identify trends allows you to make decisions that can quickly boost your profitability or enable you to avoid cash shortages.
* Do it monthly
Every month, you should calculate the profitability of your business by putting together an income statement. Ideally, you should also examine your balance sheet. By looking at your financial statements every month, you can quickly adjust expenditures and sales efforts to keep your business within budget. Otherwise, at the end of the year, you will probably find that your expenses have crept upward, leaving your profit margin below your initial projection.
* Meticulous records
No matter how strong or weak your understanding of accounting is, you need to keep very careful, well-organized records.
One reason to keep good records is for tax purposes. If you ever get audited, the tax people are going to want to see some receipts, not just cancelled checks. If you can’t produce the receipts requested during an audit, the IRS isn’t going to be understanding about it!
There are lots of other reasons to be organized. For example, it is not uncommon for large, as well as small, companies to pay the same bill twice—sometimes overpaying by thousands of dollars. And it isn’t uncommon for vendors to claim that you never paid a particular bill despite the fact that you have.
One year a state revenue division came after me for taxes they claimed were unpaid. I had organized records and could prove payment. Despite this, claims regarding the same issue were made again. Finally, I was forced to complain to the tax commissioner. But at least I had proof of payment!
* Basic principles
Don’t be awed by accounting or its fancy terminology. The basic concepts are very simple. Even if you decide to use an outside accountant on a regular basis, you need to invest some time in understanding the basic principles yourself.
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