NEW SERIES: Accounting for Small Business 101
Accounting 101
Part 1 of a 10 Part Series
A good business starts with a great idea.
Maybe it’s an ingenious invention you’re looking to sell. Or providing a centuries-old service with above-average expertise. Whatever the case, you may be eager to jump into executing this great idea of yours.
As tempting as that may be, it's best to lay some groundwork. Every masterpiece started with a blank (and well-prepped) canvas. What is the most important piece of prep work you can do for your business?
Setting up accounting.
Apart from profits, the financial aspect of business may be at the bottom of your “excitement” list. Many of us, especially the creative types, would prefer to tack this on at the last minute. However, if a great idea is the seed of a great business, accounting is the root system. Without an understanding of accounting and care towards financial matters, your business will falter and eventually die.
Therefore, one of the first tasks to starting a new business is to establish your accounting plan.
This guide will provide you with the most basic fundamentals of accounting for your business. Whether you’re a budding entrepreneur with your first start-up or a stay-at-home mom selling knit hats on Instagram, lay the groundwork. Here’s how.
Part 1: What is Accounting?
Yes, we are starting with the most basic of basics. What even is accounting?
According to Wikipedia: "Accounting or accountancy is the measurement, processing, and communication of financial and nonfinancial information about economic entities such as businesses and corporations."
Hmm, yes. If that hasn’t made things clearer, you’re not alone.
Accounting at its simplest is managing money correctly. That involves A: Keeping track of money as it comes into your business and as it flows out. B: Using information about your money to make good decisions. And C: Paying your taxes accurately.
Bookkeeping: Tracking money
Keeping track of money flow is an aspect of accounting that is called bookkeeping. And this really is the most basic form of accounting. The earliest evidence of bookkeeping is from 7,000 years ago. And it is the same general principle. You keep a record of the exchange of money. Whether it was 2000 B.C., 1911, or 2021, bookkeeping entries include the date, a description, and the amount spent or received.
Today software like Quickbooks and Xero are most commonly used for bookkeeping. It makes bookkeeping faster than ever since so much is automated. However, bookkeeping software has its a learning curve. And if your business uses invoices or has employees, things can get more complicated.
Because of this many businesses hire an employee or an outside company to do their bookkeeping. But since bookkeeping is such an important part of your business, it’s a good idea to get familiar with the process and manage your own books for a few months. You’ll have that much more appreciation for your bookkeeper.
Accounting: Making Money Decisions
While bookkeeping involves the day-to-day tasks of managing money, accounting is a bigger picture look at your finances. An accountant can do your bookkeeping, including invoicing and payroll, and can also analyze all the data to help you make smart business decisions. They will provide you with business insights and advice on how to grow.
Accounting is not something you can DIY like bookkeeping. You must go to a college or university to get a bachelor’s degree in accounting. With additional training, an accountant can pass their state’s CPA exam and become a Certified Public Accountant (CPA). A CPA can speak on a business’s behalf to the IRS. They also commit to continuing their education, always keeping up to date on the latest industry knowledge.
While bookkeeping software like Quickbooks can create basic financial reports for you to look at, an accountant can translate the numbers into decisions that support your business.
Tax Preparation: Because You Have To
Anyone can file taxes. As an employee, you have likely used something like TurboTax to input the numbers on your W-2 form and (hopefully) see the numbers at the top of the screen tick up to a nice tax refund amount. It’s generally a simple and even enjoyable process.
When you own a business, this process becomes exponentially more complicated. Check out this article to see a list of the most common tax forms and deadlines a business must pay attention to: https://www.uschamber.com/co/run/finance/guide-to-filing-business-taxes.
If you are an independent contractor (AKA freelancer AKA sole proprietor) who solely deals with a W-9 and a few 1099 forms, you may be able to prepare and file your taxes yourself using software. If your business is larger or more complex, hire professional help. Making mistakes on your taxes can result in a huge hassle and expensive fees.
There are many more aspects to accounting than we covered here. But these are the most basic of basics. A way to dip your toes into the financial side of business. And a great first step towards creating your accounting plan.