Accounting can seem intimidating, but it’s actually pretty simple to understand if you just break it down into its component concepts. Here are 9 of the most important accounting concepts every small-business owner should know when running their company, including balance sheets, income statements, and cost accounting. You may have heard these terms before, but do you really know what they mean? If not, make sure to read this article from top to bottom before starting your business!
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Accruals
This process is used to record revenue and expenses when they are earned or incurred, not necessarily when cash is received or spent. For example, a company earns revenue when it delivers a product or service, not when cash is received in exchange for that product or service. The accrual accounting method can be used for inventory valuation as well. When you purchase inventory on credit terms from your supplier, you don’t pay anything upfront and take ownership of those items until you have paid in full.
Consistency
Any small business owner will tell you that there are two things she or he values above all else: consistency and profitability. Consistency may seem like a strange topic for a tax accountant to cover, but you’d be surprised how many small businesses fail because of poor bookkeeping habits. We recommend you to try bookkeepers Vancouver for the best bookkeeping services for every small business.
Going concern
A big accounting concept that’s easy to understand. A going concern is a business that’s in such good shape financially and has such a promising future ahead of it that it can continue to operate without interruption.
Conservation
One of many accounting concepts every small business owner should understand is conservation. This concept has to do with making sure you don’t spend more than you earn or, in accounting terms, ensuring that your revenues exceed your expenses and that there’s a positive cash flow. Conservation helps you conserve cash reserves so you have money to use when unforeseen expenses come up.
Economic entity
Small businesses are typically classified as an economic entity or a legal entity. It is important to understand why your business is classified in one way or another, because different consequences follow from that designation. First and foremost, it helps clarify who pays taxes on business income: if you own a small business in which you operate as an employee but control its operations, you are likely considered an employee for tax purposes and not self-employed, meaning your net income is taxable on your personal tax return.
Materiality
When planning your small business’s budget, it’s important to determine what is and isn’t material. This term can be applied to both big costs and little ones. If you were a retailer, for example, materiality would mean that you need to consider all of your expenses (including rent and utilities), but that labor costs might not be as important. It’s also important for you to learn what is P&L to measure the growth of your business.
Matching
Once you begin accepting payments, you’ll want to make sure that all your bases are covered and that all your funds have been collected. This means making sure that you have received a check or an electronic transfer for any outstanding invoices as well as tracking down payments from customers who’ve paid via credit card. You might even find yourself matching invoices and deposits to cover payments made by individual customers, which is part of both recording transactions and managing cash flow.
Accounting equation
The accounting equation is an easy way to think about keeping track of your business’s income and expenses. Assets = Liabilities + Equity. The three main accounts you’ll deal with are: assets, liabilities, and equity.
Accounting period
An accounting period, also known as a period of account or a tax year, is simply a set period of time for which financial statements are created. Your business’s accounting periods may align with your company’s fiscal year, but they don’t have to—they could be any length of time you want. In general, it’s best to stick with an accounting period that matches up with when your business pays taxes. For example, if your business is organized as a C corporation and is subject to U.S.
