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Bookkeeping is the foundation of all small business knowledge. If you run a small business, you need to make it a habit. Too often, accounting is pushed aside by small business owners to tackle the most pressing issue of the moment. If that’s not it, it’s procrastination or number phobia (the fear of making a mistake).
Believe me, don’t put it aside. Far too many small business owners often let a backlog of transactions and expenses build up before they arrange them, which can hurt your business in at least two important ways.
First, it creates confusion. Up-to-date accounting tells you the essentials you need to know. Without it, you’ll only have a rough idea of how much money you have, any outstanding bills you need to pay, and whether you’ve been paid for the goods or services you provide.
Second, ignoring the bookkeeping makes paying your taxes more complicated. There are few things worse than having a deadline and having to sort through a paper bag full of receipts for items you can deduct – at the same time you’re trying to meet a deadline for a client. Using a tax accountant or preparer doesn’t come cheap either.
Here’s the good news: you don’t need a finance degree to understand and benefit from accounting. The double-entry bookkeeping method, the way bookkeeping is done today, dates back to the 15th century. If you’ve ever made a checklist of the items needed to complete a task and then marked the items as they were collected or completed, you have the basics of bookkeeping.
Related: Finding the Right Solution for Your Accounting Needs
When you are ready to take on your own accountancy, here is the syllabus for your non-degree course:
- Accounts. Accounts group together similar business activities for ease of analysis (i.e. a sales account). The complete list of your accounts is called your chart of accounts. Items on this list include sales, cost of goods sold, salaries – any business activity you perform.
- Accounting period: This is the specific time period in which you are reviewing your business. For example, you might want to know how you did in February. Or the third trimester. Or the year. Or since you started advertising.
- Accounts payable: This is money you currently owe to vendors or suppliers, but have not yet paid. If you bought a computer that you haven’t paid for yet, it’s an account payable.
- Accounts Receivable: You have done the work and sent the invoice, but the customer’s check is in the mail. It is an account receivable.
- regularisation account: Expenses or income that you have incurred but have not yet paid (this means that accounts payable and accounts receivable are accrued expenses). If you use accrual accounting, you record accrued liabilities (positive and negative) at the time of sale. In cash accounting, you would have recorded when you paid or received the money. The benefit of accrual accounting is that it lets you know that even if you have cash on hand, you shouldn’t spend it freely. You may need for that shipment of raw materials you just received. Conversely, you may have worked all month for a client but haven’t yet been paid for that work.
- Assets: Objects that you own, physical or immaterial. These can be things like property, vehicles, money, a computer, or the right to use a particular parking spot.
- Balance sheet: This document summarizes all your assets (what you own) and compares them to all your equity and liabilities (what you owe). With it, you can assess the overall financial health of your organization.
- Cash flow: A comparison between the money you usually receive and the money you have to pay.
- Cost of Goods Sold (COGS): If you manufacture a product, the sum of the costs is directly related to the manufacture of this product. So if you’re a bakery, it would be materials like flour, sugar, and eggs, and the cost of using the kitchen you’re cooking in. After subtracting your cost of goods sold from your net sales (that is, your total sales revenue less any sales discounts, allowances, or returns), you get your gross profit.
- Double-entry bookkeeping: By recording each entry as a credit and debit, you see the source of your money and where you spend it. This facilitates the detection of errors. Credit money when you buy a good; debit an asset account (e.g. “IT expenses”) when you spend money on that asset. When you check everything, it’s called creating a trial balance, which is just a way of telling you if your debits and credits are correct. If your debits and credits don’t match, someone has to go through each item until you find the source of the error. Although laborious, detecting these discrepancies is the real benefit of double-entry bookkeeping.
- Equity: The value of your business after you have paid off your debts and who owns it (this equity can be entirely yours or shared with a partner or investors).
- Expenses: What you spend to run your business. Your expenses can be items you need to make a product you sell. These can include the cost of renting your building, office supplies, payroll, etc.
- Big general book: This traditionally lists all the individual accounts needed to delineate your business assets, liabilities, equity, income, expenses, gains and losses. Rather than listing every transaction exhaustively (for example, the cable you purchased each week starting in January), it summarizes from chronological listings in journals, such as a gross inventory journal or log sales receipts.
- Income statement (profit and loss account): This document compares income to your expenses to reveal whether your business made or lost money during a given accounting period.
- Passives: Money you owe but haven’t paid, such as unpaid bills, credit card balances, and any business loans you have taken out. If your company’s total liabilities exceed its assets, your business is in trouble.
- Pay: A complete list of your employees and how much each is paid, as well as how much you pay in taxes and pension contributions.
Related: Five Bookkeeping Tips for Business Owners
The next non-MBA skill you need to learn is diligent and accurate record keeping. Spoiler alert: A box full of unorganized receipts and related financial documents that you only look at minutes before tax time is neither efficient nor accountable.
Watch for other systems that look like they should work, but are faulty. For example, keeping your logs in notebooks or folders, no matter how easily accessible, can be cumbersome and lead to errors. Likewise, spreadsheets seem compact, they are flexible, and most people have a basic understanding of them. Yet they lend themselves easily to error and can quickly become complex.
Here’s what really works in mastering your accounting: an online platform where your data can be quickly digitized and is systematically linked to your bank accounts and credit cards.
Such a platform is easy to configure and can automatically perform most of the tasks that help you best. There are several platforms like this (such as Cared for and QuickBooks) that provide the ability to categorize your expenses and income into standard accounts to help you quickly understand your business finances and opportunities for improvement.
So go ahead and throw your cap in the air. In just these few minutes of reading this article, you have mastered the essence of accounting without an accounting degree. Now go ahead and be profitable.