Accounting for Dummies; An Overview
Accounting for Dummies are basic accounting tips and tricks you can master in your business.
Accounting for dummies will show you with basic steps you can create financial information for your business. Please, visit other categories or search for the topic of interest at the left column.
First decision you need to make is whether you want your business be classified as cash-basis or accrual accounting. This is probably already confusing, but read on and I will explain.
In cash-basis accounting, you will record sales when the customer pays.
Ex: on May12th you sell $12,000. worth of books.
On June 12th you receive payment from your customer.
The sale of the books is recognized on June 12th, when the payment is received.
On the other side of the scale, your expenses are recorded when they are paid.
Ex: on May 10th you purchase $8000. worth of books.
On June 10th you pay your supplier for those books.
The purchase is recorded on June 10th, when you pay your supplier.
Cash-basis accounting is shied away from, because your financial statement will not give an actual picture of your company’s activities. It will only show you money coming into the business and money going out of the business.
In accrual accounting, the sales are recorded when they are made, regardless of when the customer pays and the expenses are recorded when they happen, regardless of when you pay them. This method gives a clear picture of your total yearly sales with a balance due from your customers as well as a clear picture of all your expenses and inventory purchased with a balance due to your suppliers.
Now that you have decided on which method of accounting system to use, lets talk about your team.
As a business owner the sooner you establish your team to help you reach your goals, the greater peace of mind you can have. Focus on your relationship with people such as your lawyer, banker, marketing expert, insurance company, and your accountant who will give you financial advise and minimize your tax liability. You also need a bookkeeper to look after your day to day recording of financial transactions.
Some business owners take on the task of bookkeeping themselves and soon only have time to do the bare minimum such as, payroll – employees have to be paid, paying suppliers and creating sales invoices. All these payroll, supplier and customer invoices and documents end up in a basket to be entered into an accounting software program at a later date. Well, you know what, that later day is far away and might never come. The best thing you can do for your business is hire a bookkeeper.
The bookkeeper will record every transaction that takes place with the following six basic types of suppliers or entities.
1- Customers who buy the products and services that the company sells.
2- Employees who provide services to the business and are paid wages and benefits such as, worker’s compensation, unemployment insurance, and medical and dental insurance.
3- Suppliers who provide items such as, products for resale, legal advise, utilities, gas, rent, telephone, computer and furniture.
4-Bankers or trust companies who loan money to the business, charge interest on the principal and are monthly payments are scheduled to pay off the loan.
5- Investors, the individuals that invest money in the business and expect the business to earn profit on the capital they invest.
6-Government, federal and provincial government that collect income tax, payroll tax, sales tax and property tax from the business.
It does not matter what size of business you have. You will be amazed at the amount of paper and transactions accumulate each month. Someone has to keep track, organize and record in order to be able to provide sound financial statements that the business owner can rely on and make good decisions.
As a business owner keep the following steps in mind when starting out or make a change if needed:
1- Make sure you have an accountant/bookkeeper as part of your start-up team.
2- With the help of you accountant/bookkeeper, choose a software to keep track of your business transactions.
3- Open a business bank account and keep it totally separate from your personal account.
4- Get a business credit card or line of credit and keep solely for business use.
5- Set up your office with desk, computer, filing cabinet and start-up office supplier. Make sure it’s user friendly for yourself and your bookkeeper. Situate the computer, mouse, calculator, and telephone in easy reach, so after working 8 hours you or your bookkeeper don’t get a soar neck or back.
6- Invest in office trays and label them to communicate to your bookkeeper as to where the documents are being kept. Once or twice a week when your bookkeeper comes, they know exactly where to go to get the information needed. No time wasted.
I hope this has been helpful. Good luck.