On this page you will get an accounting 101 course for your new business without having to take an accounting class. You will also learn basic accounting principles and get help finding simple accounting software that is right for you and your new business.
Accounting 101 for Your New Business
Accounting is how we keep score in business; accounting is the language of business. Today, we keep score almost exclusively on the computer. There are a variety of powerful yet simple accounting software programs that help you to know how you are doing.
Before introducing those, it’s very important to have at least a rudimentary knowledge of accounting. That’s what we call “Accounting 101”.
It’s important to realize why accounting is important. Accounting communicates information about a company’s business; it allows business owners and managers to make informed decisions; accounting also measures economic events.
But no matter how much accounting you know, you are almost certainly going to need an accountant to help you with your tax return at tax prep time if nothing else.
Find out what criteria to use to find the best accountant for you.
The next section shows how business keeps score.
Basic Accounting Principles
Basic accounting principles start with the most basic accounting reports. The three most basic reports we use in keeping score are:
The balance sheet tells you how much you own and how much you owe. The difference between the two is your equity in the business. The balance sheet has three sections as follows:
- Assets, including cash, accounts receivable, inventory and fixed assets such as property and equipment,
- Liabilities, which is what you owe, including what you expect to pay this year and what you have to pay more than a year out,
- Owner’s equity, which is how much was put in by the owners plus or minus cumulative profits.
The profit and loss statement tells you how much your profit (or loss) was over a certain amount of time (a year, a quarter, a month) The profit and loss statement, also called the income statement is calculated as follows:
- Sales – Cost of Sales = Gross Profit
- Gross Profit – Expenses = Net Profits
The cash flow statement tells you whether you have more cash than you had at the beginning of the period, and what the sources and outflows were. This is a good predictor of your cash position in the future.
- Start with your beginning cash balance, add any cash taken in, and then subtract any cash going out.
- The difference between what you take in and what goes out is the “cash flow”. If you take your cash flow and add it to your beginning cash balance you will have an ending cash balance. This cash balance then becomes the beginning cash balance for the next period.
- Cash comes in, in the form of cash sales, accounts receivable collections, new loans and new investments.
- Cash going out typically goes to expenses paid, equipment purchased, accounts payable paid, inventory purchased and paid for, and loans paid.
Of the three statements above, the cash flow statement is the most frequently overlooked. Do so at your peril, though. No matter how profitable your business is, you will soon be out of business if you run out of cash. Remember that cash is king.
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