Often, people
associate small businesses with expertise in some field. You know all there is
to know about fishing, so you open a tackle shop. Your friend loves to do hair
and makeup, so she buys a salon. What people don’t think about when they dream
of having a small business is that you have to do it all. You have to be a
janitor, repair person, accountant, marketer, psychologist, negotiator … the
list goes on.
Accountant?
That’s the one that usually terrifies people. If you can’t afford an
accountant, you have to do your own books. Many people don’t know how to do the
books and simply ignore them. This is a recipe for disaster for your business.
Understanding basic accounting concepts will take away some of the intimidation
and allow to approach your finances like a pro.
Accounting Basics: Credits And Debits
Every
transaction that your business does has two sides – a credit and a debit.
Credits increase one account, while debits decrease a corresponding account.
For instance, if you pay cash (or write a check or use your business debit
card) for new computers for your business, your cash account is debited, or
decreased. Your new computers, however, are an asset to your company, so your
asset account is credited, or increases, with the value of the computers. Just
remember that for EVERY SINGLE TRANSACTION, something must go up and something
else must go down.
Assets And Liabilities
Assets are those
things that you own or have a right to. Your business’s furniture, equipment,
computers and so forth are assets. If you own the building where you are
located, that is an asset. You may also have intangible assets, like a
copyright or patent. Your accounts receivable, that money that customers owe
you, are an asset because you have a right to collect that money.
Liabilities are
those things that represent obligations of your company. If you took out a loan
to buy machinery, that loan is a liability. Your accounts payable, that money
that you owe other people, are a liability. If you offer a layaway program to
your customers, the money they pay you before they receive their goods is a
liability because it creates an obligation
for you to provide them with products in the future. Any obligation is a
liability.
Income And Expenses
Income, of
course, is money you receive. Most of your income will probably be from sales,
but you may have interest income or investment income, for instance, that also
belongs to your business. Expenses are those things you pay for. Employee
salaries, utility bills, the rent or lease payment, and maintenance and repair
costs are common expenses.
Owners’ Equity
Simply put,
owners’ equity is the difference between assets and liabilities. If your assets
are greater than your liabilities, you have money, or at least hypothetical
money, in the bank. Your assets may be largely in your business’s very
expensive equipment, for example. The idea is that you could sell your assets,
pay off all your liabilities, and have money left over.
Small business
accounting software will go a long way toward helping you straighten all this
out, but you still need to understand why you put the numbers where you do.
Understanding your books is the first step in running a successful business.
Disclaimer: The
views expressed on Cort Christie are solely those of the Cort Christie, and do
not necessarily reflect the views of other organizations
with which the author is associated, or other authors.
