The Beginner’s Guide to Accounting

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Some studies show that 82% of small businesses fail every year due to poor cash flow management. On top of that, 73% fail due to being overly optimistic about sales and having a lack of insight into finances, while 70% fail due to ignoring what they don’t do well financially. 

At first glance, this may seem intimidating, but it’s important to know how to balance business finances. At State Tax Advisors, our team of highly experienced tax consultants and advisors work alongside CFOs and accountants on a regular basis. Because of our closeness to the subject matter, we want to help shed some light on accounting for beginners.

To be frank, if you run your own business--or are planning to start your own--you already know that bookkeeping is one of the most important tasks you need to understand. 

If you’re managing everything without a strategy or ignoring financial tracking entirely, you’re setting yourself up (and your business) for failure. 

In today’s article, we’re exploring the basics of accounting, how it relates to business finance management, and how you can start implementing these practices right away. 


What Is “Business Accounting?” 

Accounting is the process of recording, managing, keeping, filing, and organizing financial transactions for a business. Accountants, CFOs, or another type of financier is usually responsible for handling these records and reporting them. 

You’ve likely looked into accounting software, like Freshbooks and Quickbooks, or have talked to financial consultants to help with bookkeeping and business accounting. You’ve probably dabbled in this area without really understanding how you move forward with it, and that’s where a lot of the confusion lies for growing businesses. It takes more than hiring an accountant or installing expensive bookkeeping software to run finances smoothly. 

To be clear, there are a few pieces of documentation, files, and processes you need to know to handle business financials. We’ll break down each one so you feel comfortable handling them on your own.

 

Accounting Basics: Balance Sheets

Balance sheets are summaries of an organization’s financial balances. They’re great for figuring out a company’s financial health and stability. Balance sheets are usually divided up into the following categories: current assets, non-current assets, current liabilities, non-current liabilities, and shareholders’ equity.

Current assets are assets that are expected to convert to cash by the end of the fiscal year. 

Non-current assets are assets that are not expected to convert to cash by the end of the year and are usually part of a longer-term plan. 

Current liabilities define an organization’s short-term financial obligations due in the same fiscal year, or within an operating period. 

Non-current liabilities cover a variety of longer-term financial obligations, including but not limited to: deferred payments, debentures, long-term loans, deferred tax liabilities, lease payments, deferred revenue, etc. 

Shareholders’ equity (also known as a business net worth) shows “how much the owners of a company have invested in a business.” [ Source ]

A balance sheet helps organize and define these terms so that you have a good understanding of where everything is and how much you owe in a specialized amount of time. 

 

Accounting Basics: Income Statements 

Income statements (also known as profit and loss statements) show a company’s income and expenses. 

These reports are usually generated on a monthly or quarterly basis. Income statements reveal financial pain points and points so businesses can figure out how to generate revenue and sales. Accountants who know how to use income statements well will know how to present their findings and analyze the numbers to see how strategies can be improved for the future.

They’re also quite useful to show to potential investors, so they can have a sharp insight into how the business is functioning and how they can help financially. 

 

Accounting Basics: Cash Flow Statements 

Cash flow statements are financial statements and records that summarize cash, and “cash equivalents” leaving the company. (For clarification, a cash equivalent is short-term investment security, usually with maturity periods of 90 days or less).

Cash flow statements are an integral part of the accounting process and always supplement the income statements and balance sheets. When tracking info for one of these statements, you need to take the following streams of cash flow: operating activities, investments or investing activities, financing activities, and sometimes “noncash” activities.

Unlike balance sheets and income statements, cash flow statements do not include cash flow that’s been recorded or processed on credit cards. Balance sheets and income statements are the papers to turn to when looking for net income information.

There are two ways to process cash flow: the direct and indirect methods

The direct method is much more specific compared to the indirect method when connecting cash flow statements to items that affect it. For example, you would consider some direct methods of cash flow to be items like employer cash, supply cash, interest paid, taxes paid, etc.

The indirect method, by contrast, is what you get at the end of putting together the balance sheet amount, and the net income amount. Once you break down the numbers, you’ll find the end amount generated by what cash flow statements label as “operating activities.” 

You’ll want to try both methods with cash flow statements to see how it affects your business’s financial health.

 

Next Steps: Identifying Tax Obligations 

After you get the most basic operations together for accounting, you’ll want to figure out your business’s tax obligations. Keep in mind what kind of business you are, how you’ve registered in your respective state, and what methods of tax forms you’ll need to fill out and file for the appropriate deadlines. 

Whether you’re an eCommerce or SaaS business, or a sole proprietorship getting off the ground, or even a marketing agency, understanding your financials and how state tax impacts your company is critical for the success of business. Our team at State Tax advisors assists businesses in state and local tax preparation, consulting, planning, audit defense, registrations, and more. If you’re interested in taking advantage of tax accounting, schedule a call with us today

 

 

 

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