As the end of the fiscal year approaches, many new business owners are finding themselves panicking to get their books in order. Though personal income taxes will usually not be due until the middle of April, organizing your finances at the end of each year is an absolute necessity.
If this is your first year (or one of your first years) running a business, the nuances of the accounting process may initially be quite overwhelming. Accounting can sometimes be very counterintuitive and it is especially important that you pay attention to the finer details.
Ideally, your business would outsource accounting needs to a firm that has a greater familiarity with what the financial reporting process involves, but this may not always possible. In order to make sure your books are as accurate and legally compliant as they feasibly can be, we will quickly review the most essential things for you to know about accounting.
Balancing Assets, Liabilities, and Owner’s Equity.
No matter what your overall accounting philosophy might be, the importance of balance cannot be overstated. In fact, when creating an (appropriately named) balance sheet, if the two columns on the sheet are ever unbalanced, this should be the first indicator that something has gone wrong.
A balance sheet is a “snap shot” of your company’s current financial situation.
- Assets indicate what your company currently owns (equipment, accounts receivable, etc.)
- Liabilities indicate what your company currently owes (accounts payable, interest, other debts, etc.)
- Equity indicates what those with a stake in the company can claim as their own (even if your business “owns” a piece of equipment, for example, this is still considered an asset and not equity).
The formula that your business ought to use for a balance sheet — without exception — is assets= liabilities + equity. Adhering to this formula will make it significantly easier to evaluate your current financial position.
Record Transactions as they Occur.
One of the most common problems for individuals who are new to accounting is that, considering that their income statements and tax reports may not be due for quite some time, they wait to enter relevant accounting information.
But even if procrastinating is something you can occasionally get away with, there a wide variety of avoidable damages that can result from choosing to do so. First of all, at the very least, needing to focus on all of your accounting work at once will interrupt your ordinary course of business. Even more importantly, failing to actively monitor your books can result in errors that continue to compound over time. Because of this, your business ought to engage in active bookkeeping on a daily — or at least weekly — basis.
Balance Sheets versus Income Statements.
For most businesses, your balance sheet and your income statement will be your two most important financial documents. While, as stated, your balance sheet will represent a “snapshot” of your business at a specific point in time, your income statement will represent how your business has performed over a specific period of time.
The essential formulas for these financial statements are:
- Balance Sheet: Assets = Liabilities + Owner’s Equity
- Income Statement: Income = Revenues – Expenses
Other important financial statements include cash flow statements, inventory statements, and various others. When viewed comprehensively, these statement ought to demonstrate the general financial health of your company. However, while these formulas may seem somewhat simple, it is very important to pay attention to the finer details — there are a lot of mistakes that can still potentially be made.
Assuring that Your Business is Tax Compliant.
While the financial reports mentioned above are primarily to be used by your business and any other private party that holds a relevant stake, you will also need to be sure to pay attention to your tax returns as well. Making an effort to create quality tax returns will not only assure that your business is legally compliant, but it may also help you save money.
If it is your first time doing taxes for your business, you may want to consider using a tax software (such as TurboTax, QuickBooks, etc.) or outsourcing these functions to an accounting specialist. The specific tax forms that will be required for your business will depend on your business’ structure (LLC, Partnership, etc.), size (in terms of number of employees or revenues), industry, and operating headquarters.
Lastly, while the accounting process is based off of a series of industry norms (GAAP), there are still many personal decisions that will need to be made. The decisions that are best for your business will depend on your current financial situation as well as your long-term objectives.
- While incorporating more tax deductions will decrease your tax liabilities, it may also suggest to potential investors that your business is less profitable
- There are some ambiguous items that can be entered either as an asset or as a double entry—increasing equity and decreasing assets
- Even where you do your taxes will be a personal choice — some businesses find themselves in a unique situation where the state (or even country) they pay taxes to will be up to them
These are just a few of the situations where accountants have some flexibility. However, if you are new to the accounting process, you might prefer to use more simplified options.
Accounting is something that is both an art and a science. Becoming a professional accountant takes a considerable amount of time and effort. In the meantime, however, familiarizing yourself with these fundamental principles can help make your business more financially sound.
Vinnie Fisher is the co-founder and chief visionary of Total CEO. His mission is to help untrap entrepreneurs from certain operations of the business and allow them to get back to their dreams that launched their company in the ﬁrst place. He is author of “The Best Investment: A Better You“.