End Goal: Understand the basics of accounting and how it applies to your business #

Accounting can be extremely complicated even for a small business.  You can use a professional service to help keep your accounting in order, but at the end of the day, even with a CPA you as the business owner have to sign your tax returns and approve the work they are doing.  A CPA is still human and can make a mistake. These mistakes can cost you money in penalties and interest, so it is important to at least have the basics down.

Financial Statements: #

While there are many duties an accountant performs, the end result of their work are financial statements.

1. Balance Sheet – The balance sheet gives a snapshot of the business at any given time.  It shows the Assets, Liabilities, and Equity of a business.  The balance sheet equation is
   • 
     Assets = Liabilities + Equity.  
     
     
2. Profit & Loss – Also called the Income Statement, shows a business net income over a given period of time.  Revenue – Expenses = Net Income.  
3. Statement of Cash Flows – Net profits does not always equal additional cash for you.  A statement of cash flows shows exactly how much cash increase or decrease a business had over a period of time.  
4. Statement of Retained Earnings – This is less used for small businesses but it is still important.  This shows changes in retained earnings over a period of time.
5. Five types of accounts on the Financial Statements
   1. Assets – Things the company owns, cash, receivables, equipment etc.
   2. Liabilities – Things the company owes payables, loans/notes, accrued taxes.
   3. Equity – Considered the value of an owner’s interest in a company after subtracting all assets and liabilities.
   4. Revenue – Money the business has earned.
   5. Expenses – Money the business pays out

Double Entry Bookkeeping: #

This is the practice of every accounting entry being recorded in at least two accounts. 

When you make a sale you increase cash or receivables on your balance sheet and you increase revenue on the profit and loss.  When you pay for an expense you decrease cash on the balance sheet and increase expenses on the profit and loss.  These entries are recorded as credits and debits.  Credits must always equal debits.  Credits increase liability, revenue or equity accounts and decrease assets or expenses.  Debits do the exact opposites increasing assets and expenses and decreasing liabilities, revenue or equity.

Software: #

Software is your best friend in small business accounting.  Quickbooks is the overall standard.  The desktop version is a little easier to use, but the online version provides ease of access.  

Taxes: #

Taxes are extremely complicated, which is why there are accountants.  However, if you understand the financial statements then you understand what you will be paying taxes on.  Business taxes are put together using the financial statements.