Accounting basics may help you better estimate your company’s future based on historical sales and expense trends, allowing you to make more informed financial decisions. Defined regulations, such as generally accepted accounting principles, ensure that organizations prepare financial statements per the same procedures and standards.
Even if you use corporate accounting software, having a solid knowledge of these fundamental concepts is critical to have effective talks with your financial adviser. A professional accountant in Palm Beach Gardens, FL, can help you understand more.
The following are some critical accounting topics that small-business owners should understand.
You can utilize one of two accounting methods: accrual basis accounting or cash basis accounting.
- Accrual basis
Income and expenses are matched to the periods in which they are incurred in financial statements. For example, the accrual technique would include accounts receivable as soon as an invoice is sent out, regardless of when the invoice is paid.
- Cash basis
Income and expenses are only recorded in financial accounts when received or paid. This strategy, for example, would not take into account accounts receivable. Instead, income would be recorded only once an invoice was paid.
A lot of small businesses and startups begin with cash basis accounting, but accrual basis financial statements provide a far more complete picture of your company’s financial status. Furthermore, GAAP demands that public firms adopt accrual accounting.
According to the consistency notion, once you have decided on an accounting system (accrual or cash), you should stick with it for all future financial records. This allows you to compare performance across accounting periods with accuracy.
To file small-business taxes, the Internal Revenue Service also demands consistency. If you adopt an accounting technique and then decide to modify it, you must obtain IRS permission.
According to the “going concern” principle, you should presume that your company is in good financial shape and will continue to operate for the foreseeable future. This allows enterprises to defer the recording of some expenditures to later accounting periods.
The accountant or auditor may reach a different decision if there is evidence that the company cannot repay its debt or satisfy other commitments. In that circumstance, the corporation may need to consider asset liquidation value.
Revenue and costs are evaluated differently under the conservatism principle. Businesses should only record income when it is reasonably clear that it will be acknowledged, such as with a purchase order or signed invoice.
Businesses, however, should acknowledge expenditures as soon as they are reasonably likely to occur. This favors more cautious financial statements. It is better to overestimate your costs than your revenue for cash flow considerations.