What is Accounting

Why it Matters For Your Business

• When becoming an entrepreneur, you accept the new
responsibility of business accounting. But what exactly is it?
What value does it provide to you? And what does it mean
for your time?
• Fortunately, with the right people, tools, and resources,
accounting isn’t a black hole for your time.
• Here, we’ll cover the basics you need to know to get started.
But if you want to jump straight to the how-to, you can
download our free guide to small business accounting.
What is Accounting?
• Accounting is how your business records, organizes, and understands
its financial information.
• You can think of accounting as a big machine that you put raw
financial information into—records of all your business transactions,
taxes, projections, etc.—that then spits out an easy-to-understand
story about the financial state of your business.
• Accounting tells you whether or not you’re making a profit, what your
cash flow is, what the current value of your company’s assets and
liabilities is, and which parts of your business are actually making
money.
Accounting vs. Bookkeeping
• Accounting and bookkeeping overlap in many ways, and some say
bookkeeping is one aspect of accounting. But if you want to break
them apart, you could say that bookkeeping is how you record and
categorize your financial transactions, while accounting puts that
financial data to good use through analysis, strategy, and tax planning.
The Accounting Cycle
• Accounting starts with recording transactions. Business transactions—
any activity or event that involves your business’s money—need to be
put into your company’s general ledger. Recording business
transactions this way is part of bookkeeping.
• Bookkeeping is the first step of what accountants call the “accounting
cycle”: a process designed to take in transaction data and spit out
accurate and consistent financial reports.
The Accounting Cycle Has Six Major
Steps:
6 Major steps of Accounting Cycle are as Follow:

1. Analyze and record transactions 

2. Post journal entries to the ledger
3. Prepare an unadjusted trial balance
4. Prepare adjusting entries at the end of the period 
5. Prepare an adjusted trial balance 
6. Prepare financial statements
• Analyze and record transactions collect any invoices, bank or credit
statements, and receipts from business transactions.
• Post journal entries to the ledger: It’s time to take those documents
and start making journal entries for your transactions. Journal entries
have three components of a transaction: when it happened, what it
was for, and how much it was. Some businesses use single-entry
accounting where only the expense or revenue is entered. But more
common is double-entry accounting, which records each transaction
in two accounts: where money is coming from and where it’s going.
• Prepare an unadjusted trial balance: At the end of a reporting period,
list all of your business’s accounts and figure out their balances.
• Prepare adjusting entries at the end of the period When you need to
update entries you’ve already made, you prepare adjusting entries.
For example, if a client is late on paying an invoice and you offer a 5%
discount to help them pay, you would enter the discount as an
adjusting entry as opposed to changing the entry you’ve already
made.
• Prepare an adjusted trial balance After entering in adjusting entries,
you’re left with an adjusted trial balance. This information is now
ready to be turned into financial statements.
• Prepare financial statements Finally, all the information you’ve
collected is converted into your financial statements. These reports
are succinct summaries of all your business’s financial activity.
Financial Statements

• Financial statements are reports that summarize how your business is

doing financially.
• There are three main types of financial statements: the balance
sheet, income statement, and cash flow statement. Together, they tell
you where your business’s money is and how it got there.
• Let’s say you’re a self-employed surfing instructor who bills clients for
surfing lessons. Financial statements can tell you what your most
profitable months are, how much money you’ve spent on supplies,
and what the total value of your business is.
Generally Accepted Accounting Principles
(GAAP)
• Every company is different, but in order to make accurate financial
comparisons between companies, we need a common language to
describe each of them. That’s what generally accepted accounting
principles (GAAP) are: a series of standards and procedures that
accountants at all companies must adhere to when preparing financial
statements.
• A non-governmental body called the Financial Accounting Standards
Board sets the GAAP. While there are no laws enforcing these standards,
most lenders and business partners in the United States will require that
you adhere to GAAP. If you’re in Canada, you’ll use a different system
called International Financial Reporting Standards, or IFRS.
Cash vs. Accrual
• You can do your business accounting on a cash or
accrual basis. The difference between the two comes
down to timing.
• Cash basis is the most basic accounting. On a cash
basis, you only record transactions when money
changes hands. If you receive an invoice on the 10th
but don’t pay it until the 15th, the transaction is
recorded on the 15th.
• With accrual basis, you record transactions twice: when they occur
and when they’re paid. For the invoice above, you record the expense
on the 10th and the payment on the 15th as two separate
transactions.
• The method you use depends on what you need from your business
finances. Cash basis is simpler and easier to stay on top of, while
accrual offers greater insights for the more detail-oriented.
• Most small businesses have basic accounting needs which means cash
basis is often the right fit.
The Different Types Of Accounting
Following are the types of accounting:

1. Financial accounting
2. Managerial accounting
3. Tax accounting
4. Cost accounting
5. Credit accounting
Financial Accounting
• Every year, your company will generate financial statements that
people outside of your company—people like investors, lenders,
government agencies, auditors, potential buyers, etc.—can use to
learn more about your business’s financial health and profitability.
• Preparing the company’s annual financial statements this way is called
financial accounting. If you’re looking to hire a financial accountant,
start with looking into how much an accountant costs.
Managerial Accounting
• Managerial accounting is similar to financial accounting, with two important
exceptions:
1. The statements produced by managerial accounting are for internal use
only.
2. They’re generated much more frequently—often on a quarterly or
monthly basis.
• If your business ever grows to the point where you need to hire an
accountant full-time, most of their time will be taken up by managerial
accounting. You’ll be paying them to produce reports that provide regular
updates on the company’s financial health and help you interpret those
reports.
Tax Accounting
• Tax accounting is all about making sure that you don’t pay more
income tax than you are legally required to by the IRS. An example of
this is when your accountant provides you with recommendations for
how to get the most out of your tax return.
• Tax accounting is regulated by the Internal Revenue Service (IRS), and
the IRS legally requires that your tax accounting adhere to the Internal
Revenue Code (IRC).
Cost Accounting
• Whenever you’re trying to figure out how to increase your margin or
deciding if raising prices is a good idea, you’re doing cost accounting.
• Cost accounting involves analyzing all of the costs associated with
producing an output (whether it be a physical product or service) in
order to make better decisions about pricing, spending, and inventory.
• Cost accounting is often a prerequisite of managerial accounting
because managers use cost accounting reports to make better
business decisions. It also feeds into financial accounting since costing
data is often required when compiling a balance sheet.
Credit Accounting
• Credit accounting involves analyzing all of a company’s unpaid bills
and liabilities to make sure that a company’s cash isn’t constantly tied
up in paying for them.
• Credit accounting can be one of the most difficult kinds of accounting
to do well, in part because it’s a difficult subject to be critical about.
Talking about debts can be a sensitive, but necessary, conversation.
Why accounting matters for your small
business
Following are the matters for your small business:
1. Accounting helps you plan for growth
2. Accounting is essential for securing a loan
3. You need accounting to attract investors or sell your business
4. Accounting helps you get paid
5. Accounting helps you stay on top of your debts
6. Accounting keeps you out of jail (or at least saves you from fines)
7. Accounting helps you pay the right amount of taxes (and not a dollar
more)
Accounting helps you plan for growth
• Every great journey begins with a roadmap. When you’re planning
your company’s growth, it’s essential to set goals. What should your
profits look like one year from now? How about in five years?
• Keeping up with your accounting helps you stay on top of your
business finances. That information is essential to assess how quickly
your business is developing. Without accurate reporting, you won’t
have the full financial picture.
• Has your cost of goods sold increased? Are margins thinner? Are your
growth goals reasonable? Without financial statements, you won’t
have an objective answer.
Accounting is essential for securing a loan
• Up-to-date financial statements demonstrate where your company
stands. They’re essential if you want to fund your small business with
a loan.
• For instance, suppose you want to apply for a Small Business
Association (SBA) loan through one of the big banks. You’ll need to
provide, on average, three years of financial statements, plus a one-
year cash flow projection. It’s virtually impossible to deliver any of
these if you don’t have an accounting system in place.
You need accounting to attract investors or
sell your business
• You may not be planning to court investors or sell your business right
now, but it’s a good idea to leave your options open. And the best
way to do that is to put a proper accounting system in place now.
• Potential investors or buyers will expect accounting records vetted by
a CPA (Certified Public Accountant) that prove your business is
profitable and on track for growth.
Accounting helps you get paid
• When a customer owes you money, it appears as Accounts
Receivable (AR) on your balance sheet, which is generated automatically
by your accounting software or manually by yourself or your
accountant.
• The balance sheet tells you how much of your AR you’ve already
pocketed during the month and how much is still outstanding.
• By referring to your balance sheet, you can track how effectively you’re
collecting payment. Then you can put in place processes—like harder
payment deadlines or better follow-up with clients—to make sure you
get your hands on the money you’ve earned when you need it.
Accounting helps you stay on top of your
debts
• If your business owes debts to a variety of sources, like credit cards,
loans, and accounts payable, you’ll have to jump into multiple
accounts to check what you’re left owing.
• The balance sheet shows everything you owe in one place. It also
shows all your bank account balances so you can reference both at
the same time. It’s the perfect report to review to make sure you have
the cash available to tend to your debts and plan future payments.
Accounting keeps you out of jail (or at
least saves you from fines)
• As your business grows, it can be difficult to keep track of all your tax
information reporting obligations. What’s more, if there are mistakes
in your financial reports, you run the risk of misreporting your
income. Either mistake could land you in hot water with the IRS.
• Solid accounting gives you complete, accurate financial records, which
reduces your risk of breaking tax laws. And, when you have an
accountant filing your taxes for you, you can be sure they’ll be done
accurately and on time.
Accounting helps you pay the right amount
of taxes (and not a dollar more)
• If you don’t pay your tax bill in full, the IRS will fine you. But they won’t give
you a gold star for paying too much.
• You can tell you’re paying too much in taxes if your business consistently
receives large tax refunds.
• Remember: a tax refund isn’t free cash from the IRS. It’s money you’ve
overpaid the government that you could’ve used to invest in your business
instead.
• Refunds are often the result of miscalculated quarterly estimated tax
payments. To calculate quarterly estimated tax payments accurately, you
need to predict your income. It’s almost impossible to do so without reliable
financial records produced through accurate accounting.
What an accountant does
• An accountant does more than just year-end tax preparation. A skilled
CPA will save you time by communicating your company’s financial state
to you jargon-free while anticipating your financial needs.
• Accounting professionals like CPAs or tax advisors can also provide you
with knowledge and insight that is simply inaccessible to non-
accountants. These experts can offer guidance on tax deductions you
didn’t even know you qualified for, tax rules you didn’t know you were
breaking, and best practices picked up while working for other companies
in your industry.
• If those are tips your business can benefit from right now, it might be time
to hire an accountant.
Accounting solutions
• Small business accounting software has made big advancements as
more people take the entrepreneurial path. The self-service software
you use is now almost equal to the accounting software used in firms
all over the world. There are now a wide array of options available—
which one is best for you depends on your business’s accounting
needs.
Fresh books
• Fresh Book’s offers integrated invoicing that makes it simple to
manage your accounts receivable and your accounting in one place.
Automated bank reconciliation will import all transactions from your
business bank accounts, but you will have to review and categorize
each one. Their time-tracking functionality also makes it easy for
freelancers who bill by the hour. Fresh books is a good fit for someone
generating a lot of invoices with a low number of transactions.
QuickBooks
• Intuit makes both QuickBooks and a payroll processor, and allows you
to bundle both for one monthly cost. The payroll service automates
payroll taxes, checks, and all year-end forms, but the accounting
platform is mostly manual. While the tool is powerful and can help a
skilled user navigate multiple aspects of running a business, it takes a
good amount of know-how to get the most out of it.
Bench
• If you prefer a completely hands-off approach to bookkeeping and
accounting, Bench might be right for you. Connect your business bank
accounts to have transactions automatically imported, categorized,
and reviewed by your personal bookkeeper. Communication is quick
and reliable—the Bench platform allows you to send messages
straight to your bookkeeper or set up a call to go over any financial
questions that might come up. Our premium package even includes
tax filing, which makes all accounting tasks completely automated.
What's Bench?
• We're an online bookkeeping service powered by real humans. Bench
gives you a dedicated bookkeeper supported by a team of
knowledgeable small business experts. We’re here to take the
guesswork out of running your own business—for good. Your
bookkeeping team imports bank statements, categorizes transactions,
and prepares financial statements every month. Get started with a
free month of bookkeeping.
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