In a business, you are involved in numerous activities that flow money through your company. Fundamentally, you have money coming into small businesses and going out of them. These money flows are referred to as transactions and can be positive and negative. Every business needs an accountant or bookkeeper who can formulate an accounting primer specific to the needs of that business to manage this money. It must be designed so that all the basics are laid out and everyone is on the same page about how to proceed with the objectives.
Small businesses usually rely on someone considerably good at a particular skill. If there is more than one partner, the person most skillful in the field may manage that department.
However, it has been observed that entrepreneurs do not have much accounting strength. However, with persistence and an unblemished accounting primer, business owners can develop a financial understanding to help them manage current operations and future growth prospects. Here are some basics that are part of the primer for start-up businesses.
GAAP and Tax Basis for Small Businesses
After much struggle and time, the accounting standard board has established generally accepted accounting standards (GAAP) responsible for the reliable reflection of business performance. It is different from the tax basis because the government taxation laws influence the latter more. A newly developed business would not generally have specialties beyond filing a tax return. If that company needs bank financing or enters a deal with other businesses, they will probably require your audited financial records. The records must conform to the GAAP to be approved by the involved parties.
Cash and Accrual Accounting Primer
Small businesses must follow one of two methods when filing tax returns to record their revenues and expenses. Following the cash recording system, any business would recognize revenue when the check or money is received and record an expense when it goes out. The entry is made when the actual transaction takes place and not when the revenues are earned, which is the case in the accrual system. Just like a construction firm would record the income at the time of work completion, even though they have not yet received the promised amount. The accrual method in the accounting primer is preferable as it portrays an accurate picture of business operations at any specific moment.
Small businesses usually opt for the cash method as it is manageable for them and because it significantly impacts the taxable income. However, if your business deals with a lot of inventory, opting for the accrual system of recording income and expenses is better.
Direct and Indirect Costs
Direct costs are the expenses that are related to the manufacturing or procurement of a product or service. In contrast, indirect costs are incurred regardless of how you acquire the product and cannot be directly tied to it. The cost of buying all the components for a car plus direct labor costs can be termed direct costs, while rent, utility bills, and other similar costs are indirect costs in the given scenario.
This is an important concept for small businesses as they must be able to calculate the cost of making one additional unit. When pricing your products, you would need to know all the costs associated with them; therefore, an accounting primer must include all the related information.
Inventory Management
Keeping track of your resources and how you use them is essential for businesses wanting to mark their market presence. There are two basic methods to keep track of your inventory: FIFO and LIFO. First-in, first-out (FIFO) means that anything stored in the inventory should leave first, and last-in, first-out (LIFO) is just the opposite.
Both methods have their advantages and flaws. However, you may choose the one best suited to the needs of your business. The inventory price of some businesses fluctuates dramatically, and using the right recording method becomes extremely critical. The accounting primer for small businesses advocates the need for consulting professional assistance in such volatile markets.
Depreciation
Depreciation accounts for all the expenses on a company’s fixed assets. With time, a business’s machinery and other fixed assets depreciate, which needs to be recognized on the books as a depreciation expense. Under the law, it is compulsory for all businesses that meet certain standards to record the depreciation expense. However, small businesses can incur it immediately, offering them tax relief.
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