In a business, you are involved in numerous activities that increase or impede money flow through your company. This money flow is characterized by transactions, which can be both positive and negative. Every business needs an accountant or bookkeeper who can formulate an accounting primer specific to its needs to manage this money. The primer 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 skilled in a particular area. However, entrepreneurs have been observed to lack strong accounting skills. 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
After much debate and time, the Accounting Standard Board has established Generally Accepted Accounting Standards (GAAP), which are responsible for the reliable reflection of business performance. It differs 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. It would probably require audited financial records if that company needs bank financing or enters a deal with other businesses. The records must conform to the GAAP and be approved by the involved parties.
Cash and Accrual Accounting Primer
Small businesses must follow one of two methods when filing tax returns in recording 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 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 work completion even though they have not yet received the promised amount. The accrual method in the accounting primer is preferable as it portrays the 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 directly 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.
However, this is an essential concept for small businesses to master, as they must be able to calculate the cost of making one additional unit. When pricing your product, you would need to know all the costs associated with it; 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 ways to track your inventory: FIFO and LIFO. First-in, first-out (FIFO) means that anything stored first in the inventory should leave first, and last-in-first-out (LIFO) is just the opposite of that.
Both methods have advantages and flaws; however, you may choose the one best suited to the needs of your business. The inventory price of some companies fluctuates dramatically, and using the proper recording method becomes critical. The accounting primer for small businesses advocates the need for consulting professional assistance in such volatile markets.
Depreciation
Depreciation accounts for all expenses related to a company’s fixed assets. Over time, a business’s machinery and other fixed assets decrease in value, which needs to be recorded as a depreciation expense. Under the law, all businesses that meet specific standards must record the depreciation expense; however, small businesses are allowed to incur it immediately, which can offer them tax relief.
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