Accurate financial records for a business are required to comply with various local, state and federal laws.
Tax obligations are derived from the bookkeeping activities that are the product of accurate record retention throughout the daily operation.
Novice business owners will want to learn the meaning of various terms whether a CPA is hired, or the records are maintained personally.
Common Accounting Terms Every Business Owner Should Know
Defining the buzzwords that are used throughout the business world will allow the new business owner to understand the accounting processes required as the business grows.
Each of these terms has specific meaning since each one covers a particular function.
Tracking every penny earned and spent in support of the business operation is known as bookkeeping.
This function is supported through the retention of receipts, invoices and the business checking account. Savvy business owners know that an accountant charges significantly more for his services than a bookkeeper.
As the business grows, both functions can be outsourced. Accurate bookkeeping is essential when potential lenders want proof of the business income that would support loan repayment efforts.
2. Accounts Receivable
Outstanding payments for products and services reside in a category considered “receivables.”
The value in this category is considered a business asset that will be collected at some point. Managing receivables is essential for business survival and growth.
Many businesses operate on a cash only basis and avoid this category entirely.
3. Accounts Payable
Vendors and suppliers can extend credit to clients who establish an acceptable payment record.
Outstanding debts are considered a liability on the balance sheet since the bills must be paid in a reasonable time.
Managing this category determines the cash flow for the business.
Employee taxes must be collected prior to writing a check for the net pay amount to the employees.
Laws change rapidly because the federal government collects income tax throughout the tax year. After a certain point, businesses often select to outsource the payroll discipline without yielding control over the other functions.
5. Sales Tax
Businesses that sell products of any kind must collect sales taxes from retail customers.
Multiple taxing authorities require collection of sales tax at the point of sale. The business owner must track the amount of money collected and send the funds to the proper taxing authority before the deadline.
Product levels must be tracked throughout the fiscal year to reduce loss and maintain sufficient product supplies to support sales.
7. Income Taxes
Business owners have nightmares about inaccurate tax returns that result in IRS audits.
This category requires professional expertise to pay the business, or personal, income tax from the annual net proceeds from the fiscal year of operations.
The Blended Approach
Time is the most precious resource a business owner possesses.
Long days must be allocated to revenue-generating activities balanced with administrative disciplines required to comply with regulations, laws and ethics. As the business grows, funds will be available to hire appropriate assistance in these major categories.
1. Record Retention
Business owners are wise to retain absolute control over this function.
Personal awareness of business activities prevents surprises when funds appear to be short without reason.Every receipt, invoice and business check must be validated to prevent extraneous expenses.
Cash flow is affected when too many people are authorized to spend business funds.
One-person businesses can find independent bookkeepers in the community who are gifted in the discipline.
Tedious processes are required to enter every transaction in the ledger. Assistance from a bookkeeper can be the most helpful choice the business owner can make.
Few businesses maintain manual accounting records because of the affordable software packages available today.
The bookkeeping records can be imported into the software, which will create the accounting entries in the appropriate accounts. QuickBooks and Sage 50 are the most popular small business accounting packages.
4. Tax preparation
More than ever, business owners fear the IRS.
Mistakes on tax returns are expensive and can cause the death of any business entity. Certified public accountants are trained professionals who accept responsibility for the tax returns prepared for clients.
Sources of Accounting Training for Business Owners
Different training methods are available since busy professionals learn differently and have limited time.
Cursory understanding of the accounting terms allows the business owner to decide where to focus his efforts. Over the years, administrative obligations have made some accounting requirements too difficult to maintain in house.
Outsourcing is an important option once the business is earning sufficient money each month.
In the meantime, the business owner can use one, or all, of these training sources.
1. Accounting Textbook
For those who want to know exactly how accounting principles fit together, the contents of a textbook could provide a solid foundation.
2. College Course
Attending a sixteen-week course is helpful for those who have never been exposed to accounting terms or concepts.
3. Professional Class
Evening classes offered through various local business organizations can fill the need for applicable accounting training.
4. Industry-Specific Training
Various industries require specific training. Local associations can provide this specialized training.
5. Small Business Administration (SBA)
All across the United States, the SBA has established offices that provide direct coaching through the SCORE program.
In addition, online courses offered through the SBA website can be completed at the business owner’s convenience.
6. Software Package
Advanced software packages are designed to allow the accounting novice to enter bookkeeping details for each financial transaction. Automated functions complete the accounting entries.
Reports are run to reveal business details at meaningful intervals.
Business owners never outsource the responsibility for accurate record-keeping.
Financial records must be retained for certain periods to support potential audits that can arise. Excuses are not acceptable unless a natural disaster or fire destroys the records.
Accountants are excellent sources of information, but every business owner must learn the finer points of business management. Mastering accounting principles is paramount for the business owner who wishes to know how his business is performing at any point in time.
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