The Importance of Accounting for Small Businesses

The Importance of Accounting for Small Businesses

Accounting is vital for every business. Savvy record-keeping is key for monitoring business expenses and discovering new avenues of growth. In addition, maintaining accurate records ensures that business owners remain responsible for tax obligations to the government and their employees.

As you review your accounting strategy, consider your company’s financial goals. Whether you are a solo entrepreneur or employ staff, your business’ success hinges on clearly stated financial objectives.

Experts agree that small businesses commonly fail when cash flow runs dry. Your business should implement efficient record-keeping policies and a sound financial strategy to avoid this situation.

What Is Small Business Accounting?
Small business accounting requires accurate bookkeeping, which entails maintaining organized records of a business’s financial transactions, including sales, expenses, assets, and liabilities. If this is your first time exploring small business accounting, visit our helpful glossary to become familiar with basic accounting terms.

Bookkeepers commonly work with three types of accounting reports: balance sheets, income statements, and cash flow. Each report records different values and provides unique insight into a business’s financial health. The following section explores the differences between these reports.

Balance Sheets
Balance sheets measure what a company owns and owes. This type of statement provides a snapshot of a small business’s financial health at a specific point in time. Bookkeepers can view the company’s assets and liability figures at a glance.

Companies typically prepare balance sheets at the end of every quarter, but individuals can prepare them at any time. Assets, liabilities, and shareholders’ equity comprise a balance sheet.

Assets have economic value and can reduce expenses and improve sales. Examples of assets include real estate, inventory, cash, and accounts receivable. Balance sheets list assets in order of liquidity — how easily they can be sold, consumed, or turned into cash.

A liability is something a company owes to someone else. Examples of liabilities include employee wages, income taxes, mortgage loans, and accounts payable.

Shareholders’ Equity
Shareholders’ equity represents a company’s net worth — the amount shareholders would receive if they liquidated all assets and repaid all debts. Net worth can also be understood as assets minus liabilities. For example, a company with $10,000 in assets and $2,000 in liabilities would have an $8,000 shareholders’ equity.

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