In a business, you are involved in numerous activities that flow the money through your business. Fundamentally, you have money coming into small businesses and money going out of them. These money flows are referred to as transactions and they can be both positive as well as negative. To manage this money, every business needs an accountant/bookkeeper who can formulate an accounting primer specific to the needs of that business. 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 a person who is considerably good in a particular skill. If there are more than one partners, the person most skillful in the field may end up with managing that specific department. However, it has been observed that there is not a lot of accounting strength among entrepreneurs. Though, with persistence and an unblemished accounting primer, business owners can develop a financial understanding which can help them to manage current operations as well as future growth prospects. Here are some of the basics that are part of the primer for start-up businesses.
GAAP and Tax Basis for Small Businesses
After a lot of struggle and time, the accounting standard board has established generally accepted accounting standards (GAAP), which are responsible for the reliable reflection of business performance. It is different from the tax basis on grounds that the latter is more influenced by the government taxation laws. A newly developed business would not generally have specialties beyond filing a tax return. If that company needs a bank financing or enters into a deal with other businesses, it is probable that they would require your audited financial records. The records must conform to the GAAP in order to be approved by the involved parties.
Cash and Accrual Accounting Primer
When filing tax returns, small businesses must follow one of two methods in recording their revenues and expenses. Following the cash system of recording, any business would recognize a revenue when the check or money is received and similarly would 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. Accrual method in the accounting primer is a preferable method as it portrays the accurate picture of business operations at any specific moment in time.
Small businesses usually opt for the cash method as it is manageable for them and also because it has a significant impact on the taxable income. However, if your business deals with a lot of inventory, it is better to opt for the accrual system of recording income and expense.
Direct and Indirect Costs
Direct costs are the expenses that are directly related to the manufacturing or procurement of a product or service while indirect costs are incurred anyhow, 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 as direct costs while rent, utility bills, and other similar costs are an indirect cost in the given scenario. This is an important concept to grasp for small businesses as they must be able to calculate the cost of making one additional unit. At the time of pricing your products, you would need to know all the costs associated with it and, therefore, an accounting primer must include all the information related to it.
Keeping track of your resources and how you use them is an important element for businesses who desire to mark their presence in the market. There are two basic methods to keep track of your inventory which are called FIFO and LIFO. First in first out (FIFO) means that anything that’s stored first in the inventory should leave first and last in first out (LIFO) is just the opposite of that. Both methods have their own advantages and flaws, however, you may choose the one best suited to the needs of your business. The inventory price of some businesses fluctuate 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 accounts for all of the expenses occurred on fixed assets of a company. With time, machinery and other fixed assets of a business depreciate in value which needs to be recognized on the books in the form of a depreciation expense. Under law, it is compulsory for all businesses that meet certain standards to record the depreciation expense, however, small businesses are allowed to incur it immediately which can offer them tax relief.
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