Starting a new business can provide an entrepreneur the freedom and flexibility necessary to take their ideas to the market. As a new business owner, there are several tasks that you will undertake as you attempt to turn a profit.
Accounting can be one of the more daunting duties you need to master as a business owner. The survival of your business depends on your ability to maintain good and accurate records. If, as a startup business, you are unable to hire a professional bookkeeper or accountant, you will need to learn some basic accounting terms in order to bring confidence to this area of your business.
Accrual Accounting Method
The accrual accounting method describes a system of accounting where a company’s expenses and incomes are recorded when they are incurred or accrued. For example, if your business purchases a new piece of equipment that is not payable for 30 days, the accounting record will show the expense incurring today, not in 30 days when it has been paid for.
Amortization described how debt is retired in regular intervals over time. The term is associated with various items, such as loans and interest paid on loans.
A balance sheet is a snapshot of a business’s financial position at a given point and time. It is also referred to as the Statement of Financial Position.
Cash Accounting Method
The cash or cash basis accounting method looks at expenses and income differently than the accrual accounting method. Whereas the accrual method books transactions when they occur, the cash accounting method treats these same transactions when monies are received or paid. The cash accounting method is typically the most preferred method of small businesses.
Cash flow describes how money moves into a business, whether in or out. The recording of cash inflows (income) and outflows (expenses) impact the business’s cash position.
The debt-to-earnings ratio measures the percentage of a company’s earnings that are used to pay its debt obligations. Sometimes called the debt-to-income ratio, the number is derived by taking the amount of recurring debt in a stated period of time — typically month-to-month — and dividing it by the amount of income or revenue earned. The value of the number should be below 1, or less than 100 percent.
Depreciation describes the allocation of the expense or cost of an asset over the time it will be used by a business (known as its useable lifetime). The allocation of depreciation expenses is especially important for businesses because many depreciable expenses can be deducted in accordance with Section 179 of the Internal Revenue Code.
The general ledger is the collection of all accounting records and transactions of a business, including assets, liabilities, equity, income or revenues, and expenses. The general ledger is used to create both the net income statement and the balance sheet.
The process of invoicing is an important function for a business. Invoices provide a business with an accounting of monies owed for the products and services sold to its customers.
Net Income Statement
The net income statement, which is also referred to as the statement of profit and loss, shows the earnings of a business, once certain expenses — direct and indirect — and taxes are accounted for. The income statement or profit and loss can give a business a real-time assessment of its financial position.
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