Accounting may appear complicated from a professional’s perspective. But it is a practice we use every day – often without realising. When preparing a monthly budget, we use essential accounting functions to determine how much money will be spent on rent, food and entertainment. Many of us store receipts and statement to be reviewed at a future date. We don’t know that this is standard accounting practice to manage our finances.
Accounting is a formal way to organize and understand financial transactions. It also allows businesses to operate within the financial regulations of their government.
You can learn all about accounting by taking courses with official accounting bodies such as ACCA. You will not only be able to control your finances prior to launching your company, but also feel confident that it is being operated in the right way.
Let’s start with the basics and learn what you should know about accounting before getting started. You should know these things, even if you later decide to hire an accountant.
Why does accounting matter?
Staying on Track
A reliable and professional system is needed by business owners to track their financial transactions. This system allows you to analyse transactions and produce a detailed record when needed.
Business Performance
It’s much easier to evaluate business performance when you have a good accounting system. With an efficient accounting system, for example, you can look at your assets and determine if it is time to upgrade the equipment that you are using or switch to something more profitable. This information will also help you make more informed investment decisions. For example, hiring additional staff, increasing or decreasing marketing expenditure, and seeking further investment are all possible with easy access to the data.
Legal obligations
Accounting can be used to enforce your internal business rules. Consider, for example, how you can price your product while taking into account postage, VAT and discounts.
You may be required to produce specific financial statements depending on the size and scope of your company. This could be at the end or quarter of each year.
What are the five elements of accounting?
You must be familiar with and understand the five elements that are essential to successfully managing your accounting transactions.
Assets
You use these tools in your business every day. If you’re a fashion designer for example, your sewing machine, tape measure or needles will all be considered assets. If you own or are authorized to use the item, it will automatically be considered an asset. Assets will always be able to help you run and grow your business.
Liabilities
You can settle your liabilities over time. This can include loans for business or the salary that you owe your employees. You and your employees are both responsible for paying the salary owed. This may be done weekly, monthly, or every two weeks.
Expenses
They are unavoidable costs of running your business. You will be unable to run your business without them. However, they are not all fixed costs. Some can be reduced. If you have an online business you will need to pay for your website hosting. However, you can reduce this cost by selecting a lower-tier option. Your financial statements will require you to account for all expenses in your business.
Revenue
Businesses are looking to generate revenue. This is done by selling a product or providing a successful service. Income increases assets while reducing liabilities.
Owner Equity
This is what you get after subtracting your liabilities from your asset. This shows the amount of equity you own in your business, after all expenses are taken into account. It will show you the money that you have invested, as well as any profits made since your company was launched, less any drawings and money owed by others.
Which documents should you be familiar with?
These are documents that you should be familiar with and understand, regardless of whether or not you hire a professional accountant.
Cash flow statement
This statement shows the cash that comes into your business through sales, external financial activity, or investments. This statement also includes all cash transactions that leave your business. For example, it shows all financial activities that keep your business running as well as any investments.
Income Statement
The income statement will show the profit that your business made over a certain period. This is calculated annually.
Profit and loss statement
This statement summarizes all of your income, expenses, and revenue for a particular period. This statement can be used to compare the performance of your business over a period of time. This statement can provide you with the information needed to increase business revenue or reduce costs.
Balance sheet
The balance sheet, or statement of financial situation, gives a quick overview of the assets and liabilities of a company at a particular point in time. Assets, liabilities and equity are the three main components of a balanced sheet.
Bank Reconciliation
A bank reconciliation statement summarizes your cash outgoings and compares them to your banking activity. This statement will include your income and expenses for a specified period.
Understanding the essential elements of accounting is crucial, whether you are preparing to launch your business or at the beginning stages. Accounting is not only about tracking expenses, but it can also be a powerful tool for making informed decisions. Understanding the data will help you make better decisions, whether it’s to hire a new employee, increase your marketing budget, diversify your stock or reduce travel expenses.
Are you ready to develop a complete understanding of your finances and learn more? Discover ACCA courses that will empower you and give you the skills to make better financial choices, future-proofing you business.
