Accounting for Business: What you need to know about accounting

PARTNER: ACCA

Before we get started, we need to define accounting. Going by the official meaning: a detailed report of the financial state or transactions of a person or entity: an accounting of the estate

Initially, accounting may seem complicated when looked at from a professional perspective, but actually, it's a practice we all use daily - sometimes without even realising. For instance, when preparing our budget for the month, we utilise essential accounting functions to work out how much will go towards rent, food, entertainment and travel. Some of us are also storing receipts and statements to review at a later date, without knowing that these are standard accounting practices to manage our finances. 

Accounting is simply a way for businesses to organise and make sense of their financial transactions formally, whilst also operating within the financial regulations set out by their government.

With official accounting bodies like ACCA, you can take courses to learn how to carry out all the accounting functions within your business. This way, you are not only cognizant of how to take control of your finances before launching your business, but you are confident that your business is operating within the correct function.

Now, let's get into the basics of accounting and what you need to know before getting started. These are important to know, even if later down the line you decide to work with an accounting professional. 

Why?  

So, you're aware of how your business is performing, empowering you to make better and more informed decisions.

Why is accounting important?

• Staying on track

Business owners need to have a dependable and professional system to record their financial transactions. With this system, you can analyse specific transactions and provide a detailed and efficient record when required. 

• Business performance

When you are on track with your transactions, it's easier to assess business performance during particular periods. For example, with an effective accounting system, you can pull up your assets at the end of the year and work out whether it's time to upgrade or change the equipment you're using to something more financially agreeable. With easy access to this information, you are also able to make better investment decisions, such as, take on more staff, increase or decrease marketing spend and seek further investment.

• Legal obligations

Accounting is more than just tracking your transactions; it can also uphold your own internal business rules. For instance, how to price your products whilst taking into consideration postage, sales vat and discounts.

Depending on the size of your business, you may be legally obligated to prepare specific statements at the end of the year, every quarter, or every six months.

What are the five accounting elements?

To successfully manage the accounting transactions within your business, you need to be aware of and completely understand these five essential elements. 

• Assets

These are the tools you use within your business daily. For example, if you are a fashion designer, these will be your sewing machine, measuring tape or needles. These will automatically become an asset within your business if you own it or have the authorisation to use it. An asset will always provide you with the ability to support the running and growth of your business.

• Liabilities

Liabilities are something that you owe, which can be settled over a period of time. These will range from loans taken out for business purposes to the salary you need to pay your staff. The salary you owe becomes an obligation between yourself and your staff to pay at a specific time – this may be weekly, fortnightly, or monthly.

• Expenses

These are the unavoidable operational costs within your business. Without paying them, you will not be able to carry out business as usual, but these are not always fixed costs; some can be reduced. For example, if you run an online business, paying your website hosting is a fixed cost, but you may be able to reduce the cost of your hosting by choosing a lower-tiered option – depending on the website host you choose. All expenses within your business will need to be accounted for and included within your financial statements. 

• Revenue

Businesses want to generate revenue, and this is achieved when the sale of a product is made, or a service was successfully delivered. The income you make increases your assets whilst reducing the number of liabilities you have. 

• Owner's Equity

In a nutshell, this is the money left over after you have deducted your liabilities from your assets (assets – liabilities = owner's equity). It shows you the claim you have on your business after all expenses have been accounted for. This will include money you've invested, profits made by the company since launch, minus drawings, and money owed to other people.

What documents do you need to be aware of?

Regardless of whether you decide to hire an accounting professional, these are the documents you need to be aware of and understand.

• Cash flow statement

This statement provides data on cash coming into your business received through sales, external financial activities, or investments. It also shows all-cash transactions that go out of your business, for instance, all financial activity that keeps your business running, as well as investments made. 

• Income statement

An income statement shows the profit or loss (the difference between total income and total costs) your business had made during a particular period – this is usually calculated yearly.

• Profit and Loss Statement

This financial statement provides a summary of all your expenses, income, and revenue generated during a specific period. You can then use this statement to compare how your business has performed across particular timeframes. It can give you the information you need to increase revenue or reduce business costs. 

• Balance Sheet

A balance sheet or statement of financial position provides a short overview of what a business owns or owes at a specific point in time. The major components of a balance sheet are assets, liabilities, and owners' equity.

• Bank Reconciliation 

A bank reconciliation statement is the summary of your cash outgoings, compared with your banking activities. It will cover your incoming and expenditure for a specific period.

Whether you're getting ready to launch or in the early stages of running your business, understanding the critical elements in accounting is essential. It's not just about tracking your expenses; it's also a great tool to help you make sound decisions. When you understand the data, you are better equipped with the intelligence you need to take on a new hire, increase marketing spend, diversify stock, or decrease money spent on travel.  

Ready to learn more and develop a full understanding of your finances? Discover courses from ACCA that are geared towards empowering you whilst giving you the skills you need to understand your money and make better financial decisions, future-proofing your business.