Basic Accounting You Need To Know for Starting a Business
Picture yourself standing on the precipice of your entrepreneurial journey, armed with an innovative idea and unyielding determination. However, you’ll need to know some basic accounting in order to start your business.
It’s not just about numbers; it’s about laying solid financial groundwork to keep your business going strong. Let’s dive into the world of accounting and review the indispensable principles that will guide you toward success.
Accrual Basis
Under this principle, your business records transactions when a good or service is provided rather than when payment is made or received. This means that you don’t wait for money to change hands before noting a transaction in your books.
For example, if you’ve made a sale but the customer hasn’t paid yet, you record the revenue at the time of the sale, not when you receive the payment. This method allows your business to have an accurate understanding of its financial health at any given point.
Consistency
Your business should apply accounting methods consistently over time; this allows for direct comparison of financial statements from different periods. Whether it’s the method used for depreciating assets or the approach to recognizing revenue, sticking with the same method ensures that you can accurately track your business’s financial performance.
Matching
When you take this approach, your business records expenses and associated revenues in the same accounting period. Suppose you purchase inventory in January, but you don’t sell it until February. In that case, you record the cost of the inventory as an expense in February when the sale occurs. By doing this, your income statement accurately reflects your business’s profitability during each specific period.
Economic Entity Assumption
As a business owner, you should keep your personal transactions separate from your business transactions to better maintain clear financial records for your business. It also prevents confusion between your personal finances and your business’s finances, ensuring the accuracy of your business’s financial statements.
You can start this separation by using a ROBS 401(k) provider to roll your retirement savings into a brand-new program that’s completely distinct from your personal assets.
At the end of the day, understanding basic accounting before you start your small business isn’t just about tax compliance. It’s a strategic tool that empowers you to drive your business forward. Take the helm and steer your entrepreneurial venture toward financial health and success!
Want to start a business but unsure where to secure the startup cash? Head over to Pango Financial’s funding solutions tool to learn about the options available to you.