The Importance of Accounting for Small Businesses

Bookkeeping is necessary in any business. As a small business owner, it’s important to recognize that the best practices used by Fortune 500 companies also apply to you. Following basic accounting principles is essential for success in any size business; savvy record-keeping and financial analysis is key to not only monitoring your expenses, but to discovering new avenues of growth. In addition, it ensures you stay responsible for tax obligations to the government and to your employees.

Most small businesses should track the following categories of data:

  • Cash Receipts and Disbursements
  • Accounts Payable
  • Loans Payable
  • Purchases
  • Inventory
  • Accounts Receivable
  • Sales
  • Owner’s Equity Capital Drawing
  • Retained Earnings
  • DEFINITION

    Records of all cash coming into and going out of your business, sorted into applicable cash streams

    IMPORTANCE

    Tracking different cash streams can highlight trends that will develop accurate cash flow projections. Regularly monitoring these streams can alert you to shortages before they happen, allowing you to make tweaks to prevent them.

    EXAMPLE

    • Customer sales and payments
    • Vendor purchases and payments
    • Petty cash on hand
    • Payroll
    • Monthly bills
    • Daily cash reconciliation
    • Monthly bank reconciliation

    DEFINITION

    Any short-term debt, excluding payroll, that your business is expected to pay. Generally due in 30-60 days; does not carry interest fees.

    IMPORTANCE

    An accurate accounts payable process leads to accurate financial statements, a key component of any business. A dependable system creates good relationships with suppliers and a good credit rating. Paying debts on time also reduces costs from penalties and late fees.

    EXAMPLE

    • Utility bills
    • Advertising and marketing
    • Travel
    • Office supplies
    • Entertainment
    • Vendor invoicing

    DEFINITION

    Any long-term debt that carries a written promise to repay. Generally carries interest fees.

    IMPORTANCE

    Outstanding loans are liabilities against your company’s overall health. They also carry costs in interest charges.

    EXAMPLE

    • Mortgage or vehicle payments
    • Equity credit line
    • Vendor credit

    DEFINITION

    The goods your company buys, usually tracked over the course of a year.

    IMPORTANCE

    Information about specific purchases can highlight important details like discounts for early payment, shipping costs or insurance liability. Merchandise purchases must also be accurately reflected in inventory.

    EXAMPLE

    • Merchandise for resale or development
    • Technology expenses
    • Office supplies
    • Training materials

    DEFINITION

    Merchandise purchased by your company to be resold to customers. Inventory is an existing asset that has an associated cost; this cost reflects your company’s cost to produce or purchase it.

    IMPORTANCE

    Tracking inventory is crucial to projecting net income, cash flow, taxable income and working capital.

    EXAMPLE

    • Goods for sale
    • Products that are combined to produce goods for sale

    DEFINITION

    Income you expect to receive from your customers.

    IMPORTANCE

    Knowing which customers owe you money and when payments are due prevents you from giving away free product and helps you anticipate projected cash flow. Accounts receivable are a key part of a company’s assets, and correctly tracking this impacts your company’s worth and profitability. It also serves as proof of income to the IRS.

    EXAMPLE

    • Invoicing
    • Credit advances to clients

    DEFINITION

    Sales of merchandise to a customer, reported in the same time period that the goods or services were transferred to the customer.

    IMPORTANCE

    In addition to providing accounts receivables information, tracking sales can help you measure the success of your marketing efforts. Analysis of sales data can also illustrate industry trends, help you evaluate the success of a new product or inform future product development.

    EXAMPLE

    • Gross sales
    • Net sales
    • Sales discounts
    • Sales allowances

    DEFINITION

    Withdrawals of cash or other assets for the owner’s personal use, recorded as a debit to cash and a credit to owner’s equity.

    IMPORTANCE

    Applicable to businesses that are taxed as sole proprietorships or partnerships, this is particularly useful for monitoring partners’ withdrawals of company assets.

    EXAMPLE

    • Cash
    • Merchandise
    • Stock shares

    DEFINITION

    A company’s cumulative earnings since its beginning, minus any dividends paid to stockholders. This number is reflected in the owner’s equity.

    IMPORTANCE

    An accurate accounting of this number can identify funds that can be used toward company growth, measure the company’s performance against its projected worth and demonstrate the company’s health to stockholders.

    EXAMPLE

    • Cash used to pay debts or reinvest in the business