Last Updated on September 13, 2023
Whether you’re a new entrepreneur getting your first business off the ground or an experienced business owner, navigating company finances can be tough. Without proper organization and insights pertaining to accounting-related tasks, your business’ finances are in jeopardy of being mismanaged.
This comprehensive business accounting guide will explore the basics of accounting in business and provide practical tips to help you manage your business finances effectively and strategically. Get ready to empower your financial decision-making and steer your company toward sustainable growth.
What Is Accounting In Business?
First, let’s answer the fundamental question: what is business accounting?
Business accounting is defined as recording, summarizing, analyzing, and reporting a business’ financial transactions to oversight regulators, agencies, and tax collection entities.
Business accounting tracks critical financial transactions, such as income, assets, expenses, equity, and liabilities. It allows you to access crucial information that will help you make better-informed decisions related to business operations.
What Is The Role Of Accounting In Business?
Accounting is critical in helping your business meet legal requirements (like tax obligations) and providing stakeholders the clearest picture of your company’s financial health. It’s crucial to the transparency and success of your organization.
The role of accounting in your business is vital and multifaceted for your company’s overall management and growth. Some functions of accounting in business include:
Financial Reporting. Accounting involves preparing and presenting financial statements that offer an overview of your company’s financial condition and performance.
Decision Making. It gives leadership essential information for decision-making. Managers can make strategic decisions about budget allocation, investment, cost-cutting measures, investments, and more with insights into cash flow, profitability, and financial health.
Budgeting and Planning. Accounting is crucial for budgeting by providing historical data to forecast future performance. It enables companies to plan, allocate resources, and make financial targets.
Performance Evaluation. Because accounting tracks costs, revenue, profitability, and how effectively you use resources, it enables you to evaluate your business’s performance over specific periods. It can guide strategy and contribute to improvements in efficiency and profitability.
Cash Flow Management. Accounting monitors cash inflow and outflow, otherwise known as business cash flow, to ensure your business has enough liquidity to meet short-term obligations. It’s pivotal to help you maintain operational stability.
Regulatory Compliance. Companies must meet specific regulations and standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Accounting ensures that your financial reporting complies with legal requirements, which will help you avoid any penalties or potential legal issues.
Taxation. Taxes are intimidating for most businesses, especially small and medium-sized businesses, without large accounting departments. In fact, 35% of contractors said the most stressful part of doing accounts is worrying about making mistakes. Accounting involves accurate calculation and timely tax payments. It allows you to understand your business’s tax liabilities, claim eligible deductions and ensure tax compliance.
What Does An Accountant Do For A Business?
Accountants ensure accuracy and compliance for businesses. A few of their key tasks include:
Financial Record Management
Accountants manage your business’s financial records to ensure that all transactions (such as expenses, income, investments, etc.) are recorded accurately and following accounting principles and regulations. This will likely include maintaining general ledgers, payroll records, accounts payable (AP), and accounts receivable (AR).
Financial Analysis and Reporting
An accountant will analyze your financial data to assess your business’ performance and financial health. They prepare financial reports such as profit and loss statements, balance sheets, and cash flow statements, which gives insights into your company’s profitability, liquidity, and overall financial condition.
Budgeting and Financial Planning
Another critical task is to help in financial forecasting and budgeting. Accountants use past financial data to predict future revenues and expenses, assisting management in strategic decision-making and setting financial goals and growth plans.
Accountants often offer strategic financial business advice. This may include advising on revenue enhancement, risk management, cost reduction, investment opportunities, and other strategic financial decisions. They also help with mergers and acquisitions, business planning, and financial management strategies.
What Are The Tasks Of An Accountant?
Accounting involves many tasks that help manage your company’s financial information. Typical accounting tasks include:
- Record keeping
- Payroll management
- Financial reporting
- Tax preparation
- Budgeting and forecasting
- Conducting audits
- Financial analysis
While these are typical accounting tasks, the specific duties of your accountant vary significantly depending on your company size, industry, and the accountant’s specialization.
Types of Accounting
Business accounting is typically divided into several different fields, including:
Financial accounting involves preparing financial reports for your business based on past performance to give insights into the company’s financial position. These types of accounting reports are typically given to outside stakeholders, such as lenders, investors, and regulators.
This form of accounting concentrates on the needs of managers within your organization. Management accounting typically involves preparing in-depth reports and forecasts to help inform strategic business decisions.
Tax accounting requires specialized expertise and knowledge of tax codes and regulations. It includes preparing and filing taxes that comply with jurisdiction laws where your business operates.
This type of accounting tracks, records, and analyzes the various costs related to your company’s products or services. Cost accounting aims to advise management on ways to streamline costs and provide insights into financial strategy.
Auditors verify the accuracy and completeness of a business’ financial statements. They ensure that your financial records align with accounting regulations and standards. Auditing tasks are commonly required throughout the invoicing process, including invoice matching and invoice reconciliation.
Forensic accounting occurs when financial records are investigated in order to detect potential fraud, employee theft, identity theft, or financial mismanagement. Forensic accountants are extremely important to businesses, as they take on the responsibility of determining whether there was criminal intent in financial mishandlings.
Accounting vs. Bookkeeping
Accounting and bookkeeping are two equally important business functions, but they are not the same. Bookkeeping is responsible for recording financial transactions, while accounting interprets, classifies, analyzes, summarizes, and reports the financial data.
Bookkeeping lays the groundwork for accounting. While bookkeepers maintain data, accountants review and analyze the data for business insights and guidance. Both are needed for the financial health of your organization.
Small Business Accounting Tips
Small businesses often face unique goals and challenges different from larger companies. Here are some tips for getting started in business accounting:
- Keep business and personal expenses separate to make tax preparation easier and to give you a better picture of your business’s financial health.
- Regularly update your financial records and ensure their accuracy. It will help you track your company’s progress, simplify tax filing and make informed business decisions.
- Familiarize yourself with fundamental accounting principles and concepts, like the difference between cash budget vs. statement of cash flows. It will help you better understand your financial statements.
- Regularly review cash flow statements, income statements, and balance sheets to understand your company’s profitability and to make better-informed financial decisions.
- Anticipate significant expenses and budget accordingly. Plan for purchases, such as equipment or upgrades, to avoid financial strain.
- Invest in accounting software to automate your tasks, reduce errors, save time, and generate accurate, real-time financial reports.
Consider consulting with a tax professional or certified accountant as your business grows over time. They offer needed expertise to help you navigate financial scenarios and tax obligations.
Business Accounting FAQs
What is the difference between AP and AR?
Accounts payable (AP) and accounts receivable (AR) are two fundamental account types in accounting, particularly in the double-entry bookkeeping system, that handle company transactions.
AP is money a business owes to its vendors or suppliers for goods or services received but not paid for yet. When a company purchases something on credit, it goes into AP and represents a liability for the company.
AR is calculated in order to decipher the outstanding money owed to a business for its delivered goods or services. AR is an asset account: when a company sells something on credit, it goes into AR.
In short, AP is the money a company owes vendors, while AR is the money owed to the company. Both are vital when auditing company cash flow and the overall financial health of your company.
Can I do my own business accounting?
As a business owner, you can handle your own business account; many small businesses choose to start by managing their own finances to preserve funds for other business expenses.
With a solid understanding of basic accounting principles and accounting software, it’s possible to handle the daily financial tasks of your business. In fact, 72% of self-employed people do their own accounting without professional help.
However, you might find that accounting becomes more challenging and time-consuming as your business grows. Accounting tasks like payroll, taxes, and financial analysis become complex if you’re not trained in accounting. It might be beneficial to hire a professional accountant or bookkeeper at a certain point.
How much is an accountant for a small business?
According to the U.S. Bureau of Labor Statistics, the average hourly rate for an accountant is $37. However, accountants’ fees can vary widely. How much an accountant costs depends on the accountant’s certification, experience, and your accounting needs. Also, some accountants charge per project or monthly, depending on whether you need occasional help or ongoing services.
Do I need an accountant for my small business?
Whether you need an accountant depends on various factors, including the size of your business, its growth stage, the complexity of your financial operations, and your own expertise in handling finances.
If your business involves complex transactions, like large contracts, international trade, or substantial investment, an accountant might be helpful to ensure they’re handled correctly and efficiently.
If your business is a sole proprietorship or simple partnership, you might be able to manage without an accountant initially. However, if your business is a limited liability company or corporation, the financial and tax requirements are more complex and may require an accountant’s expertise.
Beyond expertise, if managing the financial aspects of your business is taking too much time or you’re not interested in that aspect of running your business, an accountant can free you up to focus on areas where you add more value.
While it’s possible to manage your business accounting by yourself, especially with accounting software available today, an accountant can provide value in financial insights, risk minimization, and peace of mind.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.