At Protea, our mission is to help as many people as possible have a better understanding of accounting and hopefully understand the value good information adds to the success of their business. Better accounting for everyone!
With this in mind, for the last 3 months I have been sharing a weekly Accounting tip of the day to my LinkedIn page. To date, it seems to have been very popular (relatively speaking). I like to believe these tips have added value to those who need to improve their accounting knowledge. To help you improve your understanding of accounting, here is a journey through my thoughts.
Nothing Beats the Basics
The simplest form of accounting is bookkeeping, but honestly it is the most important. Without accurate bookkeeping, everything else cannot be correct as the more advance accounting will be based on bad information.
So how do you get good bookkeeping? Hire the right person. Hire someone who is consistent. Get the basics correct. It will make everything so much better.
Simplify for Success
Do not over complicate your chart of accounts. Keep it simple.
Fewer accounts (generally) makes is easier to read, but more importantly, drastically improves consistency. With too many accounts, it can become ambiguous and lead to charges ending up in a lot of different accounts, making analysis difficult.
Use your accounting software’s industry basic chart of accounts and then focus on what you need to know from your chart of accounts. Then develop the chart of the accounts from there. A little bit of customization will go a long way.
Simplicity = Consistency = Ease of Use
The Accountants Trick
Understanding accounting is as easy as understanding left and right.
The accounting equation A = L + E is a process of understanding the left and right hand need to match. Now remember left is DEBIT, and right is CREDIT.
Here are the basics:
Assets increase = DEBIT
Assets decrease = CREDIT
Liabilities increase = CREDIT
Liabilities decrease = DEBIT
Equity increase = CREDIT
Equity decrease = DEBIT
Knowing your accounting equation is a key basic to being successful in the world of bookkeeping.
Save Your Backup
Always attach a backup to your vendor bills and journal entries in your accounting software. It will provide clear indication as to why the item was raised, plus make your life so much easier when trying to remember what a cost was for in the future.
Separate Personal from Business
If you are a small business owner or solopreneur, your business and personal life start to blend into one, but this does not mean your expenses should blend.
Keep your business and personal expenses separate from each other.
One of the major reasons to separate your personal and business finances is for tax purposes. The ability to take advantage of tax deductions, including writing off business expenses, is a huge reason many business owners choose to split their personal and business finances
Another important reason is to be able to see the true performance of your business. How well are you really doing?
Clean books will also make it a lot easier to sell in the future if a future buyer does not have to try and strip out your personal expenses.
Make Sure You Keep Supporting Documents
If you are spending money outside of the normal AP process, say on a company credit card or even a personal credit that you then claim back, keep the backup of the expense, and store it with all other expense backups.
The IRS requires businesses to keep receipts for all business expenses of $75 and up. Though if your business is audited, you’ll still need to be able to provide basic information about expenses under $75, such as the date of the purchase and its business purpose. So, generally, I say keep them all.
If you are transacting a lot on a credit card, make sure to make notes on each receipt or make use a third-party app to track what the expense is for.
Be Aware of Journals
If you are doing accrual financials but need to do accrual-to-cash basis adjustments for tax accounts, remember general journals are picked up as cash transactions in most accounting software. Knowing this will make your life a lot easier.
Analytical Review Can Be Your Friend
Reviewing your profit and loss using 12 months and a monthly view will not only allow to take a look at the historical performance of your business but will also allow you to look at trends.
From a pure review standpoint, it will allow you to identify if any costs were missed and help you be more consistent in your processing.
Accurate Costing Is Critical
Make sure you are costing your inventory and then raising the cost of good transaction for each sales transaction raised. Most accounting software would handle the second portion as long as you are selling inventory type items on your invoice (don’t use service if you are selling a product).
Costing can be simple if you buy a finished product, but can be extremely complicated if that product is being manufactured. Make sure the person handling your costing understands cost accounting principles and understands what needs to be allocated in terms of GAAP (tax could be a totally different story).
And Finally, Outsource to People With The Correct Skill Set
If you are a small business, it likely that your accounting does not require a full-time commitment. Rather than trying to do it yourself, outsource your accounting.
Getting the expertise from someone who does accounting daily allows you to save money in the long run as it will be done correctly, consistently and on time from the start.
Remember, good information allows you to make better decisions, which allow you to increase the odds of being successful.
Turn to Protea Financial for Any Other Accounting and Bookkeeping Questions
Here at Protea Financial, we want you to turn to us when you need accounting resources of any kind. We can help answer questions, set up accounting software for your company, and even be your outsourced accountants.
Accounting is something many find confusing. Let us help keep it simple for you. Call us today.