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Bookkeeping 101: Understanding the Basics

Bookkeeping 101: Understanding the Basics

by | Mar 2, 2023 | Accounting, Bookkeeping, Business, Financial Services, Outsourced Accounting, Wine Industry

Bookkeeping can be a daunting prospect for the uninitiated. Even for seasoned business owners, it’s easy to get overwhelmed with the various terms and concepts around bookkeeping. This is especially true when you consider the number of regulations, laws, and taxes that must be considered.

However, understanding bookkeeping basics doesn’t have to be complicated or intimidating. Here at Protea Financial, we will discuss what bookkeeping is, how it works, why it’s essential, and how you can start your bookkeeping today.

 

What is Bookkeeping?

Bookkeeping is the process of tracking and recording financial transactions. This information is used to produce financial statements and reports, which can be used by businesses like yours to make decisions about where to allocate their resources.

Bookkeeping is an integral part of any business, as it provides a clear record of what has been spent and earned over time. This information can be used to make informed decisions about where to allocate resources in the future.

Bookkeepers ensure that financial records are kept accurate, up-to-date, and in line with accepted accounting principles. Bookkeeping is often done using computer software, but there are still many businesses that rely on manual bookkeeping techniques.

 

What Are the Elements of Bookkeeping All Business Owners Need to Know?

As a business owner, it is important to have a strong understanding of the basics of bookkeeping. The elements of bookkeeping include:

  • Income: This is money your business brings in, such as sales or services rendered.
  • Expenses: This is money that your business spends, such as on inventory, rent, utilities, or payroll.
  • Assets: This is anything of value your business owns, such as cash, equipment, or real estate.
  • Liabilities: This is any debt or financial obligation that your business owes, such as loans or credit card balances.
  • Accounting Principles: This is the set of rules and regulations that guide your bookkeeping.
  • Financial Statements: These are regular reports that show the financial position of your business, such as balance sheets, income statements, and cash flow statements.
  • Tax Requirements: This includes federal and state taxes that your business must pay or report annually.
  • Auditing: This is an independent review of your bookkeeping records to verify accuracy and compliance with industry standards.

Protea Financial Understanding Bookkeeping Basics

The Different Types of Bookkeeping

There are three different types of bookkeeping: single-entry, double-entry, and triple-entry. Here is an overview of each:

Single-entry bookkeeping is the most straightforward type, and it involves recording financial transactions in a single ledger, where each transaction is listed only once without balancing. This type of bookkeeping is suitable for small businesses that don’t require complex financial tracking.

Double-entry bookkeeping requires more effort and time to maintain but is more accurate than single-entry bookkeeping. Double-entry bookkeeping involves recording financial transactions in two ledgers, called the “debit” and “credit” sides. Each transaction must be recorded on both ledgers so that any changes made to one ledger will be reflected in the other. This helps maintain accuracy and ensure that all transactions are balanced correctly.

Triple-entry bookkeeping is the most complex type of bookkeeping, and it requires three ledgers or books to keep track of financial transactions. In triple-entry bookkeeping, each transaction is recorded in three separate ledgers: debit, credit, and third-party ledger. This helps provide an additional layer of security by requiring an independent third party to verify all transactions before they can be considered complete. Triple-entry bookkeeping can be used for large companies

 

The Benefits of Bookkeeping

Bookkeeping is an important part of any business, and it can offer several benefits to both the business owner and the employees. With proper bookkeeping, businesses can keep track of their income and expenses, which can help them make better financial decisions.

Additionally, bookkeeping can help businesses identify areas where they may be overspending or underspending, and it can also provide valuable information for tax purposes. Furthermore, well-kept books can be valuable if a business is ever audited by the IRS or state tax authorities.

Lastly, good bookkeeping practices can help businesses avoid penalties and interest charges on late payments. This simple practice can help businesses save money over time.

 

How to Get Started with Bookkeeping

To get started with bookkeeping, you’ll need to set up a system for tracking your financial transactions. This can be as simple as creating a spreadsheet or using specialized bookkeeping software. Once you have a system in place, you’ll need to start recording all your income and expenses. This may seem like a daunting task, but it’s important to keep track of your finances so that you can make sound business decisions.

If you need help figuring out where to start, plenty of resources are available to help you get started with bookkeeping. You can find books, online courses, and even software that will walk you through the process step-by-step. However, the best approach if you are unsure where to start or what information to track is hiring an in-house or outsourcing to a virtual bookkeeper. Virtual bookkeepers are typically more affordable than in-house bookkeepers and usually know just as much, so your business finances are still safely being tracked.

Protea Financial Basic Bookkeeping for Small Businesses

Tips for Staying Organized

Assuming you’re starting from scratch, you first need to create a system for organizing your finances. This can be as simple as setting up folders in your email inbox or computer desktop or using a physical filing system. Whatever system you choose, ensure it’s one you can stick with.

Once you have a system in place, start by creating folders for your income sources and expenses. If you have multiple bank accounts, credit cards, or loans, set up a folder for each. Then, start sorting your transactions into the appropriate folders. As you do this, you may want to create sub-folders to organize your finances further. For example, you could create a folder for “Utilities” and then sub-folders for “Gas,” “Electricity,” and “Water.”

As you organize your finances, remember that some items may span multiple categories. For instance, your mortgage payment will likely include principal and interest payments, which could go into separate folders. Similarly, if a business expense is used for personal purposes (like a home office), track both aspects.

By staying organized from the start, you’ll save yourself many headaches down the road. Not only will it be easier to find information when needed, but you’ll also be less likely to overlook important details.

 

Let Protea Financial Help You Understand Bookkeeping Basics or Track Your Expenses For You

Bookkeeping is essential to managing your finances and running a successful business. With the help of the Protea Financial experts, you can better understand bookkeeping basics.

Whether you choose to do it yourself or outsource the work to a professional, having accurate records will help you make better decisions and maximize profits. If you are serious about succeeding in business, take some time to learn more about bookkeeping and understand how it can benefit your organization. For more information on hiring a bookkeeper, contact Protea Financial!

Protea Financial Is Here to Help with Bookkeeping Basics and More!

Reach out to the experienced professionals here at Protea Financial today and let us help you with anything from understanding bookkeeping basics to hiring us as your company’s bookkeeper!

Call Protea Financial Today!
Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

by | Jul 22, 2021 | Accounting, Bookkeeping, Business, Financial Services

Cash flow is an important element of any small business. To effectively manage your cash flow, you need to be aware of all the aspects that can affect it and how they impact your business. The best way to achieve this is by understanding what might cause fluctuations in cash flow and coming up with solutions ahead of time for each negative event so as not to be caught off guard if one occurs. This article will discuss some common factors that may reduce or increase your company’s cash flow and provide tips on how to handle crunches when they arise.

What is Cash Flow?

In quite simple terms, cash flow is the money flowing in and out of your business each month. Small businesses need to strike a balance between accounts payable and accounts receivable to ensure that more money comes in than goes out each month. Although cash flow is related to net income, they have some key differences. 

Net income refers to the earnings of a business during a period after considering all expenses incurred during the period. Net income includes sales recognized but not collected until subsequent months. In addition, net income likely includes a monthly depreciation charge which is a non-cash item. These are important to consider when comparing net income to your operating cash flow.

Why is Cash Flow Important?

Understanding how your business generates and uses cash can help you better navigate the growth of your company. Analyzing your cash flow helps you see how well your business is performing and how much liquidity your business has. 

Having cash on hand puts you in a better financial position, adds stability, and gives you better purchasing power. Your cash flow determines how quickly you can expand your business. Additionally, having positive cash flow that leads to a surplus makes you a worthwhile investment for banks or investors. 

maximize cash flow

Tips for Boosting Your Business’ Cash Flow

There are so many things you can do to keep your business running smoothly.

You should have a plan for every day; when the unexpected happens, you should be able to react. There are three areas to focus on for boosting cash flow.

Increase Revenues

  • Keep an eye on customer retention rates, customers are the backbone of any business, and if you have a low customer retention rate, it is time to look at what is going on. Customers are the lifeblood of any company. They provide the revenue that funds your business, and they keep you in business. 
  • Find out what is lacking in the market and offer new products and categories to augment your current offerings. You may be able to charge a higher price for new or improving on existing items.

Decrease Expenses

  • Reach out to new suppliers or renegotiate prices with an existing vendor. Even offering to pay early could result in getting a small discount, which is almost always worth taking.
  • Find ways to automate, or even outsource, parts of your operations. 
  • Find less expensive suppliers that have nothing to do with the product you sell. You do not want to sacrifice product quality for a lower price since this affects your image and reputation in the market. Focus on costs such as office supplies or a less expensive insurance provider. 

Operational Efficiency

  • Be open about what your cash flow is like with your team. They will need to know what is going on if cash flow is already tight or if it becomes tight. They can help your business quickly find ways to cut expenses or reinvest profits into projects with high rates of return.
  • Find ways to increase your return on assets. Smart business owners track their return on assets because it reveals how effectively you are investing in your business.
  • Manage inventories through buying more efficiently or increasing inventory turnover. When you buy efficiently your customer is the focal point, which makes it easier to make more sales.

 

An interesting observation by the Italian economist Vilfredo Pareto helps explain how best to manage cash flow. He noticed that 80 percent of the land in Italy was owned by 20 percent of the population. He further noticed that it happened in nature in that 80 percent of the peas in his garden were produced from 20 percent of the pods.

What does this have to do with cash flow management? Look at your business: it is likely that the Pareto Principle, also known as the 80/20 rule, is in play. Do 80 percent of your sales come from 20 percent of you customers? If so, it might make sense to cut out some of your more high-maintenance, low profitability clients. Your ratios may be different but understanding roughly 80 percent of an output results from almost 20 percent of an input gives you a competitive advantage on where to look to focus your effort and resources. 

By keeping an eye on your expenses, income, and operational efficiency you can predict when you might need a little extra cash coming in or going out. You can even use a budgeting tool to help with this process. You will see how much money is coming in each month and where all the money is going out each month, so it is easy for you to make changes if needed.

QuickBooks Beginner Mistakes You Must Avoid

QuickBooks Beginner Mistakes You Must Avoid

by | May 13, 2021 | Bookkeeping, Bookkeeping Software

If you’re familiar with QuickBooks Online, you know how spectacular it is in maintaining financial records for small and medium businesses. Whether you’re a business owner or an individual looking for reliable bookmaking software, QuickBooks is a great option.

However, there are some common mistakes beginners tend to make in QuickBooks Online. In this post, we are going to look at the most common mistakes in QuickBooks and how to avoid them.

If you’ve already made these mistakes, it’s your time to correct them. And if it’s your first time using QuickBooks, you’re in luck because you rectify can your mistakes without even making them!

 

Forgetting to Update the Records

This is by far the most common mistake QuickBooks users make. If you’re guilty of the same crime, it’s a good thing you’re not alone. With the fast-paced nature of today’s business world and the stress of managing everything, it’s fairly normal to miss a few transactions here and there.

However, these mistakes might become costly if not fixed immediately. When your QuickBooks records don’t match up with your bank statements, it means you are not on top of your organization’s finances.

To avoid such a rookie mistake, build up the habit of recording transactions when they happen. If it’s too much to ask, at least update the records at the end of the day.

 

Double Charge

Believe it or not, double entries are also very common among beginners. If you’re the conscious kind, you are more prone to making this mistake. Let’s look at an example.

Suppose, you went on a business trip at the beginning of the month and you spent from

quickbooks transaction

 your credit cards only due to a short in company accounts. Being a good businessman, you logged everything in your expenses tab as a business trip.

However, at the end of the month, when you are paying the credit card bills, you are also considering the ‘business trip’ from before. So, there are effectively two entries for the same expense.

It can cause you a lot of headaches. So, it’s always better to be careful when making entries. Label them clearly so they don’t create confusion for yourself.

 

Write Checks for Payrolls

If you’ve been using QuickBooks as a business owner, there is a good chance you use it for employee payroll as well. So, how do you pay the payroll taxes? If you’ve been using the Write Checks window, you’ve been doing it wrong!

When you use the Payroll function in QuickBooks, the payroll taxes are automatically filed in the Payroll Liabilities window. When you pay them through the Write Checks, the tracking gets all messed up.

So, only use the Payroll Liabilities to pay off those taxes!

 

Deleting Transactions

It’s another huge mistake made by rookie QuickBooks users. As QuickBooks does the job of central bookkeeping for your business, all of the transactions are interconnected across different accounts.

So, when you delete a transaction from one account, it affects the whole ledger. And at the end of the month when you finally sit down to make sense of things, the deleted transaction will cause you a lot of headaches!

So, if you absolutely have to delete any transactions, look for other entries that it might affect. For example, if you delete a transaction in one account, it will effect another account. So keep this in mind before deleting transactions.

 

Making Too Many Accounts

The sub-accounts feature is quite handy in QuickBooks to further organize the books. However, some users take the concept too far and open up accounts and sub-accounts for each of their expenses. If you can keep track, it’s all good.

The problem arises when you can’t. Introducing too many variables is a surefire way to confuse things. For example, do you really need sub-accounts like electricity, gas, etc. under the bills account?

It brings extra stress on your organizing skills. So, what you can do is chalk out a plan for your accounts before you make them. Make a list of the information that you actually need to know and start accounts from there.

So, delete any unnecessary accounts you may have now to tidy up your QuickBooks account.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

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The Basics of Financial Statements

The Basics of Financial Statements

by | Mar 25, 2021 | Accounting, Bookkeeping, Business, Financial Services

A key aspect and skill in managing a company is the ability to understand financial statements. Because we operate in a competitive business environment, it is important to be able to identify a company’s financial position/health, business trends and risks at an early stage. The ability to analyze your company’s financial statements forms a key part in cultivating overall growth.

 

Let us dig into the basics of financial statements:

 

The Balance Sheet

The foundation of the balance sheet reflects the “book value” of a company at a specific date, also known as the reporting date. The balance sheet provides a clear overview of the company and can be divided into three components namely, assets, liabilities, and owners’ equity.

Assets: Anything that the company owns or is owed, and represents an accurate quantifiable value can be attributed to this asset.

Liabilities: Any legal obligations owed by the company to third parties. In a simplistic term, liability can be seen as the opposite of an asset.

Owners’ Equity: this refers to amounts invested by or owed to shareholders. If you had to subtract all the liabilities from all the assets you should effectively arrive at the owners’ equity value. The amount reflects the net worth of the company that belongs to the shareholders.

The term “balance sheet” is indicative of one important accounting principle which is that it should always balance according to the well-known formula: Assets = Liabilities + Owners’ Equity.

 

The Income Statement

The income statement (also referred to as the profit & loss statement) is an accurate record summary of revenue, expenses and other transactions over a given period. This is a particularly important document that allows you to analyze the progress and performance of your company. You can easily determine if your company is making a profit or loss, analyze expenditure/costing, identify business trends, etc.

The Income statement typically includes the following basic information:

Revenue: The amount that the company earned from sales.

Costs of goods sold (COGS): This figure is the cost of what it took to produce your goods. A simple way to put it, for each product that you sold, how much did it cost to make and get it into the hands of the customer.

Gross profit: This is the total revenue less the cost of goods sold.

Operating expenses: These are costs incurred to keep your company operating but aren’t direct materials or labor related to producing your goods or services. Examples of operating expenses include property insurance and taxes, building repairs and maintenance, utilities, administrative staff wages, etc.

Operating income: This is the income amount that reflects the gross profit less the operating expenses (other than COGS).

Net income: This is the company’s profit after all expenses and taxes.

The income statement provides you with a good indication of how well your company is performing. You will also be able to analyze financial trends on profitability, excess expenditure, cost-saving and if there is any excess cash to invest back into your company.

 

The Cashflow Statement

This cash flow statement provides a detailed overall view of what has happened to the company’s cash and the movement of cash over a given period. It is vital that a company has enough cash on hand to meet its obligations. A cash flow statement is typically broken into three sections namely, operating activities, investing activities, and financing activities. This allows for the reader to determine the following:

  • Operating activities indicate whether a company can generate cash from their normal operating activities (selling their goods or services).
  • Investing activities indicate the cash earned or spent from investments. This can include buying/selling physical property, vehicles, fixed deposits, patent rights, etc.
  • Financing activities indicate the cash raised/spent to settle debt and/or equity financing.

 

A positive cash flow figure reflects more money coming in than going out. A negative cash flow figure reflects more money flowing out (being spent) than flowing in. A negative cash flow figure is not necessarily a bad indication and this can relate to various strategic cash flow expenditure by management. The cash flow statement is vital when it comes to decision-making pertaining to the company’s cash position. It portrays the ability of a company to operate in the long term and short term based on the in and outflow of cash. Knowing this not only allows you to plan and budget in the long term, but also allows for better short-term strategical decision making.

 

Bringing it all together can provide meaningful information

 

Whilst accountants work with financial statements on a daily basis and for them it is second nature, the same cannot be said for all business professionals and it sometimes becomes difficult to understand the financial jargon. You can however learn the basics of understanding financial statements and the benefits it can yield when it comes to analyzing the statements. Financial analysis of the balance sheet, income, and cash flow statements can provide useful information such as:

 

  • The financial health of the company
  • Assist with financial forecasting, budgeting, and cash flow planning
  • Maximizing gains or minimizing losses
  • Identifying trends and new opportunities to grow the company
  • Identifying and avoiding undue risk
  • Improving and visualizing strategic business decisions
  • Allows investors to analyze the profitability and market value of the company and decide whether they would like to invest

 

The possibilities of financial analysis and the usefulness of metrics are endless. It is important to have accurate financial statements prepared by experts that will provide you with invaluable data to analyze. The data itself won’t save your businesses – only you can.

 

Protea Financial is Your Outsourced Bookkeeping and Management Accounting Services:

 

The good news is that you can learn how to interpret financial statements even if you do not have a financial background. At Protea Financial we match our solutions to the needs of the customer. Protea Financial can support you with everything from bookkeeping services, preparing financial statements, order processing, inventory tracking, handling management accounts, and tax schedules in order to support your tax accountant. Protea’s goal is to provide timely, accurate, and high-quality financial information on which a business can act. We can work with you to provide an evaluation and find the best solution for your business.