It's important for small business owners to understand accounting basics so they can manage their finances effectively. For example, small business owners should be aware of certain accounting principles, methods, and definitions.
Here, we'll cover the foundational concepts and strategies of small business accounting.
Accounting is the process of calculating, documenting, and analyzing the financial transactions of a business. This can involve reporting income and expenses to tax collectors, drafting financial statements for investors, or providing stakeholders with balance sheets.
Small business owners can use accounting practices to measure their financial health, make strategic decisions, and plan for the future.
It's important to understand basic accounting definitions for financial management.
Key accounting terms include:
Learning these terms can help you navigate financial statements like balance sheets, income statements, and cash flow statements.
Business owners can use this basic accounting equation to keep their finances balanced:
Assets = liabilities + owner's equity
Basically, the equation helps ensure that each debit is offset by a credit or asset. This can help keep your business in good financial health.
The accounting cycle is an eight-step process that businesses can use to record their financial transactions for a certain accounting period, such as a month, quarter, or year.
The eight accounting cycle steps include:
There are two main types of accounting methods:
Small businesses may opt to use cash basis accounting because of its simplicity. It can also allow them to only pay taxes on income that's in their account. However, accrual basis accounting can help provide a clearer picture of a company's financial health and future performance.
Small businesses may be advised to account for certain widely accepted accounting principles and standards. These standards are created to help businesses accurately and consistently report their finances; they are set by the Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB).
For example, the FASB established the Generally Accepted Accounting Principles (GAAP) as a framework for conducting business accounting in the U.S.
You can use accounting tools and software to automate your bookkeeping and save valuable time and resources. Accounting tools may also come with additional features that you can use to better track your finances and grow your business.
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Some small businesses and entrepreneurs may choose to hire an external accountant to handle their bookkeeping, manage their operating expenses, and ensure they're meeting certain standards. It's important to thoroughly research accounting solutions to find a trusted and verified associate that can help your business grow.
Discover more small business accounting resources.
In partnership with three expert business owners, the PayPal Bootcamp includes practical checklists and a short video loaded with tips to help take your business to the next level.
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