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Basics of Accounting: What You Need To Know As A Business Owner

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Unless you’re in the field of financial services, it’s pretty safe to assume that you haven’t done an extensive study of accounting. I suspect that you probably don’t have an affinity for that type of work either. That’s perfectly OK, because, as a business owner, you’ve got plenty of other demands on your time, all of which are centered around the maintenance and growth of your company. On the other hand, we’re all familiar with the stories about startups that failed, and formerly thriving businesses which went belly-up and left the business owner penniless.

More often than not, these failures occur due to poor financial decisions. You may not have a burning desire to do accounting, but it behooves you to have some understanding of at least the basics, to avoid mistakes that could have easily been avoided.

Once you reach the limits of either your knowledge of accounting or the time you can devote to it, you may hire a bookkeeper or an accountant to manage that work. Or, as we always recommend, you may opt to use the services of a virtual accountant. Either of those choices will certainly help the situation. But, as a business owner, you don’t want to get too far removed from your own company’s finances. Doing so could leave the business running itself into the ground, before you even see that it’s happening.

What do you really need to know about accounting as a business owner? We can’t give you a crash course on finances in this blog, but we can touch upon some of the basic principles that fall under the category of Generally Accepted Accounting Principles (GAAP). Here are some of those basics:

Revenue Principle – This is also known as the realization principle. It states that revenue is earned when the sale occurs, in other words, when the goods or services are provided, not at the moment when the cash changes hands.

Expense Principle – This is basically the flip side of the revenue principle, and it states that expenses are incurred when you use the goods or receive the services. Again, it doesn’t matter if you take time to pay for what you bought.

Matching Principle – The companion to the two principles already quoted, the matching principles states that your expenses are to be matched up with your revenues, as much as it’s practical to do so. In other words, if you buy supplies to produce a product, the expense is recognized when you’ve used those supplies to produce the product, and sold it.

There’s been plenty written on the subject of GAAP, and we could go for days about those principles. Generally speaking, the key for a business owner is to keep your books in order and up to date. You’ll need to remember the importance of always recording all transactions: every dollar that comes into or leaves your company. This is crucial for intelligent planning, and also to be ready when it’s time to file your taxes.

If this seems overwhelming, consider using a professional to work with you on your bookkeeping and accounting needs. Outsourcing it all to a virtual accountant is usually an excellent solution for small and growing businesses who need professional financial expertise.

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