Business Accounting

As a business owner, you face several challenges every day while trying to run it smoothly. The last thing you would want is unknowingly harming your business’s financial health or, worse – getting into legal trouble. Accounting helps you avoid shooting in the dark and safeguards your business in numerous ways. Hence you need to know what business accounting is and why your business needs it.

At a ground level, business accounting helps your management determine the financial status of your organization, and make decisions accordingly.

But what exactly is covered under business accounting? What value does it add to your business? How is it different from general accounting? How can small businesses manage business accounting in a hassle-free way?

We discuss all of these and more in this blog. Stick around for useful insights, especially if you want to truly understand business accounting for small businesses.

What Is Business Accounting In Simple Terms?

Recording, analyzing, and interpreting your business’s financial information with the aim to keep track of your business is referred to as business accounting. Also known as managerial accounting, this type of accounting manages a company’s day-to-day financial activities while setting long-term financial goals.

Business accounting is primarily used by internal stakeholders like managers, directors, and others to make crucial business decisions. Some of the popular use cases are:

• Forecasting cash flows
• Make-or-buy decisions
• Performance analysis
• Forecasting revenue
• Analyzing the rate of return
• Investment decisions

Suppose you want to increase the price of certain products or services you sell as the costs and expenses have gone up.

To determine the exact amount to be increased for optimal business outcomes, you need managerial accounting. The process of deciding the price of a newly launched product is quite similar too.

Additionally, other operational decisions based on the analysis of current and future trends are also part of business accounting.

It doesn’t matter if you have started a new business or are running a 10-year-old established organization. Keeping a check on your assets, (link: https://fincent.com/blog/liabilities-in-accounting-definition-types-examples-and-how-to-calculate text: liabilities), inventory, expenses, and other records will help you run your business smoothly and build growth plans.

In order to make informed financial decisions, the core tasks of business accounting for small businesses include:

• Bookkeeping
• Preparing and filing tax returns
• Drafting financial reports

Why Do You Need Business Accounting?

Business accounting is an integral part of your finances and hence, your entire business. There are numerous reasons why you cannot operate accurately without accounting.

Let’s discuss some of the most impactful ones.

1. It keeps your business records organized

Maintaining a systematic, accurate, and complete record of your business’s financial transactions forms the economic backbone of your business. Organized records can not only be retrieved and reviewed at any time but can also be used to drive further business decisions.

You can look up any transactions and get the required details. Observing trends is easy too, just compare the latest data with historical data and you would be able to analyze business success.

2. It enables informed decisions

From stakeholders to finance managers, and more – effective business accounting helps decision-making at all levels and departments of an organization. For instance, revenue growth observed after a certain campaign would help marketing teams, and the finance department can make decisions around investments required as per the needs and circumstances.

On the other hand, managers use accounting reports to boost business efficiency and profitability. This especially helps early-stage companies not have a surplus cash flow to optimize every expense and investment they make.

Not to forget – decisions backed by financial data significantly contribute to preventing mismanagement and potential losses.

3. It helps in filing tax returns effectively

What happens when you misreport your income while filing taxes? You face legal trouble which could lead you to heavy fines or worse - jail.

We are not trying to scare you or anything - but this is how critical accurate business accounting is for your business.

At ground level, keeping track of all your tax information reporting is trickier than it sounds. Ensuring that your financial reports have no mistakes is the key to filing the right income taxes, and hence staying out of trouble with the IRS.

Continuously managing business accounts and maintaining all the necessary financial records help you:

• Pay the right of taxes
• File taxes on time
• Avoid any escalated audits

4. Investments and loans are only possible with accurate accounting books

Most businesses need external capital at some point in their lifetime. Regardless of whether you want to apply for bank loans or sell equity to raise investments – having updated financial statements is a basic need. And we know it’s not possible to create these statements without a business accounting system in place.

Banks, institutions, Angel Investors, Venture Capitalists, and all other entities that invest in businesses, expect accounting records evaluated and verified by a Certified Public Accountant (CPA).

It should be noted that they would only invest if your business is on the right track toward growth, and accounting reports passed by the CPA help you convince them effectively.

5. Your growth plans are driven by business accounting

Your growth plans depend on the stage of your company and the goals you have set as a business owner. While profits may not be much important while building your business in the initial days, your business objectives and plans change with time.

From revenue goals to profitability, business expansion, scaling up, and everything in between – your business finances drive most of the bigger decisions related to growth.

How do you plan to grow your revenue? What are the headcount goals you can afford to cover soon? Will the cost of your product/service remain the same in the future?

Accurate and consistent business accounting helps you answer all of these. Moreover, it plays a pivotal role in laying down the future goals of your business.

Basics of Business Accounting

While business accounting covers a wide array of concepts, you need not know all of them for maintaining your small business accounts. Here are some of the basics of business accounting that will help you operate your business in a hassle-free way.

Note that we have shortlisted some of the most important accounting terms and principles. Knowing all of these would give you a good headstart.

• **(link: https://fincent.com/blog/what-is-account-payable-definition-and-examples text: Accounts payable): **The net capital you owe to suppliers, creditors, vendors, and all others who you are liable to pay.
• **(link: https://fincent.com/blog/what-is-accounts-receivable-definition-importance-and-examples text: Accounts receivable): **The total amount owed by your customers for the products or services they purchased from you. It is covered in assets as the customers are legally obligated to pay you.
• **Balance sheet: **The complete summary of your business transactions during a specified time period. It consists of your summed-up assets, liabilities, and equities of all the shareholders. It’s one of the most vital business accounting reports.
• **(link: https://fincent.com/blog/assets-liabilities-equity-key-differences-and-their-importance text: Assets): **Anything that your company owns is an asset. From capital in your company's bank accounts to accounts receivable, real estate, inventory, furniture, electronic equipment, and everything else purchased by your company. ** **
• **Liabilities: **Debt you owe to any financial institutions, accounts payable, bank loans, employee wages, income taxes, and any other account your company owes – is covered under liabilities.
• **(link: https://fincent.com/blog/understanding-income-statement-accounts-definition-template-and-examples text: Income statement): **A financial document that reports earnings, expenses, profits, and losses for a specific time period. It is also known as the profit and loss statement.
• **Cash basis accounting: **Registering a sale when the required amount is received is referred to as cash basis accounting.
• **Accrual basis accounting: **Recognizing a sale and accounting revenue when the sale is made (regardless of the amount being received or not), is called accrual basis accounting.

For an in-depth guide, also read: Cash basis accounting vs Accrual basis accounting.

What is the Difference Between Business Accounting and General Accounting

Business Accounting

Business accounting is primarily focused on business needs rather than satisfying general accounting standards. It’s mostly used for internal purposes like making informed decisions and analyzing performance through projections, modeling activities, and more.

While it is vital for large-scale businesses to track and leverage financial data for future trend predictions, small businesses don’t need this type of accounting.

• The objective is to meet the unique internal financial needs of a business
• Involves trend analysis to estimate future growth projection
• Effective decision-making is done based on possibilities and projections, not exact figures.

General Accounting

Also known as Financial Accounting, this type of accounting is used to meet compliance standards of legal financial regulations set by the government. Additionally, it involves external business operations.

In the United States, accountants follow the rules set by GAAP (Generally Accepted Accounting Principles). IFRS (International Financial Reporting Standards) is followed for the rest of the world. The primary objective of these accounting standards is to guide all regulators, tax authorities, financial institutions, and investors in reviewing a business’s financial records.

• At its core, general accounting is focused on the finances of the company.
• The idea is to adhere to financial standards set up globally and in the US.
• Financial accounting involves estimating data and results and also making trends that can be produced for the company’s decision-making.

If your business organization needs compliance with global standards like IFRS, you must invest time, energy, and capital in financial accounting. On the other hand, if you just need accounting for internal decision-makers, business accounting is enough.

Top 5 Accounting Tips for Small Businesses

As a small business owner, you are already covered by a large variety of responsibilities and tasks. While you do not need to maintain the books yourself for your business, here are some business accounting tips that will make your life actually easier:

1. **Keep your records neat and tidy: **From ledgers to business expenses, all the other financial documents that you maintain for your business should always be available in good shape.
2. **Keep your business and personal finances separate: **Have different bank accounts for your personal and business needs. Use separate credit cards and maintain the expenses in a completely independent way. ** **
3. **Prepare for Tax Filing in advance: **Don’t rush things at the last moment. From error-free accounting to reviewing your taxable income and filing taxes, everything should be streamlined and pre-decided for both your business and personal finances.
4. **Categorize expenses: **Tracking expenses is a huge task in itself. To avoid unnecessary taxes, ensure you get the most out of available benefits. Once you document the expenses, categorize them between payrolls, bill payments, vendor expenses, inventory, administration, or miscellaneous.
5. **Automate your bookkeeping with cloud-based accounting: **Digitize and streamline your small business accounting operations using automated accounting software. Sync all your transactions with your business books automatically and save significant time by preventing manual workflows.

Summing Up

Business accounting plays a crucial role in driving key decisions for any business. Your growth plans, headcount goals, investments, and pace of business expansion need you to understand business finances thoroughly. Effective accounting makes it feasible to make informed decisions and helps business owners to stay on the right track.

While bookkeeping and accounting for small businesses seem to be complex for business owners, things can be made easy with a comprehensive accounting solution. Fincent simplifies business accounting for you with automated cloud-based bookkeeping. It enables you to handle your complete business finances with a hands-off approach. Use automation to import transactions from your bank account and ensure your books always stay updated, and your business stays on track.