Millions of small business owners and startup entrepreneurs are masters at creating great products and services, building effective teams, and winning over customers. Many of them, however, would probably flunk basic bookkeeping.
As the business owner, if you don’t understand the different types of “accounts” your bookkeeper uses to organize your finances, measuring the success (or failure) of your efforts will be futile.
Being adept at digital marketing, for example, isn’t enough if you don’t have a clear financial picture of your business and run headlong into cash flow problems.
You wouldn’t go to the doctor and ask to only have your legs checked. You want a comprehensive exam! It’s the same with the financial aspects of your business. You need to know everything about your business’s finances, not just your bank account balance. As small-business writer Joshua Adamson-Pickett explains, it not only helps you make solid decisions now and plans for your company down the road, an efficient bookkeeping system saves time. Notably, it prepares you for government audits and helps prevent fraud.
Here are 10 basic types of bookkeeping accounts for a small business:
- Cash. It doesn’t get more basic than this. All your business transactions pass through the Cash account, which is so important that often bookkeepers actually use two journals, Cash Receipts, and Cash Disbursements, to track the activity.
- Accounts Receivable. If your company sells products or services and doesn’t collect payment immediately, you have “receivables,” or money due from customers. You must track Accounts Receivable and keep it up to date so that you send timely and accurate bills or invoices.
- Inventory. Unsold products are like money sitting on a shelf and must be carefully accounted for and tracked. The numbers in your books should be periodically tested by doing physical counts of inventory on hand.
- Accounts Payable. No one likes to send money out of the business, but a clear view of everything via your Accounts Payable makes it a little less painful. Concise bookkeeping helps assure timely payments and avoid paying someone twice! Paying bills early can also qualify your business for discounts.
- Loans Payable. If you’ve borrowed money to buy equipment, vehicles, furniture, or other items for your business, this account tracks payments and due dates.
- Sales. The Sales account tracks all incoming revenue from what you sell. Recording sales in a timely and accurate manner is critical to knowing where your business stands.
- Purchases. The Purchases Account tracks any raw materials or finished goods that you buy for your business. It’s a key component of calculating “Cost of Goods Sold” (COGS), which you subtract from Sales to find your company’s gross profit.
- Payroll Expenses. For many businesses, payroll expenses can be the biggest cost of all. Keeping this account accurate and up to date is essential for meeting tax and other government reporting requirements. Shirking those responsibilities will put you in serious hot water.
- Owners Equity. This account has a nice ring to it. Basically, it tracks the amount an owner (or owners) puts into the business. Also referred to as net assets, owners equity reflects the amount of money an owner has once liabilities are subtracted from assets.
- Retained Earnings. The Retained Earnings account tracks any company profits that are reinvested in the business and are not paid out to the owners. Retained earnings are cumulative, which means they appear as a running total of money that has been retained since the company started. Managing this account doesn’t take a lot of time and is important to investors and lenders who want to track how the company has performed over time.
Many business owners think bookkeeping is a dreaded chore, but if you understand and effectively use the data your bookkeeper collects, bookkeeping can be your best ally.
If you need help with your bookkeeping or just want to run your business more effectively, contact SCORE today to get paired with a mentor!
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.