What you need to know about business accounting

 

Even if you don't have a knack for numbers, you can still master the basics of business accounting. And you'll likely find that doing so pays off — both literally and figuratively — because you'll be able to make more informed financial decisions for your company. You'll also be better prepared for key reporting periods and tax season.

Read on for more info on how to build a better financial foundation for your business, along with answers to common accounting questions.

 

Understand key accounting terms

To become an accounting whiz, you need to know the lingo. Familiarize yourself with these essential terms:

• Financial statements: Reports that show the current financial state of your business — its activities, financial positions, assets, liabilities and more
• Balance sheet: A financial statement that shows your assets, liabilities and shareholder equity
• Income statement: A financial statement that measures profitability and performance over time (also known as a profit and loss statement, or P&L)
• Cash flow statement: A summary of your cash inflows and outflows
• Payroll: The total salary and wages paid to your workers
• Accounts payable: The money due from your business savings to other parties
• Accounts receivable: The money due to your business from other parties
• Certified public accountant (CPA): An officially accredited financial professional, who can help your business with detailed financial reporting and taxes
• Bookkeeper: A financial record-keeper, not necessarily a CPA

 

Choose your accounting method

Unsurprisingly, different accounting methods provide different financial insights. It's important to do some research before adopting a method to make sure that it's a good fit for you and your business. Here's a rundown of the two most common methods:

• Cash basis accounting: Analyzes when cash enters and exits the business; bases calculations on when a transaction has occurred
• Accrual accounting: Tracks when income or expenses are recorded, as well as when money is actually received or paid out; requires more record-keeping

Generally, the cash basis method is a bit easier to maintain since it focuses solely on the moments that money flows into or out of your business. If you choose to use this system, you'll always know the status of your cash flow at a given time. If you choose the accrual accounting method, on the other hand, you'll get a more detailed picture of your business savings and overall financial health.

 

Create a record-keeping system

Once you've decided which accounting method you'd like to use, you're nearly ready to put it into practice. But first, get organized. Find a safe space to store all your documentation, and take some time to organize it. Some of the items to have on hand include:

• Bills
• Invoices
• Receipts
• Tax returns
• W-2s and 1099s
• Bank statements

It also helps to catalog the documents by year and expense type so that you can always find them quickly.

 

Frequently asked questions

Should I separate my business and personal expenses?

Yes. It's a good idea to separate personal and business expenses to streamline your bookkeeping processes and make it easier to file your tax returns. To do this, look into setting up a business bank account with a reputable financial institution. Also plan to link a credit card to your account for business purchases.

Should I use accounting software?

Yes. Accounting software can take the guesswork out of accounting by breaking down business expenses and providing real-time views of your company financials. Depending on which program you choose, you may also receive access to extra features, like automated reporting, on-demand support from financial professionals and mobile integration. Take time to research your options to get a sense of which programs would work well for your needs.

How do I handle my business taxes?

When tax time comes around, you'll have to file a detailed return with the IRS. The accuracy and detail of your accounting throughout the year will affect your tax preparation. The more precise and comprehensive your records are, the more streamlined your process may become.

Many business owners find it helpful to hire a financial professional around tax time each year. A professional can help you organize your information, search for money-saving deductions and fill out your return.

Should I hire a professional accountant?

The importance of accounting when it comes to maintaining — and ultimately growing — a business can't be overstated. If you aren't fully confident in your ability to manage your accounts, or if you'd simply prefer to devote your time elsewhere, you may benefit from the services of a professional accountant.

Where else can I turn for additional financial support?

You don't have to answer all your accounting questions on your own. Reach out to a Chase business banker for additional support.