Millions of small business owners and startup entrepreneurs are masters at creating great products and services, building effective teams and winning over customers. However, not everyone of them excels at basic bookkeeping; many of them would probably flunk it.
If you own a business and you don’t understand the different types of “accounts” your bookkeeper uses to organize your finances, measuring the success (or failure), all of your efforts will be fruitless.
To make it easy for you, below is the list of some basic types of bookkeeping accounts for a small business:
- Cash. It cannot 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 to your customers.
- Inventory. Products in stock that are unsold, resemble money sitting on a shelf and must be carefully accounted for and tracked. The numbers in your books should be periodically checked 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 throbbing. Clear yet comprehensive 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 shows payments with their due dates.
- Sales. The Sales account keeps a track of all incoming revenue from what you sell. Doing so in a timely and accurate manner is critical to knowing where your business stands.
- Purchases. The Purchases Account keeps the data about 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 when subtracted from Sales helps you 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.
- Owners Equity. This account keeps an eye on 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 partner. If you need help with your bookkeeping or just want to run your business more effectively than now, contact Opulent Accountants today to get paired with a mentor!