Understanding accounting can sometimes be difficult. It’s easy to get lost in the deluge of details when it comes to every financial transaction your business makes.
The good news is that there are relatively simple steps to take to understand accounting. These accounting tips should help you sort out how to make accounting simpler and more effective for your business.
Set Up Your Accounting System To Work for You
Above all, however, you maintain business accounts that should make sense to you. Perhaps this goes without saying, but no amount of time or money spent on managing finances will be worth it if your approach doesn’t work for your business.
1. Research Using Reputable Resources
There’s no shame in doing your research before you decide on the accounting methodology and software that will fit your business. There are plentiful accounting resources for accounting out there, and accounting is certainly important enough to invest time and effort.
2. Choose an Accounting Method Carefully
Having consulted with accounting resources as needed, you should be poised to decide what accounting method will work for you.
A common choice is cash basis accounting, which records income when it’s received, whereas accrual accounting tracks cash flow as soon as it’s been billed for.
Your choice will depend on your business type, most likely, as businesses with inventory to manage will need to opt for accrual accounting.
3. Purchase Accounting Software That Suits Your Needs
You’ll want to be sure that you understand how the software works and that it genuinely does make matters easier for you. Remember to fully leverage your accounting software of choice by customizing it, taking advantage of its automated features, and using it diligently.
4. Consult With Professionals To Avoid Headaches
If you are not a professional accountant, chances are that you’re prone to making mistakes in accounting. Professionals are perhaps the best accounting resources available.
Especially noteworthy here is that it’s worth consulting with someone on a temporary basis, for example, to prepare your taxes, or hiring someone full-time to manage your bookkeeping needs. Many small businesses opt to consult so that they can have someone help set up an AP process (accounts payable), employee compensation, taxes, cash flow, and the balance sheet. Even with the best software, accounting can be very tedious and time-consuming work, and you cannot afford mistakes.
5. Record Everything and Plan Ahead
All of these simple accounting tips will only help so much if you’re not going to create a financial plan and stick to it. The more detailed your records, the more likely you are to have an accurate picture of your business’s finances.
6. Budget for Upcoming Expenses
Having a budget in the first place is tremendously helpful and necessary for any business’s financial health. But of particular importance is keeping an eye on any major expenses coming up. You may need to set aside savings for several months beforehand.
Planning ahead is also very important for tax season. If you choose not to hire an accounting professional full-time, it would be wise to consult with one at least in the case of taxes. It could be disastrous to find out too late that you owe more than expected.
7. Back Up Your Records
Don’t forget to regularly back up your accounting data. Though there are several ways to accomplish this, it’s recommended to do so at least weekly, but daily if possible.
It might be that your accounting software includes technology to save backups to the cloud and you won’t need to give it much thought. Consider this possibility as you choose your software.
8. Pay Attention To Accountancy Changes: e.g. ASC 842
As much as the basics of accounting (net profit, gross profit, profit before tax, etc) don’t change, there are often updated guidance notes issues that change the treatment of certain accounting articles. Lease accounting is a prime example, as ASC 842 has been recently released. ASC 842 is the new standard that companies following GAAP in the USA must follow when accounting for their lease accounting arrangements. In short, one of the main changes is that you now have to bring pretty much all of your leases onto the balance sheet. It’s a simple tip, but if you don’t pay attention to simple accounting changes, you could be completing a whole section of your accounts incorrectly. It can be quite confusing, which is why you should read an ASC 842 guide to get your head around ASC 842 properly. If you don’t account for your own leases, you should probably check in with your accountant to make sure they’re following ASC 842 and bringing leases to the balance sheet instead of still treating a majority of them as off-balance sheet activity items. That’s just an example of a lease accountancy change set out under GAAP…there are often accounting treatment changes in other areas of accounting too.
To some extent, accounting deserves its reputation as a complicated endeavor. But if you make good use of the accounting resources available to you, including these simple accounting tips, you should be able to understand accounting for your business’s purposes.
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