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How to Avoid Improper Accounting Practices
By Garrett Sutton, Esq.
Many new business owners make the mistake of not properly accounting for it all. Please know that companies live and die by numbers. They are defined by numbers. They grow with numbers. They bleed with numbers. Numbers define the health of your business at any given time and over time. To be successful you must have a system to record, classify, report, and analyze your company’s numbers. And you must use this system every day (or pay someone who will).
Accounting – A Foundation for Your Business
Too many new businesses let the numbers slide. They never establish a system for their accounting, they don’t write down all the incoming and outgoing money, they forget and/or guess at some transactions, they forget to file necessary paperwork. The main reasons for this are:
- most of us hate dealing with numbers and
- time taken on accounting is time taken away from business.
Excuse #1 – Accounting is Boring
The first reason for avoiding accounting (your dislike of numbers) comes under the heading of “too bad.” Numbers are a fact of business life. If you don’t want to keep track of your accounts, that’s fine, but find someone who will. Don’t let your aversion suck the lifeblood out of your company.
Excuse #2 – It Takes Time From Business
The second reason for avoiding accounting (time taken away from your business) is just, to be blunt, ignorant. Whether you sell a product or a service, sales are what makes the time you spend a business rather than a hobby. And sales are defined by numbers.
You need to know what you are bringing in and what you are sending out so that you can set appropriate prices, manage your overhead, market, and make a profit. Without a knowledge of income and expenses, you are leaving profit up to chance. The best way to keep up on your accounting is to have a system – a method or plan – that becomes second-nature with repetition.
Form Good Business Habits
This won’t happen overnight. After all, it takes 90 days to form a habit. And it may take a while for you to find a system, that suits your temperament and your business needs. But once the habit is in place, you no longer have to think about it every day. Regardless of the system you use – computer program, ledger, accountant, bookkeeper – your system will fall into one of two categories:
- Cash-based method (you count income when it comes in and expenses when they go out), or
- Accrual-based method (you count income when you invoice and expenses when you commit to pay).
The difference is timing and can be important if you regularly have inventory or if credit is a part of your business. The accrual method is better under some circumstances, but the cash method is simpler. However, if you make more than $5 million you may have no choice but to use the accrual system, since the IRS may require it. Accounting can be complicated, but it is also predictable.
Here is a very basic outline of what you can expect: Every day you need to record the day’s transactions. On a regular basis (dependent upon your personality, your business, and your revenue and expense levels), you will want to post all your sales and expenses to a general ledger. Just as regularly, it’s a good idea to adjust the ledger so that you don’t lose sight of anything that doesn’t get recorded on the day of the transaction.
At the end of your accounting cycle (usually monthly), when the ledger is complete, balanced, and up-to-date, post the profits to the owner’s equity account. This balances revenue and expense accounts back to zero, preparing you for the next cycle. The cycles add up to an accounting period. At the end of that period, you will compile your financial reports to give a picture of all financial activity during that period. While there is much financial data you will want to keep in-house (and there are regulations stating how long you need to keep different records), much of it is also dependent on filing. If it isn’t filed, it doesn’t exist. Keep on top of those numbers.
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