5 Things You Should Know About Business Accounting

For most people, starting a business is a dream come true. But beyond all the great possibilities that could happen from your business, there’s a lot of hard work that needs to be done from the backend and one of these is business accounting. Accounting is the language of business so it is important that you know it by heart. Every entrepreneur must have at least a basic knowledge of accounting principles. Otherwise, there are things you will not easily understand. As a business owner, you should know firsthand about what is going on with your business. You should know how things work so that you will know your next move ahead of time.

Here are five things you should know about business accounting.

1. There is a difference between cash and profit.

If you are just starting out with your business and have just hired an accountant, it is still important that you know one of the basic principles of accounting which is knowing the difference between cash and profit. There are three things you need to know; gross profit, operating profit, and net profit. Gross profit is calculated by sales minus the costs of goods that were sold. Operating profit comes next which is calculated by gross profit minus the operating expenses. Finally, the net profit is calculated by the total income minus the total expenses. This may sound pretty simple but a lot of business owners still get confused because most of the time the cash you have in hand rarely amount to the net profit.

2. The difference between managerial and financial accounting.

In accounting, there are two disciplines that you should know; managerial and financial. Managerial accounting is all about the day-to-day expenses and sales. In short, it’s what you use internally to keep track of things. Financial accounting, on the other hand, will be the summary of all the transactions made by your business and this is what you present externally to the government, banks, or investors.

3. Know your assets and liabilities.

Assets and liabilities are the foundations of accounting. In simple terms, assets include everything that you own, whether it is your home, car, or equipment. Liabilities, on the other hand, means everything you owe. This includes your loans. If you increase your loans, it is important that you also find ways to increase your earning potential to balance out your assets and liabilities.

4. The importance of having a balance sheet.

When it comes to business accounting, having a balance sheet is important. This is where you can see the entire snapshot of the business. A balance sheet states how many assets and liabilities you have in different categories.

5. Accounting involves a lot of judgment.

Contrary to popular belief, accounting is actually not an exact science but in fact, involves a lot of judgment from one’s end. You must understand policies on tax or how things are increasing or decreasing the value. In the end, it requires your firm decisions on whether you should keep things or not.

The post 5 Things You Should Know About Business Accounting appeared first on Home Business Magazine.