Understanding Accounting Principles and Practices: 10 Things Company Should Follow

accounting principlesThere are just so many things that a business owner must consider before going on a venture or putting up a company starting from the major stuff like operations to the petty ones like accounting. But if you think you can skip accounting, you will definitely know in the long run that your business cannot work properly and in an organized way without it. Accounting is not solely about crunching numbers. It covers almost every aspect of your business starting from your inventory, sales, workforce and even your resources. It accounts for what your business has accomplished, is currently accomplishing and hopes to accomplish in the years to come. Without the accompanying accounting principles that your company must live by, your business will eventually suffer. If you are just starting your business and still unfamiliar with fundamental accounting principles and good practices, read on.

1. Understand generally accepted accounting principles.

You might think that accounting is overwhelming. Before understanding the whole concept of accounting or accounting principles and concepts in general, you first need to determine and understand various terms and jargons for accounting. You don’t need to get overwhelmed as general accounting principles do not vary from country to country. There is the GAAP or Generally Accepted Accounting Principles that could be applicable to any type of business. If you are planning to expand internationally, accounting your business is not a problem anymore.

2. Practice accounting regardless of your business size.

Many business owners believe that accounting can only be best applied for big companies or corporations. Little did they know that even small start-up businesses are in need of even the most fundamental accounting practices to be put in place. Small businesses need records too starting from their inventory, daily sales, accounts receivable, as well as expenses. These terms as well as the act of recording everything while doing these transactions are covered by accounting. Some may not be familiar with accounting without knowing they are already doing it.

3. Practice bookkeeping religiously.

Bookkeeping and accounting are often used interchangeably. While bookkeeping is only a part of accounting, it is very important thus the confusion that they are the same. A business must keep records or its transactions. For instance, you bought machineries and supplies, you need to record such under capital upon starting your business venture. Sales and revenues are generally assets. If a customer gets merchandise from you on a credit, it is known as accounts receivable and is recorded under accruals. Bookkeeping can be quite confusing but it is enjoyable in the long run when you already know what you are doing. Just remember that whatever transaction involving your business must be recorded in your journals. When recording a transaction, never forget the date and a short description of what the transaction is about.

4. Your personal transaction must be separate from your business transaction.

It would be hard to account your business when you mix your personal transactions with it. It is a common accounting assumption that your business, whether a sole proprietorship, a partnership or a corporation must be separate from your personal transactions. It could really get messy when you mix the two especially when it comes to finances. Have a separate checking account for your business. Don’t use your business credit card to buy your personal stuff. And don’t spend the money you earned from business for your personal transaction because when you do you will realize that you are spending way too much than actually earning. Your business is going nowhere when you continue with such practice. It is difficult to clear your records and you might end up having problems with the IRS.

5. Keep your receipts and other forms of proof for every transaction you make.

Receipts are the best proof for a transaction so keep them and demand for such for every official transaction you make so you won’t forget to make a record. Attach them in your books as they may be needed when your business is audited by the IRS.

6. Don’t overspend.

Just like doing personal accounting, you must also avoid spending too much when it comes to your business. Don’t spend beyond what you earn as it would most likely end up in bankruptcy. Whether it is a recurring cost you are paying or a once in a while investment, you have to keep in mind that your business needs enough money to keep afloat. If you think your costs are exceeding your revenue, it’s time to cut them. Practice cost cutting and saving. If an investment is too big for what your company can afford, maybe you need more time before you can finally go through with it.

7. Your revenue must always exceed your expense.

In short, your income must always be higher than what you spend. Keep this in mind and your business will be just fine. If it’s the other way around, you are most likely on your way to filing for bankruptcy. Revenue comes from a sale and is recorded as soon as you have provided the good or service regardless whether you are paid upon delivery or on a later date. Expense happens when you have received the good or service. You record an expense on your books upon delivery not upon payment as in the case of late billing or payments.

8. You may need to bring in help.

If your business can afford it, you can start looking for help when it comes to the accounting part of your business. Doing the books will most likely eat up your time and you might end up crunching numbers for your eight-hour shift. Delegate the work and do something more productive for your business. You may need to hire an accountant especially when your business is already in full swing.

9. Be honest when it comes to your books.

It is common for many businesses to cheat their way to paying small taxes. However, this practice will most likely end up in a court battle between your business and the IRS or paying a big fine. So the next time you want to skip an entry for revenue to deflate your taxable income, think twice and of the possible consequences of your actions.

10. Invest in a bookkeeping software.

While it is acceptable to do manual bookkeeping when you are starting up your business, you also need to keep up with your business’ demands by upgrading to a bookkeeping software that will automate the task. Your records will be more secure and accurate. It also requires less time to do bookkeeping with the help of a software like QuickBooks.