Understanding the Basics of Business Accounting

To successfully run a business, regardless of industry or business type, you need to understand the ins and outs of accounting. Accounting covers much more than simply tracking income and expenses, it actually provides important insights into a business’ financial performance.

Whether you’re a small startup who’s just getting started, or a large and established international brand, understanding the basics of accounting will help you to stay on top of your incoming and outgoing payments, make informed financial decisions, stay compliant with tax regulations, and have a better chance of business success.

What is Accounting and What Do Accountants Actually Do?

Accounting is the process of recording, analysing and interpreting financial transactions and data within a business. For businesses, accounting is not just about tracking money going in and out of an account, it’s about making informed decisions, ensuring compliance with regulations and planning for the future.

There’s a lot that goes into accounting, which is why you need to have an expert handling things. Accountants are the professionals who handle the financial side of running a business, and their roles are hugely varied. It’s the job of an accountant to maintain accurate financial records, prepare financial statements, and ensure that all transactions are properly documented. Accountants also analyse financial data to find trends, manage budgets and provide recommendations for ways to save money and increase revenue.

Accountants are also a big part of planning and complying with tax. They ensure that a business meets all its tax obligations, whilst taking advantage of any tax benefits available. After all, getting your taxes wrong as a business can have serious consequences. Accountants can assist with financial forecasting and strategic planning, helping businesses make informed decisions about investments, expansions and growth.

Types of Business Accounting

There are many types of business accounting, all of which are slightly different. Three of the main types are:

• Financial – Financial accounting is what all other types of accounting are built on. It involves recording, summarising and reporting a business’ financial transactions by looking at financial statements. This gives a clear picture of a business’ financial health, which investors and stakeholders are always keen to see. Financial accounting is governed by standard principles and regulations, which ensure consistency and transparency across the board.

• Tax – Tax accounting is another key area of accounting, and it’s focused on making sure that a business complies with tax requirements and regulations. It involves preparing and filing tax returns, planning for future tax payments and finding ways to reduce a business’ tax bill. An accountant can help a business to avoid penalties by making sure that tax returns are accurate, and ensuring that all tax reductions are being taken advantage of.

• Auditing – Auditing involves the examination of a business’ financial records and statements, which is done to ensure that a business’ is complying with accounting standards and regulations. An internal audit is carried out by the business itself or internal auditors, and it’s done to identify any discrepancies or areas for improvement. External audits are carried out by independent auditors, who provide an unbiased assessment of the company’s financial statements.

Accounting Principles

Accounting is governed by a handful of key principles, all of which are centred around making sure that financial statements are accurate, consistent and reliable. These principles – such as the accrual, consistency and cost principles – guide how a business records and reports financial information. By following these principles, businesses can provide accurate information about their finances performance. This is beneficial when it comes to making informed decisions and building stakeholder trust.

Accounting Basics

There are a lot of terms and phrases that are thrown around in the world of business accounting. We would be here all day if we went through all of them, but we’ve handpicked some of the key accounting basics to be aware of.

• Assets – Assets are the things owned by a business that have economic value and can be converted into cash. This includes property, equipment and inventory, as well as patents and trademarks.

• Capital – Capital refers to the financial resources that a business uses to fund its processes and growth. This can include money invested by the business owners, borrowed funds or earnings.

• Revenue – Revenue is the income a business generates from its operations, usually from the sale of goods or services.

• Expenses – Expenses are the costs involved in the business’ process of generating revenue. This includes everything from salaries and rent, to utilities and raw materials.

• Liabilities – Liabilities are the financial obligations or debts that a business owes, such as loans, accounts payable and mortgages.

• Accounts Receivable – Accounts receivable showcases the money owed to a business, usually by its customers, for goods or services that have been delivered but not yet paid for.

• Accounts Payable – Accounts payable refers to the amounts a business owes to its suppliers or creditors, for goods or services received but not yet paid for.

• Debits and Credits – These form the basis of accounting, and they’re used to keep a business’ financial records balanced. A debit typically increases asset or expense accounts, whilst decreasing liability, revenue or equity accounts. A credit does the opposite, by increasing liability, revenue or equity accounts, whilst decreasing asset or expense accounts.

• Accruals – Accruals refer to revenues and expenses that have been incurred, but not yet reflected in the financial statements. For example, if a business earns revenue but hasn’t yet received payment, it will record this as accrued revenue.

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