Accounting Basics For The Entrepreneur #101

Accounting is an important aspect of owning a business, but accounting is about more than just keeping track of how much money a business spends or brings in.

Accounting therefore, is the process of collecting, recording, analyzing/interpreting financial condition and progress of a business.

As an entrepreneur, you are dedicated to creating a sustainable and profitable business. A profitable or successful business can be based on several factors such as quality in goods or services, effective marketing strategy, and healthy customer relations.

When you think about a business’s profitability, you have to think about the money your business brings in and the money your business spends. It’s important to keep track of your company’s finances because your business will never be financially sustainable if you are not aware at every moment of where your business is financially.

Keep in mind that accounting is a much broader term than bookkeeping. Bookkeeping refers mainly to the record-keeping aspects of accounting; it’s essentially the process of recording all the information regarding the transactions and financial activities of a business.

It is important that we understand the terms that are used so that we know how to use each of them correctly. Essentially, accounting from a bookkeeping perspective is about managing debits and credits. Carefully keeping track of debits and credits in a company is called double-entry bookkeeping. In double-entry bookkeeping, every business transaction that takes place is recorded in two accounts.

An accountant will record a company’s debits and credits on a ledger, and one account will receive a debit entry on the ledger, and another account will receive a credit entry. On the ledger, the debits are recorded on the left side of the ledger, and the credits are recorded in the right side.

The reason every business transaction must be recorded twice in double-entry bookkeeping is because of one of the most foundational concepts in accounting: Debits = Credits. What this means is that after all transactions are recorded on a ledger, the totals at the bottom for both credits and debits must be equal. Otherwise, something has not been accounted for.

Do entrepreneurs need accounting? Below are some of the reasons

1) Making predictions about the Future

Visions in projects, startups and small businesses are great. However, visions need to have a solid pragmatic base, in order to turn from wishful thinking to palpable reality.

That’s why any entrepreneur has to stick to three basic projections: “future revenues, future operating costs, and assets needed to service future demand. ” Accounting and finance step in, as they offer the analytical tools for connecting expectations with what’s actually possible in the real world.

2) Remaining Responsible

Accounting helps entrepreneurs be more responsible when it comes to time, energy and money being invested. It helps them be more efficient in attracting customers and in selling their goods or services.

All entrepreneurs make commitments over time. Cost accounting, which measures costs and relates them to activities, is essential. Through this it becomes clearer for a business how profits and cash flow are impacted by operational and financial decisions.

3) Measuring and reassessing progress (if it is not measured it cannot be pone properly)

This way you can encourage profit, review your progress, make reports, and organize your business as is required in the long run.

You can track your progress by measuring profits and expenses to see whether you’ve turned out profitable & productive, and also to highlight problem areas. Through financial analysis you become more transparent and responsible in running your business.

ekoconnect.net

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