Why Accounting And Bookkeeping Will Make Your Business Thrive
Why accounting is important?
Accounting provides the business the information to take decisions, that is the basics of accounting. The summary of all transactions that you have in a year or in a period, could be a month or a quarter and instead of having bank transactions or invoices or records you have an orderly set of financial statements, and those financial statements will allow the business to see the picture, what is going on. Why or what is the result of the decisions that the owners of the business have taken and how those decisions have impacted the business.
What are the types of accounting?
There are 2 types of accounting, one is accrual accounting and the other one is cash accounting.
When you do cash accounting you don’t report accounts payable and accounts receivable. It means that whatever you collect is income and whatever you pay is expenses, that’s the basics of cash accounting. Cash accounting is for example when you do a payment of a check, when you receive a payment from a client and you at that point you consider that as income for your company. That’s cash accounting means you only go by what you pay and what you receive or you collect from your clients and based on that you do your reporting, your balance sheet, your profit and loss and your cash flow.
Accrual accounting is a little different, in accrual accounting you are going to report yours accounts receivable and my accounts payable. Now remember, accounts payable and accounts receivable they are not collected, you have not collected your accounts receivable and you have not paid your accounts payable. But even though you have not paid them or collected them, you are reporting them and that is the basic difference between cash accounting and accrual accounting.
Those are the types of accounting companies do, here in the US, companies with over 50 million dollars are obligated to do accrual accounting and small business no, small businesses up to 25 million they are able to do cash accounting. So the basic difference is how you account for the accounts receivables and accounts payable.
Accounts receivables is basically for example, if you’re consulting with me, you send me a bill but I don’t pay you and you don’t collect it yet. For you, it will be an accounts receivable and if you do accrual accounting for you it will be income but you have not collected the income yet, even though you haven’t collected that income you are reporting that on your financial statements in account known as accounts receivable. For me, your bill is going to be an accounts payable but I have not paid it yet, but because I do accrual accounting I am going to report the bill as an accounts payable and for me it’s going to be an expense on my profit and loss report. For me, in the balance sheet it’s going to be an accounts payable but in the profit and loss report it’s going to be an expense. For you, it’s going to be an account receivable in the balance sheet and also in the profit and loss statement is going to be income. That is the nature of the two types of accounting.
Who needs accounting?
Everyone who owns a business, every individual who wants to know where his or her money is going too. If you don’t have accounting, say for example you only have your bank statements and that is what you do, you only go by the balance of your bank statements. And you’re an individual not a company and you only go by your bank statements and you decide based on that. The problem is that you never know what the category or the classes of your spending is, what do you spend on, what is the classification of all this expenses that you have, because you don’t have accounting, you don’t have control, you don’t know if you need to reduce one particular category of expenses, let’s say utilities, payments for subscriptions, payments for commissions, let’s say payments for salaries, you don’t know because you only go by the balance of your bank statements.
But if you have accounting, you will have control, that is the most important thing in accounting, that you have control of the expenses. That’s why accountants and personal financial advisors they insist that not only the company must have accounting but also the individual, they will control over the most important thing you have after your life, money. Because once you have control, you can act and those actions are taken to improve yourself that’s why accounting is so important, because it will give you control.
Same thing if you don’t know who your clients are, you don’t know how much you are receiving for each client, you don’t know to whom to give a promotion for example. You only know that you have collected X amount from clients, from an X number of clients that have paid you but you don’t have a list of clients, you won’t have control, you will not be able to create promotions and not be able to create strategies, you won’t know what markets you are attending. Control is, you have to put in writing and in writing you will have to show it to someone to help you to take decisions, that is why every single person not only businesses need to have a accounting process to provide for their financial statements and to take control of their money. That’s why accounting is important and why every person in the world needs accounting.
What is the accounting process?
The accounting process is the transformation of the transactions into financial reports, financial reports as balance sheet, profit and loss and cash flow. The balance sheet is a representation of all your assets like cash, inventory, accounts receivable and like fixed assets, liabilities, all your accounts payable and your debts and your equity, the capital that you have provided for your business. That is the balance sheet, assets, liabilities and equity. For the profit and loss is only income minus expenses, is how much money you make. The cash flow is the report that few people use it or require, but it’s very handy when you want to know what the source of your cash is and what are the uses of your cash. So, this is not about assets or liabilities, this is the sources of your cash and how you have used that cash.
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What is the difference of accounting and bookkeeping?
Bookkeeping is only doing the books, that’s why is bookkeeping. Keeping the books, meaning providing the financial statements, reviewing the transactions and doing your books. Accounting is a little more, it involves using the financial statements that come from bookkeeping to take decisions. That’s why you are accountable for the resources that you have used, the assets and liabilities and equity that you have in the balance sheet, the income and expenses that you have on your profit and loss and the uses and the sources of your cash that you have on your cash flow report, how they have been created and you are accountable for those reports that now are in your hands. That’s why many people don’t like to see the financial statements because now when they see them, they have to be accountable. They have to provide a testimony of why they did this and why they didn’t do things different. That’s the difference between one and the other, bookkeeping is doing just the books, but what are you going to do with the books, you have to be accountable for the decisions you have taken with the money that you have and how the money given to you from your clients and how you have been using that money for your expenses and how those decisions with the money that you received and the money that you paid are reported on the financial statements and for that you are accountable.
What are the advantages of bookkeeping?
The advantage of bookkeeping is that you will become accountable, it will force you to take action to improve your life or improve your business. In the case of a business, you have a balance sheet, you have an income statement and now you have the classification for each one of the expenses that you have. Ideally, you will compare those expenses to the average of your industry and if you are over you need to come down. Because that is the nature of the bookkeeping, when the books are taken care of they will give you reports and they will allow you to take action to improve the company, to create promotions, to give discounts to loyal clients, reduce your expenses, reduce your payroll, reduce subscription payments and reduce your expenses in utilities, this will give you control and because of that you are accountable, that’s why bookkeeping has an advantage in that many people prefer to do it at the end of the year and not do it on a monthly or quarterly basis but I will suggest do your books, be accountable, meet your accountant at least once a quarter and plan for the future. This is something that financial statements will give you, another advantage of bookkeeping will allow you to plan for the future. It will give the ability to plan and create a strategy to grow, you can’t grow if you don’t have numbers. Imagine for example, if you went to school and you have no grades, how do you know if you’re approving the class? In Bookkeeping is translated the same way, the objective of bookkeeping is to give you numbers, to give you the numerical representation of your decisions, so you do decisions for the whole year but those decisions are represented in a number, it could be positive or could be negative, but it will be the result of your decision and because of that you will have the chance to change, to plan and create strategies to improve and to grow. Those are the advantages of bookkeeping.
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