Accounting Basics
Accounting is an essential function of running a business and if you are deciding to start-up a business you would do well by getting to understand the basics of accounting and how they are used in business.
When you have an idea for a business you will proceed on the basis that the business has the potential to produce a profit but there will also be the expectation that further financing will be required to get the business running. Therefore, to raise funding for your business you need to use accounting methods to forecast your potential sales and profits and how much extra funding is required.
If you are the person who does not like financing or accounting then you should make the effort to learn. Alternatively, you can hire the services of an accountant who will show you how it is done but remember unless they owe you a favour you will have to pay for their services.
You will have to include some form of financial projections in order to illustrate how profitable or not your business will be. The projections will also show how much cash flow the business is likely to produce over a set period of time. Accounting can also identify if additional capital is required and where and what that capital will be spent on.
The following are the basic accounting concepts that you are likely to use in your business:
Balance sheet
The balance sheet provides an overview of the business in terms of where the funding and other sources of money have come from and where this money will be spent. The balance sheet covers a specific time period either 6 months or more commonly 1 year.
The balance sheet has 2 main sections that include liabilities and assets. The liabilities section records where the money has come from such as financing and bank loans. This section can also include short-term financing through VAT and tax. These are referred to as current liabilities. The other section is called Assets and these can involve fixed and current assets. This illustrates were the money in the business is being spent. For example, fixed assets would include plant and machinery, land and buildings, vehicles etc. Current assets would involve items that change frequently such as debtors and cash.
Profit and Loss
The profit and loss account provides a snapshot of the businesses profit during a financial year. The profit and loss account records the depreciation of the businesses assets. This is normal as assets will devalue over time and depreciation is used to estimate the devaluing effect.
