Small Business Accounting

By Alex Nordeen – Re-Blogged From https://www.guru99.com

Accounting is no big deal to understand, for a new business

Before you start your own business, it is mandatory to know about how accounting works. Accounting involves necessary tax payments, cash flow and expenses, manage payroll and producing financial reports. Accounting gives a summary about the performance of your business. Regardless of the size of the company, accounting will be done. You need a few things to start with your accounting and that is

  1. Opening a bank account
  2. Making a list of creditors
  3. Making a list of items you own in the company

If you have all these things, your accounting work is half done. The next stage is how you use all this information in your balance sheet. But before that, you have to choose the accounting method. There are basically two methods, on which accounting is based.

  1. The Cash Method: This method is most common in small businesses. In this method, you count income when you actually receive the payment, and your expenses are counted when you do the payment.
  2. The Accrual Method: In this method, the company counts income when a sale is made, regardless of whether or not the company actually received the payment. Similarly, the expenses are noted or recorded when they occur and not when they are paid. This method is usually practiced in big business.

Once you have decided your accounting method the next step is to understand the balance sheet. It keeps the accountability of all your income. Only through a balance sheet you can figure out how your business is running. Your balance sheet will include main three things a) Assets b) liabilities c) Stockholders or Owner’s Equity.

  1. ASSETS: Cash, Petty Cash, Account receivable, Prepaid insurance, Land, Goodwill, Equipment, Bond etc.
  2. Liabilities: Account payable, Interest payable, Salary payable, Bonds payable, Loan payable etc.
  3. Owner’s Equity or Stockholders: Owner’s Equity is the difference between the asset amount and the liability amount.

To understand how a balance sheet is prepared, we have shown an Illustration of small business transaction over here.

For example, you have bought a vehicle for $15000 for your business transportation, and you have paid that amount through check. Here two accounts are involved Cash and Vehicle. The amount you pay will go in a credit account and the amount you receive will go in a debit account. Here we have paid $15000 for vehicle through check, so the cash account will go in credit, and we have received the vehicle, so the price value of the vehicle will go in debit account.

Account Name Debit Credit
Vehicle $15000
Cash $15000

[Fig-1]

The common equation for accounting is, Assets = Liabilities + Stockholders

Transaction 1

Assets Liabilities
Cash $5000 Owner’s Equity $20,000
Vehicle $15000
Total $20,000 Total $20,000

[Fig-2]

In fig-2, in first table, the cash amount is depleted from $20,000 to $5000 as you paid $15,000 for your vehicle, so the Asset decreased, but at the same time you bought a vehicle for $15,000 which will balance the Assets and the total remains same as $20,000.

Transaction-2

Let’s assume that you have received a $20 check from a customer for your product, and we will debit the account ‘CASH.’ But we have a rule: we have to balance the credit side, as well. The second side or the credit side will be a ‘SERVICE REVENUE’; it is an income statement account. The amount $20 is the amount we ‘earned’ and not what we received, so it will go in Credit side.

Account Name Debit Credit
Service Revenue 20
Cash 20

Transaction-3

Now, your business is doing well, and you have received another order for $300, but your customer asked to pay that amount after a week. The customer tells you to submit an invoice for $300, and they will make the payment after one week. As we have discussed in transaction-2, any amount that is earned and not received will go in Service Revenue, so one account will be a ‘Service Revenues’, which will be our credit account. For this deal, we haven’t received the cash, and an invoice is generated to the customer. Any bill or invoice generated to the customer for payment in a given time frame will go in ‘Account Receivable’, which will be our debit account.

Account Name Debit Credit
Account Receivable 300
Service Revenues 300

Transaction-4

Now, there is another transaction that we missed, while we got an order for $300 for the product, we had hired a person to deliver the product, and we paid him $50. Any expense will go in debit account. While the company owes money to someone for the purchase of product or service, which was not paid immediately will go in account payable. ‘Account Payable’ would go in the credit side.

Account Name Debit Credit
Temporary Expense 50
Account Payable 50

Now, before we prepare a balance sheet for our transaction, we will calculate our net income. Net income is something that we get by deducting an expense from our gross profit. Here our gross profit is $300 and also we got a check for $20, and deducting a $50 expense from it, we will get net profit. $320- $50= $270

Gross Profit $ 320 (Total business revenue )
Expense – 50 ( Paid to delivery person)
Net Profit $ 270
BALANCE SHEET
Assets Amount Liabilities & Owner’s Equity Amount
Cash $ 5,020 Liabilities/ Account Payable $50
Vehicle $ 15,000 Common Equity $ 20,000
Account Receivable $ 300 Retained earning + $ 270
Total Assets $20,320 Total Liabilities $20,320

Now, in the balance sheet you have balanced the both sides. If you know which amount will go on which side, it is easy to do business accounting.

Before you start with balancing the accounts, there are few rules you have to follow for credit and debit accounts, as shown in below table.

Debits and Credits of accounts

Debit Credit
Increase in asset accounts Decrease in assets accounts
Increase in expense accounts Decrease in expense accounts
Decrease in liability accounts Increase in liability accounts
Decrease in equity accounts Increase in equity accounts
Decrease in revenue accounts Increase in revenue accounts

If you get familiarized with these basics of accounting, then to use accounting for taxation will be easier to understand and implement for your business.

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Loans vs Lines of Credit

Guest Post By Rebecca Kennedy

Is a Loan or Line of Credit Better for Business Financing?

When you are searching for the best-fit financing to grow or sustain operations in a business, the number of options can seem overwhelming. There are lenders who offer complex products based on the assets held by the business, crowdfunding platforms that engage everyday investors, and conventional banks that provide a variety of borrowing vehicles based on how the funding will be used over time. While the options are daunting, it helps to understand the differences between the two most common categories of business lending – a business loan and a line of credit.

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Guanxi: How Business Is Done in China

By Scott Stewart – Re-Blogged From Stratfor

The case of Candace Claiborne, a U.S. State Department employee recently arrested and charged with failing to disclose gifts from Chinese intelligence officers, offers many useful insights into the world of spying. In my April 6 column, I discussed her unusual motive for working with Chinese intelligence: to help pay for her son’s education. Another item in the criminal complaint against Claiborne touches on a more commonplace, but equally striking, issue. The complaint mentions that Claiborne sent her son a message discussing guanxi, the complex cultural system that governs personal relationships in China. Guanxi typically describes the moral obligations that arise from giving and receiving personal gifts or favors. The custom is generally considered a natural way of relating to people and conducting business in China. Many Western businesses, on the other hand, view guanxi as corruption.

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