Tuesday, July 1, 2008

Basic accounting tips

Accounting is not just about knowing about cash flow and expenditure. It involves knowledge of profits losses, incomes and expenditures. Without accounting it is not possible to know how much profit or loss a business is making.

About 500 years ago a man called Fra Luca Pacioli noted that three things are essential to run a business sufficient cash, being comfortable with the numbers side of business and system of organizing financial information is called accounting.

Accounting is a part of every day life. To understand accounting we need to know the and understand the different terms used in accounting. Next we need to see how accounting fits into our every day business life. This means that every transaction made has to be entered into the business books. This includes all details of checks, deposits, sales invoices cash receipts and purchase orders. Though individually they may not seem to be important, these numbers when systematically organized produce a picture of the health of the business.

One of the basic principles is to avoid double entry debits will always tally with credits. For every transaction, there will be two entries, one for credit and the other for debit.

The Accounting equation which states that Assets equal Liabilities plus Capital has to followed always. This is just another way of putting the first rule. As assets are debit balance accounts and both liabilities and capital are credit balance accounts.
The system of accounting is divided into categories and each category is further divided into accounts. Categories are of two types balance sheet and profit and loss.
Every debit entry would mean an addition to some accounts and a reduction to other accounts.

Accounting is necessary to assess the financial position of a company and accordingly engage in future planning for finances. As each organization has different needs accounting is customized and highly adaptable.

Financial accounting is about delivering accurate financial statements and hence is considered a precise science. Managerial accounting provides information to managers. In this type the manager is responsible for, Accounts Receivable, Billing, Payroll, Accounts Payable audits of operational procedures and process. It remains indispensable for anyone involved in any type of business.

Some tips to protect businesses from losses would be beneficial. Managers have to ensure their company is protected from check fraud. To this end they can set up financial limits for checks with their bank. An inventory of bank checks must be maintained and kept secure in safes.

Similarly a careful record off all bills paid must also be maintained. They will also serve as the basis for tax records.
All financial statements also need to reviewed regularly and entries made at least once in a week and balance expenditures with income. If not it could result in errors and overlooked payments.

The bank statements also need to reconciled as early as possible. The services of a good book keeper could also be used if you do not have the time. Their services would include paying salaries, coordinating and handling accounts receivable and payable, balancing ledgers and checkbooks, and organizing financial information required for business plans, loan proposals, cash-flow statements, etc.

Financial statements should be used to review the costs and expenses. They should be used to guide you to find better suppliers, cut down expenses and increase profits. Set up a cost control system. A systematic and streamlined accounting procedure will help in minimizing mistakes and missed accounts. Accounting helps considerably for any business to grow and increase profits.

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Simon Slade is the author of this article on Simon Slade.
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