Small Business Accounting 101

Small business accounting requires accurate bookkeeping, which entails maintaining organized records of a business’s financial transactions, including sales, expenses, assets, and liabilities.

Bookkeepers commonly work with three types of accounting reports: balance sheets, income statements, and cash flow. Each report records different values and provides unique insight into a business’s financial health. The following section explores the differences between these reports.

Balance Sheets:

Balance sheets measure what a company owns and owes. This type of statement provides a snapshot of a small business’s financial health at a specific point in time. Bookkeepers can view the company’s assets and liability figures at a glance.

Companies typically prepare balance sheets at the end of every quarter, but individuals can prepare them at any time. Assets, liabilities, and shareholders’ equity comprise a balance sheet.

Assets:

Assets have economic value and can reduce expenses and improve sales. Examples of assets include real estate, inventory, cash, and accounts receivable. Balance sheets list assets in order of liquidity — how easily they can be sold, consumed, or turned into cash.

Liabilities:

A liability is something a company owes to someone else. Examples of liabilities include employee wages, income taxes, mortgage loans, and accounts payable.

Shareholders’ Equity:

Shareholders’ equity represents a company’s net worth — the amount shareholders would receive if they liquidated all assets and repaid all debts. Net worth can also be understood as assets minus liabilities. For example, a company with $10,000 in assets and $2,000 in liabilities would have an $8,000 shareholders’ equity.

Income Statement:

Income statements, often referred to as profit and loss statements, summarize a small business’s revenues and expenses over a specific period. Companies typically prepare quarterly and annual income statements.

Income statements focus on four key items — revenue, gains, expenses, and losses — which bookkeepers use to calculate net income.

Revenues and Gains:

Revenue includes operating and non-operating revenue. Operating revenue makes up a business’s primary activities, like selling products. Businesses obtain non-operating revenue through secondary business activities, like bank account interest.

Gains include money made from one-time, non-business activities, like selling off old equipment or unused buildings.

Expenses and Losses:

Like revenue, expenses include costs accrued through primary and secondary business activities. Primary activities include general administrative expenses, research and development, and the cost of goods sold.

Losses include elements like unfavorable lawsuit settlements and assets sold for less than their value.

Net Income:

Accountants calculate net income by subtracting a business’s expenses from its revenue. If revenue is higher than expenses, the business gains net profit. If revenue is lower than expenses, the business experiences a net loss.

Cash Flow Statement:

Cash flow statements summarize the amount of money entering and leaving a company. These statements focus exclusively on liquid assets like cash and cash equivalents — investments that individuals can readily turn into cash.

Accountants calculate cash flow by making adjustments to a business’s income statement. Through addition and subtraction, bookkeepers remove non-cash items and transactions from the net income. Components of a cash flow statement include operating activities, investing activities, and financing activities.

Operating Activities:

Operating activities include generating and spending cash for business activities. Businesses consider receipts from sales of goods, bank account interest, payments made to vendors, and wages paid to employees as operating activities.

Investing Activities:

Examples of investments include asset sales or purchases, loans made to vendors, and payments related to business acquisitions or mergers.

Financing Activities:

Financing activities include generating and spending cash to fund the company, such as paying cash dividends to shareholders, receiving cash from issuing stock, and receiving cash from paying down debt

Accountants for Small Businesses

In some cases, small business owners may prefer hiring sole practitioners or accounting services firms that specialize in small businesses. Other businesses hire temporary accounting staff at certain times of the year or hire part-time bookkeeping employees with advanced training.

For a business owner who lacks accounting skills or dislikes crunching numbers, outsourcing the company’s financial information offers an attractive option. Many business owners find comfort in an accountant’s financial expertise and tax knowledge. A qualified accountant can also assist outside of managing day-to-day finances. For example:

• Advising on how best to structure a company before launching
• Consulting on the financial details of your business plan
• Identifying potential cost savings in operations
• Managing payroll
• Developing a financial safety net in case of catastrophic events or struggling growth
• Liaising with the IRS in the event of an audit

Wrapping it up:

Our experienced accountants can integrate the best cloud accounting software for your company and even train your in-house staff on how to use it properly.

Why Should You Choose Mideast Accounting:

At Mideast Outsourcing, we’re the first and best place to turn for accounting outsourcing Dubai can be proud to offer to the world. For the very best chartered accountants Dubai has to offer and so much more, turn with complete confidence to Mideast Outsourcing.

Because we provide accounting outsourcing services Dubai companies can trust and because our company is run by chartered accountants Dubai can be pleased to call its own, we’ve become a premier company in our field. Our accounting and business consulting firm is managed by professionals with decades of experience serving Big 4 and multinational companies, and we look forward to serving you too.

Let us allow to assist you by doing what we do best so that you can return to doing what you enjoy and focusing on growing your business. Please contact our team to see how we can assist you.