SMALL BUSINESS ACCOUNTING Small business When choosing a what business you want to pursue, there are not

only many different kinds of businesses you can run, but there are also a wide variety of business models that you should consider when deciding what is the right business for you. Now lets start with what is a Small business? A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing, and online business, such as webdesign and programming, etc. Accounting Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."

Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in Mesopotamia (Assyrians). The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.

Now lets Understand the real TOPIC (SMALL BUSINESS ACCOUNTING)

Small Business Accounting Small business accounting is dreaded by most business owners and would-be entrepreneurs. Yet, mastering accounting is critical to being successful in your business. We take a look at the accounting basics that business owners need to know about. Accounting isn't the most glamorous part of running a small business. Most entrepreneurs would rather spend their time developing their product line or growing their client base. But accounting is important. Without it, your business will never reach its full potential. A lack of adequate accounting could even create legal problems that could easily have been avoided. The purpose of accounting is two-fold:

First, a basic small business accounting system generates a record of the receipts and expenditures of your business' day to day activities. This data is vital for the

completion of your annual tax returns and other legal documents. It will also be required by lenders when you apply for a small business loan. Second, small business accounting provides you - the entrepreneur - with a valuable tool for assessing and analyzing your business' performance. With just a little practice, you will begin to notice trends that highlight your business' strengths and weaknesses. This information will help you make informed decisions about how to improve your bottom line.

The good news is that legally you are not required to maintain your financial records in any specific manner, as long as the records accurately reflect your business' income and expenses. Most businesses maintain their records in a ledger, which is simply a record of sales receipts and expenditures The process of transferring individual receipts and expenditures to a ledger is called posting. How often you post to your ledger usually depends on the volume of receipts and expenditures you need to record. Many businesses find it necessary to post to their ledger on a daily basis. However, you should plan to update your ledger on a weekly, or at least monthly basis. Once you have posted your receipts and expenditures to the ledger, you can begin to compile financial reports for your business. The most common types of reports for small businesses are income & expense reports, cash flow reports, and a balance sheet. The balance sheet is an itemization of your business' assets (cash, inventories, accounts receivables, etc.) and liabilities (loans, debts, accounts payable). If done properly, a good balance sheet will provide an accurate snapshot of where you actually stand because accounts payable and accounts receivable items do not usually show up on in your receipts and expenditures ledger. In a perfect world, your business would employ a bookkeeper to keep track of your finances. But since most entrepreneurs can't afford to employ a bookkeeper (at least not initially), here are a couple of tips to help take the headache out of doing it yourself.

Tip #1: Consult an accountant. You're probably thinking the last thing you need is another expense. But unless you know how to do income tax reporting yourself, you're going to need to find an accountant eventually anyway. By consulting an accountant to help set up your accounting system, you can save time and money when it comes time to prepare our income taxes, especially if you use the same accountant for both jobs.

Tip #2: Purchase accounting software. One of the best things you can do for your business is to purchase small business accounting software. There are several affordable programs such as QuickBooks and Peachtree that not only keep track of your receipts and expenditures, but automatically translate them into quality financial reports as well.

The Importance of Accounting For Small Businesses When starting your own small business one of the most important aspects to think about is the accounting process and how you choose to account all of your financial information. It is important to understand that the accounting of your business's financial information needs to be accurate or else your business may not be as successful as intended. Even if you don't like accounting or numbers, there is no way to avoid accounting for a business. The purpose of accounting for a business is to have a record of the receipts and expenditures of it's daily activities. Also, accounting makes it available for the business owners to assess and analyze the business's performance. This will help the owner to decide what improvements they need to make, or what practices to keep doing in order to keep the company at it's successful place.

In order to file for tax returns, apply for a loan to expand your business, or for certain legal purposes, accounting is necessary. Accounting for your small business is also important so you are able to assess your financial performance. The financial statements such as the balance sheet and cash flow statement show financial information that is important in the success of your business. The balance sheet shows how much your business is worth and what your assets are. The cash flow statement shows where the future cash needs of your business are. Without any of these financial statements your business would not be able to account for the revenues and profits made from day to day, which results in mistakes and inaccurate records. In the tough economic times we are facing today, having accurate accounting is necessary. There are so many firms that can assist you in accounting for your small business. So many small business owners believe that they need to be able to do their own finances and take the accounting in their own manners. However, that surely is not the case. It is much better to hire a firm that is respectable and can help assist your company in the accounting department. That way, while the firm is handling your accounting necessities, you can be improving your business by putting your name out there to draw in more clients, keep a strong relationship with existing clients, and encourage your employees constantly so that they, too, are putting their best efforts towards your company. This will definitely improve your business and help you as the small business owner to feel more confident and less stressed, knowing that your finances are safe with a trusted accounting firm. There are too many instances where small business owners have tried to take accounting into their own hands, and unfortunately have not succeeded in the process. If you want to have a successful business, you have to learn to keep the accounting out of your job task. In addition to hiring an accountant, as the business owner it is important to purchase accounting software, such as QuickBooks. This type of program is where you will be able to keep track of receipts and expenditures and will help make the financial reports for you as well. If there is one certain fact about small businesses and accounting it is that the staggering failure rate for new businesses, has more to do with bad financial management than almost any other problem. Whether it means the company does not have a successful business plan, their expectations are impracticable, there is no limits on spending, or just bad decisions made in the financial department overall,

businesses such as these need to realize the importance of accounting and what a difference it can make for their company. There are a few options small businesses have for improving some of these mistakes. Small business owners need to be aware of how accounting systems work so that they can realize when their finances are successful or in danger, as well as understanding how to make and read a chart of accounts that makes sense to them. One of the major problems with small business owners and failing to do the accounting for their business is that the businesses grow so fast to the point where the owners do not have time to worry about the accounting part of the business. They get caught up in trying to perfect their customer service, that they do not see the significance in getting the financial aspect of the business up to par. Hopefully, small business owners will begin to realize how important accounting is for the business, and we will see more successful businesses and less failed businesses in the future.

Methods For Small Business Accounting Small business accounting plays a crucial role in deciding the success of a business enterprise. Financial matters related to small businesses are a little different from that of the large business firms. So, if you wish to administer your business in a proper way, understating of these accounting matters are mandatory. Optimum utilization of funds, correct business activities, right credit allocation and timely evaluation of competitors along with effective decision making are all necessary for small business accounting professionals. There are primarily three main financial measures that are involved in the management of accounting details of a small business. This includes cash flow statement, profit and less account and the balance sheet. The balance sheet presents the worth of the business and lists the liabilities and assets of the small business throughout the year. The profit earned or the loss incurred by the

business is all calculated by the profit and less account. This statement shows the performance of the business and covers either the quarterly report or the monthly report. The cash flow statement is prepared so as to know about the cash balances of the small business firm in future. This statement predicts about the cash requirements of the small business in future. Usually, there are two methods that can be utilized for small business accounting. The first method is the cash basis method that involves identification of cash receipts as the expenses and income and bill payments are seen as expenses. This method is used by most small business owners as it uncomplicated and can be easily implemented. Accrual method is the second method to maintain accounting books in small business. In this method, revenue that is entered in the account books does not rely on the real cash collection. If a sale is made, the product is recorded in the books as "accounts receivable", no matter if the amount has been paid by the customer or not. Further, when the amount is received from the customer, "accounts receivable" turns into cash and registered into the accounting books. Similarly, if there is any expenditure that is incurred by a small business, it is written to be an expense in the book of accounts, even the bill is paid after a long span of time. Usually, small business that deals in manufacturing businesses, employ this accrual method to maintain their accounting books. There are also several accounting software that are especially designed for small businesses and their requirements. Generating reports, storage data and performing calculations and managing other such accounting transactions can easily be sorted out with the help of these software. Using these software makes the work of accountants of these small firms not only easily manageable but also this is a very cost-effective option. Small business owners may also seek assistance from accounting outsourcing firm for the proper management of their accounts and to hire proficient accounting services at affordable rates. So, select the small business accounting firm that suits your budget as well as requirements and lessen the burden of your accounting tasks as early as possible.

Alvis Brazma gives advice to business owners about how to manage their business efficiently without any hassles. To know more about accounting outsourcing, small business accounting
Step One: Gain the Knowledge If you're going to be in business, you must know how to keep score. To gain this knowledge will require that you go to school to learn both accounting and computer software that is used to support your particular business. With this knowledge, you can talk intelligently about your accounting needs with employees, bankers, and your own accountant.

The financial matters you will confront in your own business are little different than those of large corporations. Financial tools, coupled with an understanding of how to use them, will assist you in the proper management of your business. Without this understanding and without a dedicated commitment to using financial tools, you reduce your chances of success. Your business will be judged by the classic financial measures: the balance sheet, the profit and loss statement, and the cash flow statement. These three measurements will define the financial health of your company. In this session you will learn how:

The balance sheet tells how much the business is worth. The profit and loss statement tells if your business is profitable or not. The cash flow statement predicts your cash balances into the future.

As a business owner, you need to feel comfortable with the values portrayed by each measurement. Understanding these three measurements will whet your appetite to learn more, which in turn will lead to your strategic use of credit and ability to make choices tying operational activities to the best use of funds. They will help you make better decisions. You will also need to gain knowledge of accounting in order to evaluate your competitors or businesses you might wish to acquire (or be acquired by). While information about companies may be obtained from stock brokers or interviews with key executives, the best source to learn about your most successful and publicly owned competitors is to read their annual reports Step Two: Select an Accountant

You should consult an accountant before you start. This could be a Certified Public Accountant (CPA) who is a sole practitioner or a large accounting firm that can offer expertise in many areas (and whose fees tend to be higher). Another type of accountant is an "Enrolled Agent" (EA). EA's must pass a taxation test administered by the Internal Revenue Service. At present, there are no national certification standards for bookkeepers like there are for CPA's or EA's. So, it may be best to look for referrals when selecting a bookkeeper. Many CPA's and EA's will refer you to people they have confidence in to help you with your accounting needs. Bookkeepers range from those who only pay bills or

process receipts to "full charge" bookkeepers who can summarize bookkeeping activity for your CPA or EA to prepare tax returns. On the other hand, if you want someone to advise you on business organization and prepare income and payroll tax returns, you will probably want a CPA or EA to help you. The more "routine" bookkeeping you know and do yourself, the better it is, because you can then afford a higher level of expertise. You will need to determine what accounting software program will work best for your business and your accountant can help decide this. Some good ways to determine this include

Ask others in your industry whose judgments you trust about their experience with software. Your accountant may be helpful in setting up and training you in software applications. Or he may have business acquaintances that will do so. Look for ads in trade magazines for software and visit booths at industry trade shows for ideas. For Quickbooks users, have a look at MyBizHomepage which offers a great tool allowing users to view important financial snapshots of their business through any Web browser. Click here to learn more.

Payroll accounting and reporting is increasingly complex. If you will have employees, look up the "Payroll Accounting Service" providers in your area. Your accountant may have a recommendation. This complicated function can be outsourced at a reasonable cost. Ways that your accountant can help in dealing with your banker: Sooner or later, you will need financing in addition to your start-up sources. It is important to establish banking relations BEFORE future needs arise. Your accountant can help you:

Prepare cash flow control statements that will estimate what the cash needs of the business will be in months to come. Prepare a personal financial statement, including a balance sheet of your personal assets and liabilities along with a statement of income and expenses showing how much cash flow you generate each month. Banks will usually require a personal guarantee. Locate a banker. This can be helpful because the banker has had prior dealings with the accountant. Polish your business plan for your banker. Organize as much information as possible including financial statements in a neat and orderly fashion.

Methods of Accounting Before you start, you will need to decide what form of accounting your business will use. There are two major types:

Cash Basis Method: This is what the name implies; you recognize income when you receive the cash and you recognize expense when you pay the bill. Most service businesses operate on the cash basis because it is much simpler to understand. Accrual Method: Here you match revenue with expense regardless when the cash may or may not be collected. If you sell a product to a customer and he doesn't pay you for 30 days, the sale is recorded in the books on the day that you made the sale. When the money comes in the "accounts receivable" is then turned into cash. The same with expenses: if you incur an expense on one month but don't pay until the

next month, the expense will be recognized in the month in which you incurred the expense. If you're in manufacturing or deal with inventory, the Internal Revenue Service generally requires that you be on the accrual basis. Keeping Separate Business Records: Even in a small business you should, before you start, set up a business account even if you're a sole proprietor. It will be important to keep your business records separate from your personal records. This will make it easier for you and your accountant to pull records together for income taxes when the time comes. Your accountant can help you prepare and set up your company accounts, including establishing your checking accounts and or savings account for operating your business. Tax Liability Issues: There will be a number of tax liability matters that you and your accountant will need to deal with

Income Taxes. If you start as a sole proprietor you will be reporting your business activity on a schedule that is attached to your IRS form 1040, called Schedule C. Not only will the sole proprietor pay income tax on business income, but the sole proprietor will also pay social security tax on this income. This is reported as a separate item on the income tax return. The social security tax can be quite a surprise for the new small businessperson who does not expect to pay roughly 15% of net income for social security tax on top of the income tax. Operating as a partnership or LLC does not relieve a partner of the obligation of paying selfemployment tax. Your accountant can help set up estimated tax payments that will lessen the burden of your final tax bills as well as avoid penalties for not paying taxes as you go along. Payroll Taxes. If you have employees, your accountant can help you apply for necessary state and federal payroll numbers that you will need to file payroll tax returns. The federal number is called a "federal employer identification number" or FEIN, and these are obtained by form SS-4. Also, in every state there are local and state taxes that are required. For instance, in California you need to apply for a state identification number that will establish an account for you to pay the state withholding tax that you withhold from employees and the state disability insurance monies withheld. There is also a state unemployment tax that you pay. There may be other taxes that may be unique to your local situation.

Financial and Technical Assistance. Many times, there are sources of financing and technical assistance available to start-up businesses that are given by various organizations and agencies that wish to spur the development of small business. Your accountant may or may not be familiar with these sources, but this might be a question you would pose to a prospective accountant before you hire him or her. Financial and technical assistance may be available from

The Small Business Administration (SBA). SBA guaranteed loans to businesses, handled through banks. Local community banks, funded by the federal government Tax incentives available for hiring minority employees. Trade organizations.

Service Corps of Retired Executives (SCORE), which is a nonprofit organization whose goal is to help small businesses become successful. SCORE offers workshops and seminars on various business topics and may give you the opportunity to talk to someone who has been down the same road before.

Internal Controls: "Internal controls" refers to what is needed in the handling of funds, where money in the form of cash, checks or credit cards, is exchanged for goods and services. The goal is to make sure that the business receives all of its income without any of it being siphoned off by waste, fraud, dishonest employees or just through carelessness. Even a business that is healthy in all other respects can be very vulnerable to failing from the inside through lack of internal controls. Your accountant can help set up appropriate controls for your particular business. If you are in a manufacturing or retail business you will need to set up inventory policies and controls because inventory, similar to cash, can disappear very rapidly through carelessness or employee dishonesty. You need to have safeguards in place very early on in the process by setting up controls as to who can sign for goods and services and who controls the release of goods and services out the door after the processing has been completed. You are probably getting the idea by now that in your selection process of retaining an accountant, it is a good idea to get one with experience in your industry. Quarterly Returns Quarterly returns are primarily payroll tax returns and sales tax returns. Start-up businesses need to file quarterly payroll tax returns and send the money that has been withheld from the employee's check as well as the employer's share of social security taxes to the federal government. Likewise, state income taxes that are withheld and state unemployment tax that the employers pay to the state must be accounted for. These are matters you need to get right from the beginning, so that these taxes are paid in the appropriate time frame and you're not penalized for late payment or non-payment of your tax obligations. It is a common occurrence for start-ups to be short of cash. And it is very tempting to hold off paying certain obligations to conserve cash. Yet, you should not fall into that trap with your government obligations because governmental agencies have little patience with delinquent taxpayers. Similarly, the sales tax money that you collect, in states that charge sales tax, needs to be forwarded to the state, either on a monthly or quarterly basis depending on the volume of your sales. Quarterly reports will be required to show how much you have collected and that you have submitted this money to the state in a timely manner. Bank Account Reconciliation We suggested earlier that you set up separate business accounts to make it easier to track expenses and business income. This bank account needs to be reconciled at least once a month when you receive your bank statement. You can save money by learning to do this yourself, and your accountant can teach you if you don't know how. Reconciliation refers to taking the balance in your checkbook and reconciling or mathematically comparing it to the bank balance. You must also take into account any difference in those two balances that are due to checks that you have written that have not yet cleared the bank. If this is the case, your checkbook balance will be lower than

the bank statement because the bank has not yet seen some of the checks you have written. So it is important that these outstanding checks get subtracted from the bank balance and the resulting number be compared to the number in your checkbook. When the two match, we say the account has been reconciled. Employee Benefits Policy As you add employees to your business, you will need to decide

How many hours people will work? What holidays they are entitled to? What your vacation policy might be. If you elect to cover employee medical expenses or provide medical insurance, you will need to give some thought to what type of policies you will provide. This might be an HMO, PPO, or pick your own doctor policy. What sick leave policy to offer. Will you pay employees when they are sick or will this time be considered unpaid time off? Be sure to refer to the Fair Labor Standards Act when making this determination. There are different requirements for hourly vs. salaried employees.

There are a number of sources to give you some help in deciding these issues. They include:

Start with your accountant and lawyer. Your own experience in your particular industry will help determine your policy. What has worked for similar companies in the past is very likely a good way to consider going with your own company so you are competitive with other firms in your industry. Organizations such as SCORE can be helpful in determining policies and procedures.

Major Financial Statements and Software

The Balance sheet The balance sheet is a "point in time" statement. Think of it as a snapshot. It is a listing of all of your assets as well as your liabilities and the difference between these two numbers is your equity in your business. You will see in the example that the balance sheet is divided into two major sections. The first section is "Assets." The second section is "Liabilities and Owner's Equity." The general order of a balance sheet is to go from the most liquid to the least liquid. In other words, under "assets", you see the heading "current assets" and the first item is cash, because cash is the most liquid of your assets. After cash are receivables, representing money owed you from customers. When you receive the money, the receivable turns into cash. Next in assets are "inventories." Since inventory is not as liquid as either cash

or receivables, this falls below them on your balance sheet. Following current assets are property and equipment that are typically carried at cost.

You will also notice "depreciation" on a balance sheet prepared by an accountant. Depreciation is a noncash expense and is nothing more or less than an attempt to record that these assets go down in value over time. IRS Publication 946 "How to Depreciate Property," contains information that will give you a better understanding of depreciation. One reason this particular financial statement is called a "balance sheet" is that assets always equal your liabilities and owner's equity. This is called double-entry bookkeeping, and is the type done in nearly every business. The reason double-entry bookkeeping is the accounting gold standard is that it serves as a check to make sure a transaction has been properly recorded. For example, let's say the first thing you buy is a desk. You have an asset of office equipment. If you paid cash, you don't owe any liabilities so your interest in that desk is called your equity (on the other side of the ledger). Similarly, other transactions will give rise to an increase in assets and/or an increase in liabilities or equity. For example, looking at our balance sheet example under current liabilities (again, from most liquid to least liquid) your account payables are the first item listed. After that there are items called "accrued liabilities," which usually refers to payroll taxes and sales taxes that may not be due for another month or two.

Read Transcript

Also under current liabilities is debt that is due within a year. So, the current 12 months of payments for equipment would be shown as a current liability. Following that we have long-term debt, which are items that are due after the current year. Following total liabilities is the section called "owner's equity" which is the owner's interest in the business. If we take all the assets of the business, $37,000, and subtract the total liabilities, $18,000, there is a difference of $19,000. Of this $19,000 amount, $13,000 is from past income and $6,000 is from income earned during the current accounting period, thereby balancing out $37,000 for both assets and liabilities and owner's equity. When bankers look at a financial statement, they are interested in various financial ratios. Ratios help indicate the financial strength of a business and how the business can handle payback of loans. For example, current ratio is current assets divided by current liabilities. If your current assets are less than your current liabilities, a red flag will go up because it would indicate a risk of insolvency during the present year. Various industries will have different levels of ratios. You can track your ratios with others in your industry to see how your business compares. Your banker will probably be most interested in your owner's equity.

The Income Statement (Also called the "Profit and Loss" Statement)

The income statement, unlike the balance sheet, covers a period of time, usually monthly or quarterly. Usually yearto-date figures are also presented to show how the business

is doing during the current accounting year. In the example shown here, the financial statement covers a six-month period and shows the activity for the current month as well as the year-to-date total of the prior five months plus the current month, for a total of six months.

The income statement and the balance sheet tie together. Look back on the balance sheet and you'll see current earnings of $6,000. The income statement shows this same $6,000, which was the profit for the last six months. Your income statement will disclose valuable information. You will see a section for sales as well as a breakdown of all your expenses, leading down to the net profit for the period. The more current your financial statement, the greater will be its value. If you see a bad trend developing, you can take action at once. Computer programs can produce financial statements with a keystroke, which is why you need to acquire the computer skills and software that is appropriate for your particular business.

Cash Flow Control Cash fuel drives you in business just as jet fuel keeps a plane aloft. A pilot is very careful to accurately predict the fuel requirements. You should place the same importance on cash flow control because if, at any point in the future, you run out of fuel, like the pilot, you've got a BIG problem. Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your balance of cash is at the end of designated periods of time. This is a great tool because you can predict your future needs for cash before the needs arise. In cash flow control, for each of a number of intervals of time, you make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, say a month, you start with the cash you now have. To this you add IN items and subtract the OUT items, which results in the cash at end of the month. The cash at the end of month becomes the starting cash for the next month. The attached cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. Your projection should be made for an upcoming 12-month period. The projection will be a useful tool for you to arrange financing before it is required by showing your banker that you are sophisticated enough to provide for future cash in order to preserve liquidity.

You can use this simple cash flow format to make up your own cash flow projection for the business you have in mind. It is so simple, yet can be so valuable! Your Accounting and Cash Flow Punch List

Prepare frequent financial statements; at least monthly or even weekly. Keep track of key income statement percentages. If you're in manufacturing, your cost of goods sold percentage should be relatively the same as competitors in your industry. Compare your income statement with prior periods. To start with, you won't need certified financial statements. Accountants have three levels of statements: certified, reviewed and compiled. For most startups, the compiled type will work; that is, your accountant prepares the financial statement with a letter stating that the numbers are based on the information you have provided. From the beginning, maintain good internal controls. Learn from the practices used in your industry to prevent dishonesty and shrinkage. Shrinkage includes shoplifting and other types of stealing, which results in the "shrinkage" of your inventory. Do not delegate the authority to sign checks or purchase orders. Don't use money that you have withheld for payroll taxes or sales taxes for other purposes. You will be a trustee of funds belonging to the Internal Revenue Service, Social Security Administration and your state's sales taxing authority. A "payroll service provider" can be used to manage these responsibilities. Keep in mind that liquidity is not the same as making money. You can be making a profit and still go broke by running out of cash. Learn and practice cash flow control. Look ahead and write out your list of projected financial requirements including premises, equipment, staff and working capital. Arrange for financing well before the need arises.

Major Financial Statements and Software

The Balance sheet

The balance sheet is a "point in time" statement. Think of it as a snapshot. It is a listing of all of your assets as well as your liabilities and the difference between these two numbers is your equity in your business. You will see in the example that the balance sheet is divided into two major sections. The first section is "Assets." The second section is "Liabilities and Owner's Equity." The general order of a balance sheet is to go from the most liquid to the least liquid. In other words, under "assets", you see the heading "current assets" and the first item is cash, because cash is the most liquid of your assets. After cash are receivables, representing money owed you from customers. When you receive the money, the receivable turns into cash. Next in assets are "inventories." Since inventory is not as liquid as either cash or receivables, this falls below them on your balance sheet. Following current assets are property and equipment that are typically carried at cost.

You will also notice "depreciation" on a balance sheet prepared by an accountant. Depreciation is a non-cash expense and is nothing more or less than an attempt to record that these assets go down in value over time. IRS Publication 946 "How to Depreciate Property," contains information that will give you a better understanding of depreciation. One reason this particular financial statement is called a "balance sheet" is that assets always equal your liabilities and owner's equity. This is called double-entry bookkeeping, and is the type done in nearly every business. The reason double-entry bookkeeping is the accounting gold standard is that it serves as a check to make sure a transaction has been properly recorded. For example, let's say the first thing you buy is a desk. You have an asset of office equipment. If you paid cash, you don't owe any liabilities so your interest in that desk is called your equity (on the other side of the ledger). Similarly, other transactions will give rise to an increase in assets and/or an increase in liabilities or equity. For example, looking at our balance sheet example under current liabilities (again, from most liquid to least liquid) your account payables are the first item listed. After that there are items called "accrued liabilities," which usually refers to payroll taxes and sales taxes that may not be due for another month or two.

Read Transcript

Also under current liabilities is debt that is due within a year. So, the current 12 months of payments for equipment would be shown as a current liability. Following that we have long-term debt, which are items that are due after the current year.

Following total liabilities is the section called "owner's equity" which is the owner's interest in the business. If we take all the assets of the business, $37,000, and subtract the total liabilities, $18,000, there is a difference of $19,000. Of this $19,000 amount, $13,000 is from past income and $6,000 is from income earned during the current accounting period, thereby balancing out $37,000 for both assets and liabilities and owner's equity. When bankers look at a financial statement, they are interested in various financial ratios. Ratios help indicate the financial strength of a business and how the business can handle payback of loans. For example, current ratio is current assets divided by current liabilities. If your current assets are less than your current liabilities, a red flag will go up because it would indicate a risk of insolvency during the present year. Various industries will have different levels of ratios. You can track your ratios with others in your industry to see how your business compares. Your banker will probably be most interested in your owner's equity.

The Income Statement (Also called the "Profit and Loss" Statement)

The income statement, unlike the balance sheet, covers a period of time, usually monthly or quarterly. Usually yearto-date figures are also presented to show how the business is doing during the current accounting year. In the example shown here, the financial statement covers a six-month period and shows the activity for the current month as well as the year-to-date total of the prior five months plus the current month, for a total of six months. The income statement and the balance sheet tie together. Look back on the balance sheet and you'll see current earnings of $6,000. The income statement shows this same $6,000, which was the profit for the last six months. Your income statement will disclose valuable information. You will see a section for sales as well as a breakdown of all your expenses, leading down to the net profit for the period. The more current your financial statement, the greater will be its value. If you see a bad trend developing, you can take action at once. Computer programs can produce financial statements with a keystroke, which is why you need to acquire the computer skills and software that is appropriate for your particular business.

Cash Flow Control Cash fuel drives you in business just as jet fuel keeps a plane aloft. A pilot is very careful to accurately predict the fuel requirements. You should place the same importance on cash flow control because if, at any point in the future, you run out of fuel, like the pilot, you've got a BIG problem. Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your

balance of cash is at the end of designated periods of time. This is a great tool because you can predict your future needs for cash before the needs arise. In cash flow control, for each of a number of intervals of time, you make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, say a month, you start with the cash you now have. To this you add IN items and subtract the OUT items, which results in the cash at end of the month. The cash at the end of month becomes the starting cash for the next month. The attached cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. Your projection should be made for an upcoming 12-month period. The projection will be a useful tool for you to arrange financing before it is required by showing your banker that you are sophisticated enough to provide for future cash in order to preserve liquidity.

You can use this simple cash flow format to make up your own cash flow projection for the business you have in mind. It is so simple, yet can be so valuable! Your Accounting and Cash Flow Punch List

Prepare frequent financial statements; at least monthly or even weekly. Keep track of key income statement percentages. If you're in manufacturing, your cost of goods sold percentage should be relatively the same as competitors in your industry. Compare your income statement with prior periods. To start with, you won't need certified financial statements. Accountants have three levels of statements: certified, reviewed and compiled. For most startups, the compiled type will work; that is, your accountant prepares the financial statement with a letter stating that the numbers are based on the information you have provided.

From the beginning, maintain good internal controls. Learn from the practices used in your industry to prevent dishonesty and shrinkage. Shrinkage includes shoplifting and other types of stealing, which results in the "shrinkage" of your inventory. Do not delegate the authority to sign checks or purchase orders. Don't use money that you have withheld for payroll taxes or sales taxes for other purposes. You will be a trustee of funds belonging to the Internal Revenue Service, Social Security Administration and your state's sales taxing authority. A "payroll service provider" can be used to manage these responsibilities. Keep in mind that liquidity is not the same as making money. You can be making a profit and still go broke by running out of cash. Learn and practice cash flow control. Look ahead and write out your list of projected financial requirements including premises, equipment, staff and working capital. Arrange for financing well before the need arises.