Accounting can seem daunting to new entrepreneurs and business owners. It's a whole new language that most ignore learning. Most people understand their business' performance by the amount of cash in the bank, but if you learn a little bit of accounting, you can learn so much more about your business. Here are 12 accounts that we feel you should know.
1. Cash, is the lifeblood of the business. All business transactions will eventually pass through this account. Inflows can come from sales that have been collected, loans, and owner’s investments. Outflows can come from paying expenses and loans that are due and payable.
2. Accounts Receivable represents the total open unpaid invoice balance that your business can collect. Increases will come from customer billings and decrease as customers pay their invoices.
3. Inventory represents the balance of purchased goods and products to be sold to customers. This account increases as the business purchase and decreases as the business sell the products.
4. Accounts Payable is the balance of bills that are currently outstanding.
5. Loans Payable is the balance of any outstanding loans the business may have with a bank or lender.
6. Sales are products or services sold to the customer regardless of if cash has been received.
7. Cost of Goods Sold the cost of the inventory that has been sold to a customer.
8. Operating Expense are those used in the operations of the business, such as rent, utilities, office supplies, and employee expenses.
9. Net Income is the residual of sales after all costs of goods, operating expenses, other expenses, interest, and taxes are deducted.
10. Dividend is a distribution of the business earnings to the owners of the company.
11. Owner’s Equity tracks the amount an owner puts into the business and the earnings they have retained for future business endeavors less any debt the company may owe. It is calculated as Assets less the Liabilities of the company.
12. Retained Earnings are any remains of the net income, or earnings, that have not been distributed to the owners of the company.
Many business owners ignore the financial statements that are prepared by their accountant. Learning how to read financial statements will help you understand the performance of the business.
GFT's accounting services can help get your books ready and clean. Continued monthly accounting will help you get a sense of your business performance.