What is Financial Accounting?
Accounting is properly recording, analyzing, and interpreting your business’s financial accounting. Business owners use finance and accounting to track their financial operations. This helps them meet legal obligations and make stronger business decisions.
Accounting is an essential part of running a company. It’s a task you’ll either need to develop expertise in or outsource. Let’s ease into the details of Accounting 101.
Accounting is something that the majority of people have heard about at some point, on TV, online, or among friends. But we still need to get the essentials of accounting.
Like many jobs, accounting is a mix of tactical and boring tasks. And it’s not just noting down transactions or filing taxes. Financial accounting considers what the financial records will mean to regulators, the government, and tax collectors.
If you’re in charge of accounting, it is more than just numbers and receipts. It’s a process of collecting and reporting financial data. You’ll use those documents to communicate the cash flows, financial status, and business performance.
Understanding accounting usually begins with learning basic terms and rules. These can help one learn the foundation of finance and accounting. Then, it’s about learning the way you can apply these practices.
But before we dig into these ideas, let us discuss the day-to-day work of an accountant.
What do accountants do every day?
Accountants oversee a business’s financial records and ensure the information is correct. Then, they utilize this data to create budgets, financial papers, and reports.
Examples of this may include a cash flow statement for dealings or an income statement for an upcoming management meeting.
They also attend sessions to offer advice or look into law-related issues. Other common activities include:
- Gathering new financial data
- Checking or updating records
- Collecting data for audits and other legal things
- Calculating taxes
- Checking on obedience to relevant laws
- Making sure tax submissions are on time
- Forecasting and risk-calculation
Financial Accounting Skills
Accountants can’t only be good with figures. This position uses several other technical and other skills daily to ensure a company is financially healthy.
Important skills are:
- Hearing out
- Time management
- Critical thinking
These help professionals gather information from affectees and communicate their results. Knowledge of the industry’s workings is also necessary to contextualize financial data.
While math skills are useful, data and systems analysis are essential to success in the role. An accountant usually plays the role of investigator. This means that wonder and deductive reasoning abilities are also useful.
Suppose you don’t feel like the right skills are the strongest niches. Also, if you run a business, you should seek assistance to manage your financial accounting.
Finance and Accounting vs. Bookkeeping
These two might seem the same if you’re new to business finance and accounting, but they’re very different.
To keep it concise, bookkeeping is tactical, while accounting is more about the wider picture.
Bookkeepers record and manage financial data for a business.
Accountants check and advise business professionals about what to do with that information. They offer insights on taxation, legal concerns, and expansion. They prepare reports and audits to convey and present financial accounting data. These insights help companies prepare for unexpected shifts that result as a business grows.
So, an accountant may be a bookkeeper, but not every bookkeeper is an accountant.
Basic Finance and Accounting For Your Business: What You Need to Know
Many small company owners do a mix of bookkeeping and accounting.
If you run a company on your own, you might do some or all of these tasks:
- Making a bank account
- Tracking income, outlays, assets, liabilities, and equity
- Making financial statements
- Developing a mechanism for bookkeeping
- Making a payroll mechanism
- Figuring out tax laws and payments
Sometimes a company will do this work and act as part of an initial business plan. Other times they figure out these requirements a bit at once as the business expands.
Financial Accounting Automation
According to Socialpod, 64% of small businesses use accounting software for their finance and accounting needs. Another 43% use software for taxation. Automated accounting technology includes tools like QuickBooks, Hero, and other loved accounting applications.
These tools are how many small businesses control their accounting. Automation tools save businesses and accountants’ effort by limiting the amount of effort they spend on data entry. This gives them increased time to analyze data to better the business.
Most accounting software is quick and easy to use, so skipping learning accounting things and principles can be tempting. But all the know-how makes it easier to figure out a complex audit or discover errors in automated data.
Financial Accounting Basics
Regardless of how we manage our business accounting, it’s wise to understand accounting terms. If you can read and make these basic documents, you have to understand your business’s worth and financial health — as a consequence, and you’ll have greater control of your business and financial decisions.
Here are the papers and calculations we recommend picking up. Even if you work with a proper consulting agency or have recruited a certified public accountant (CPA), they give valuable snapshots and systems of your business performance.
An income statement displays your company’s profitability and tells you how much your business has made or lost.
A balance sheet is a sketch of your business’s financial position at a single point in history. A balance sheet will show you your business’s total earnings, which is the amount of funds you’ve reinvested in your business (rather than being distributed to shareholders).
Profit and Loss (P&L) Statement
A profit and loss (P&L) document assesses your business’s income and outgoings during a given time frame (like quarterly, monthly, or annual). Your business’s Schedule C tax document will also show this calculation.
Cash Flow Statement
A cash flow statement analyzes your businesses operating, financing, and investing work to show how and where you’re receiving and spending money.
A bank reconciliation compares your monetary expenditures with your complete bank statements and helps keep your company records consistent. This method reconciles your book balance to your bank balance of funds.
Basic Accounting Terms
These terms will create the basis for building your knowledge of finance and accounting. While some of these terms might not apply to your business presently, developing a wholesome understanding of the subject is important if you expand or move into another type of business.
Debits & Credits
Refrain from being mixed up with your personal debit and credit cards. We know that debits and credits are foundational finance and accounting terms.
A debit is a ledger of all money expected to flow into an account. A credit is a statement of all money expected to g out of an account. Debits and credits measure where the money in your firm is coming from and where it is going.
Many businesses work out of a cash or commercial bank account that holds cash assets for the company. When a company pays for an expense independently, the cash account is credited because money shifts from the account to cover the expense. This means the expense is debited because the funds credited from the cash account cover the cost of that expense.
Here’s a simple visual to help you understand the difference between debits and credits:
DEBITS & CREDITS
Increase the balance of expense accounts
Decrease the balance of expense accounts
Reduce the balance of equity accounts
Improve the balance of equity accounts
Accounts Receivable and Accounts that are Payable
Accounts receivable are funds that people owe you for goods and services. It’s considered an asset on the balance sheet. For example, if a client fulfills their invoice, your company’s accounts receivable amount is curtailed because less money is now owed.
Accounts payable is the amount you owe other entities and is considered a liability on your balance sheet. For instance, let us say your company pays $5,000 monthly rent. Here is how that would be noted down in your financial records before that amount is paid out.
Accruals are credits and debts the business has recorded but still needs to fulfill. These can be sales you’ve made but have yet to collect payment on or expenditures you’ve made but have yet to pay for.
Assets in finance and accounting
Assets are all you have that your company owns, either tangible or intangible. Your assets include cash, tools, property, copyrights, patents, and trademarks.
Burn Rate in financial accounting
Your burn rate is the speed at which the business spends money. It’s a critical part when calculating and managing your cash flow.