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Accounting Terminology Accounting Terminology On-Line Resource from – Bench https://bench.co/about/ Accounting vs. bookkeeping Both are numbers-related but bookkeeping and accounting are not quite the same thing. Bookkeeping is the process of tracking all financial records—mainly income and expenses. The term dates to the olden days when business owners tracked finances in paper books. Accounting is the process of interpreting your financial records for everything from making sure you pay the right amount in taxes, to making strategic business decisions based on your business’s numbers. Both bookkeeping and accounting are vital to every business’s success, but as a startup you may have an additional need to keep good records. If you have investors, they’ll require that you provide financial reports. And if you are trying to get a business loan, you’ll need clear and easy-to-read financials so that potential investors can make an informed decision about investing in your vision. The difference between cash and accrual The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it’s earned, and expenses when they’re billed (but not paid). Cash basis accounting The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. This method does not recognize accounts receivable or accounts payable. The cash method is also beneficial in terms of tracking how much cash the business actually has at any given time; you can look at your bank balance and understand the exact resources at your disposal. Also, since transactions aren’t recorded until the cash is received or paid, the business’s income isn’t taxed until it’s in the bank. Accrual basis accounting Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. For example, you would record revenue when a project is complete, rather than when you get paid. This method is more commonly used than the cash method. The upside is that the accrual basis gives a more realistic idea of income and expenses during a period of time, therefore providing a long-term picture of the business that cash accounting can’t provide. The downside is that accrual accounting doesn’t provide any awareness of cash flow; a business can appear to be very profitable while in reality it has empty bank accounts. Accrual basis accounting without careful monitoring of cash flow can have potentially devastating consequences. What it means to “record transactions” Every business has to record all its financial transactions in a ledger—otherwise known as bookkeeping. You’ll need one central place to add up all your income and expenses and use to claim tax deductions at the end of the year. Journal Entry The record of all individual financial transactions made by a business. Balance Sheet A statement of the assets, liabilities, and capital of a business at a particular point in time, detailing the balance of income and expenditure over the preceding period. Cost of Goods Sold (COGS) COGS is the accumulated total of all costs used to create a product or service, which has been sold. These costs fall into the general sub-categories of direct labor, materials, and overhead. In a service business, the cost of goods sold is the labor, payroll taxes, and benefits of those people who generate billable hours (though the term may be changed to "cost of services"). In a retail or wholesale business, the cost of goods sold is likely to be merchandise that was bought from a manufacturer. In the income statement presentation, the cost of goods sold is subtracted from net sales to arrive at the gross margin of a business. Break-even Point In accounting, the break-even point refers to the revenues necessary to cover a company's total amount of fixed and variable expenses during a specified period of time. Bookkeeping checklist Here’s a bookkeeper-recommended checklist for keeping precise books. Weekly Bookkeeping Tasks Enter all transactions into your bookkeeping software or Excel spreadsheet. Even if you integrate your financial accounts with software, be sure to enter everything else, such as cash transactions. Categorize your transactions Was that trip to Staples for office supplies or to pick up a new banner for your tradeshow booth? These two items are categorized differently on your tax return, so record the category while transactions are fresh in your mind. File or digitize receipts We recommend filing (or digitizing) your receipts and old invoices weekly to avoid damage or loss of documentation that would be required in an audit. Monthly bookkeeping tasks Reconcile your bank accounts to safeguards against any income or expenses oversites and errors. Prepare and send invoices (if applicable) as soon as you can. Pay vendors and other bills Keep current in paying bills, late payments may incur interest and could also affect business credit scores. Review outstanding invoices See who hasn’t paid yet, and follow-up. Review your financial standing We recommend scheduling dedicated time for handling business financials. Keeping good records also means quarterly and annual income taxes for your business will be easier. And last but not least, with confident knowledge of your books you’ll be armed to make good financial decisions on behalf of your startup. Financial statements: Not only do well-kept books ensure there is more money coming in than leaving, they can be used to make other financial decisions, too. Use an accountant. Early and often. It’s never too early for a founder to speak with an accountant. Even if weekly and monthly bookkeeping tasks will be done in-house, an accountant can provide guidance with early-stage questions. Because business taxes are much trickier than personal incomes taxes, an accountant familiar with your industry can help minimize the amount of taxes paid and possible protect you from the IRS limelight. You can do your own books (if you have time) When your startup is in its early stage, chances are your budget will be tight. In this case you may want to consider managing your business’s books yourself. As an added benefit, handling your own financials will allow you to truly grasp how money flows in and out of your business. You’ll feel more confident about your financial standing and the many rapid-fire financial decisions a startup founder has to make. When considering an accounting software system, look for one that has a complete offering. For example, a system that allows you to make journal entries create a balance sheet. Quickbooks and Xero are a couple of examples. You can outsource your bookkeeping If the demands of startup life mean you don’t have time to learn an accounting software system, or if you’d just rather leave bookkeeping to a professional. .
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