Dear Entrepreneur,
Businesses make money by selling products and services to consumers, and it’s critical that each transaction be recorded and presented to show that value is being generated. Accurate bookkeeping and accounting will help you make more informed spending decisions, plan investments, and manage your cash flow.
Major Differences Between Accounting & Bookkeeping
The crucial distinction between bookkeeping and accounting is how a transaction is recorded and presented. The practise of recording all of a company’s transactions in a set of books, often known as a ledger, is known as bookkeeping. These days, the entries are entered into accounting software, which generates reports based on how bookkeepers tag the entries. Accounting, on the other hand, is the analysis of recorded transactions in order to offer an accurate picture of a company’s financial status. Accountants do more than just record transactions; they assess how each one affects the company’s financial health.
Notable Accounting Terms
On a monthly basis, most businesses reconcile and close their books and the preparation of financial statements is the end result of this process. However, in order to construct financial statements, each transaction must be recorded in a ledger of accounts, which is separated into five categories:
Assets – Examples include inventory, accounts receivable, and cash.
Liabilities- These are debts or obligations the business owes to other businesses or individuals who are not shareholders.
Equity- These consist of the shareholders’ claims on the company, the book value of which is equal to assets minus liabilities.
Revenue- The income from what you sell to clients is called revenue.
Expenses- These are the costs of selling your products to customers.
Components Of Financial Statements
Income Statement: The purpose of the income statement is to show how much revenue you make in comparison to the expenses you incur during that time period. The income statement reveals whether your company’s operations make a profit or a loss.
Balance Sheet: The value of your assets, liabilities, and shareholders equity are all listed on your balance sheet. This paper gives you a picture of your company’s net value.
Cash Flow Statement: This is useful for reconciling the beginning and ending cash balances since it illustrates the sources and uses of cash from operations, investment, and financing activities.
Does my startup need Accounting, Bookkeeping, or both?
Founders frequently make the error of delaying account reconciliation and are typically more concerned with its day to day operations than with the details of its assets and liabilities. However procrastinating or neglecting this process can be costlier and in some cases even lethal to the business. Bookkeeping becomes necessary as soon as a company starts spending or receiving money and its a lot easier to start off right with everything reconciled than it is to figure out how to make sense of a company’s finances after several transactions. Bookkeeping is also an important part of becoming investor-ready. Before investing in a business, investors demand an accurate, up-to-date, and easily read collection of financial data. Putting time, effort, or money into bookkeeping is a crucial first step toward presenting accurate financials and attracting investment.
An accountant becomes more important as a company’s income, transactions, or people increase. They make financial reports more understandable by reading transactions in a way that more correctly reflects the value of the company and its activities. However A full-time accountant may not be required in the early stages of a business, and a freelancer or part-time accountants may suffice.
Accounting Software
There are many different types of accounting software available for small businesses, with varying capabilities and price tags. Generally, the type of industry and number of employees are two factors that can help a small business owner begin to choose the accounting software that is appropriate. For example, a freelancer would not need the same features in accounting software as a restaurant owner. Some common accounting software for small businesses include: QuickBooks Online, Xero, FreshBooks, Wave etc
Parting Thoughts
Understanding how to maintain your books as a business founder may appear intimidating at first, but it is a critical component of running a business for two major reasons: 1) ensures that you have enough liquidity to accomplish your business objectives, and 2) displays your company’s capacity to generate value for shareholders.
Businesses should use accounting software to keep their financial records up to date; nevertheless, when a startup’s business activities become complex enough to require frequent interpretation, owners should engage an accountant as soon as possible, especially if they are considering raising funds.
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