Accounting Basics Every New Business Owner Should Learn

​By: Emily Heaslip, Contributor

When you first start as a business owner, you will have to wear many hats. You may find yourself launching a marketing campaign, ringing up purchases, designing your online store, and managing accounting all in the same day.
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However, the learning curve can be steep if you’ve never done business accounting before. You may not even know what you don’t know.

Everyone starts somewhere, and while you may eventually hire an accountant, it can be helpful to know the basics so you can build a good partnership. Here are some accounting basics to help you familiarize yourself with this important business function.

Master the key documents
Five documents show you how your business is performing financially. When you can read and prepare these documents, you’ll be able to make better decisions and improve your business’s financial health. The documents you should know include:

• Income statement: This shows your company’s profitability — how much money your business has earned or lost.
• Balance sheet: This is a high-level view of your business's financial health at a single point in time.
• Profit and loss (P&L) statement: This provides a snapshot of your business’s income and expenses quarterly, monthly, or yearly.
• Cash flow statement: This shows how and where you receive and spend money through your business operations, investing, or financing.
• Bank reconciliation: This reconciles your bookkeeping with your bank balance, helping you keep consistent records for tax purposes.

By understanding these documents, you can begin to see how your company is growing sustainably.

Learn the different accounting methods
“Accounting” isn’t just one process. You can use a few different methods to record financial transactions, including two approaches for recording your income and expenses. Your accounting system can be set up using either the cash basis or the accrual basis.

The cash basis method means that you record income and expenses when the cash transaction is complete. In contrast, accrual basis accounting records income when you make a sale and expenses when they are incurred. This creates a double-entry accounting system, with two entries for each transaction.

Most businesses use accrual-based accounting; however, if you have no cash flow, you may start with cash-based accounting and switch approaches later. “Cash basis accounting is easier, but accrual accounting portrays a more accurate portrait of a company's health by including accounts payable and accounts receivable,” wrote Investopedia.

Track your expenses
Modern POS systems make it easy to track sales, but it’s up to you to set up a way to track expenses. Keeping track of your expenses is fundamental to monitoring the growth of your business, building financial statements, keeping track of deductible expenses, and preparing tax returns.

Tracking expenses can be as simple as keeping an Excel spreadsheet. Many small business owners do their own bookkeeping or outsource to a part-time bookkeeper. There’s also software that can help you track your expenses, including tools like Bench, Manager.io, QuickBooks, FreshBooks, or Xero. Create a system for recording receipts, too, in case there are any questions down the road with your tax return.

Get familiar with GAAP
GAAP stands for Generally Accepted Accounting Principles, the best practice accounting processes and strategies for businesses across the United States. The GAAP were set up by the Financial Accounting Standards Board (FASB) to create consistent quality and set the standard for accounting activities for companies of all sizes. Publicly traded companies are required by law to follow the GAAP; starting with a foundational understanding of these principles can benefit your business in the long run.

Many more accounting terms can easily become confusing when you dive deeper into bookkeeping and start working with an accountant. Be sure to check out our short glossary of accounting terms to learn more.

How to create an effective budget for your business
Accounting and budgeting go hand in hand. When you first create a budget, you’ll want to make sure every dollar you spend is properly accounted for. Ryan Carrigan, CEO and Founder of MoveBuddha, recommends small businesses start with short-term or activity-based budgeting before looking too far into the future.

“It can be beneficial to analyze all costs and profits in the beginning,” Carrigan said. “Then create a monthly budget until you grow enough to create a sustainable budget that can last a quarter, six months, and eventually annually.”
Use your accounts receivable and accounts payable, which can be found in your accounting software or Excel sheet, to see how well you’re able to stick to your budget. Feedback from your accounting records can help you improve your budgeting in the long run.

Understanding cash flow management for new entrepreneurs
Cash flow is one of the most important metrics for measuring the progress of a new business. It’s also, unfortunately, the cause of failure for many new businesses. In essence, accounting provides a complete financial overview, including both cash and non-cash transactions. Then, cash flow zooms in on the cash portion of that story, providing a clear picture of the company's liquidity (how much cash it has readily available)

A business can be profitable according to its accounting records but still run out of cash if it doesn't manage its cash flow effectively. This is why both accounting and cash flow management are crucial for business success.

New entrepreneurs need to keep a careful eye on cash flow to make sure they have enough funds available to pay their debts — with a little extra buffer for any unexpected expenses. Accounting software like QuickBooks, Xero, or FreshBooks will generate cash flow reports based on your input data. Business owners can also create cash flow projections and track actual cash flow in Excel; this method requires manually inputting data, but it is more flexible.