When it comes to accounting and bookkeeping, for many people it appears a complicated, daunting task. The bottom line though, is that accounting is the way in which you track income and expenses so that you know whether your business is making or losing money. While there are no “one size fits all” method of keeping track of your business finances, there are specific items that need to be taken care of and an experienced accountant can take care of those items on your behalf.

Here are some basic terms you need to understand so that you can have a conversation with an accountant to determine what you need to do to be financially responsible:

1. You will need to choose an accounting method for your business. There are two from which to choose: accrual or cash basis. The choice you make will have an impact on your tax filing status. Accrual basis accounting means you will enter invoices and sales when the money is received and you will enter expenses when they are paid. The accrual method offers a more accurate financial picture of your business. Cash basis accounting means you will enter your income into your records when you make the sale, whether you’ve received payment or not. Under the cash basis method you also enter expenses at the time of ordering items not when you actually pay them.
2. Your general ledger can be viewed as the checkbook for your business. You will input income and expenses in the ledger even if you will be entering them in another area of your accounting system.
3. Accounts payable and receivable can be considered as sub-accounts under the general ledger. The AP and AR show uncollected income and unpaid expenses for the business. An accounts payable is a liability account where you list any outstanding bills. The accounts receivable are considered assets and will show money that is due your company.
4. Your company’s balance sheet offers an overview of your company’s financial health. Your balance sheet tracks income and expenses for specified periods of time and provides a snapshot on which you can see whether you’re making a profit.
5. Financial documentation is the paperwork your accountant or bookkeeper will need and that the IRS may request in the event of an audit. You will need to keep proof of income and expenses as a way to back up your income and expense claims. This proof should show dates, dollar amounts and what the purchase was for or where the income was generated. While there are no set rules as to how you need to file these financial documents, you do need to keep them and be able to access them if requested.

Once you sit down with an accountant or bookkeeper, he or she will have further questions for you and will likely offer advice as to how you should be tracking your income and expenses. Be advised that the way in which your company is legally set up (LLC, Sole Proprietorship, etc) may impact the documentation you file, the paperwork you keep, and the taxes you pay.

Still have questions? If so, leave them in the comment section below or contact us to ask a question privately.