Small Business Accounting: Proven Steps to Tackling This Like an Accountant
Small Business Accounting in short is no easy task. What is accounting and why is it so important for small businesses?
Accountants and accounting and tax services in Miami do their best to keep clients informed of best accounting practices. Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.
The purpose of Small Business Accountancy is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.
As a result of economic, industrial, and technological developments, different specialized fields in accounting have emerged. The famous branches or types of accounting include financial accounting, managerial accounting, cost accounting, auditing, taxation, AIS, fiduciary, and forensic accounting.
Five Modern Small Business Accountancy Practices.
The Revenue Principle of Accounting
The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is collected. For example, a snow plowing service completes the plowing of a company’s parking lot for its standard fee of $100. It can recognize the revenue immediately upon completion of the plowing, even if it does not expect payment from the customer for several weeks. This concept is incorporated into the accrual basis of accounting.
A variation on the example is when the same snow plowing service is paid $1,000 in advance to plow a customer’s parking lot over four months. In this case, the service should recognize an increment of the advance payment in each of the four months covered by the agreement, to reflect the pace at which it is earning the payment.
If there is doubt concerning whether payment will be received from a customer, then the seller should recognize an allowance for doubtful accounts in the amount by which it is expected that the customer will renege on its payment. If there is substantial doubt that any payment will be received, then the company should not recognize any revenue until payment is received.
Also under the Small Business Accountancy accrual basis of accounting, if an entity receives payment in advance from a customer, then the entity records this payment as a liability, not as revenue. Only after it has completed all work under the arrangement with the customer can it recognize the payment as revenue.
Under the cash basis of accounting, you should record revenue when a cash payment has been received. For example, using the same scenario as just noted, the snow plowing service will not recognize revenue until it has received payment from its customer, even though this may be several weeks after the plowing service completes all work.
The Expense Principle of Accounting
The Expense Principle of Accounting is the same as The Revenue Principle of Accounting as it relates to expenses. The expense recognition principle states that expenses should be recognized in the same period as the revenues to which they relate. If this were not the case, expenses would likely be recognized as incurred, which might predate or follow the period in which the related amount of revenue is recognized.
The Matching Principle of Accounting
The Matching principle is the Small Business Accountancy principle that requires that the expenses incurred during a period be recorded in the same period in which the related revenues are earned. … The principle is at the core of the accrual basis of accounting and adjusting entries.
The Cost Principle of Accounting
The cost principle is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle. The cost principle requires that assets be recorded at the cash amount (or the equivalent) at the time that an asset is acquired.
It is generally the system that the cost of any period should be met in that period itself. If the costs of the past period are taken to a future period for recovery it would be a wrong step, because the future period costs will be unnecessarily overburdened with the load of the past costs and it may lead to misunderstanding.
The Objectivity Principle of Accounting
The objectivity principle is the concept that the financial statements of an organization be based on solid evidence. The intent behind this principle is to keep the management and the accounting department of an entity from producing financial statements that are slanted by their opinions and biases.
Generally accepted accounting principles (GAAP)
How is it all tied together? GAAP is a set of rules that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.
The purpose of GAAP in Small Business Accountancy to ensure that financial reporting is transparent and consistent from one organization to another.