Understanding the accounting basics within any business is very important. The reports compiled will help you to make decisions about how you need to change or improve your small business. While you can rely on other people doing the work for you, it is worthwhile taking time to understand the basics of the reports and try and get the correct accounting information you require.
Why are the basics of accounting so essential?
Keeping up-to-date with the business accounting basics may sound a bore, but it is vital to stay on track of the financial position of your small business. There is a basic accounting equation which is the basis of all accounts.
Completing everyday transactions is part of bookkeeping basics. Bookkeeping basics covers credit control, sales invoicing, reconciling bank accounts, writing cheques, posting receipts, producing profit and loss accounts, and maintaining the balance sheet. Every small business needs to complete its bookkeeping basics regularly so that the accurate accounting reports can be produced.
Types of accounting records
There are two types of accounts which make up accounting basics – financial and management accounts.
Company Financial Accounts basics
Every limited liability company needs to produce a set of accounts at the end of the company’s financial year. These consist of a profit and loss account, balance sheet, trial balance, and cash-flow statement.
Every company in the UK has to submit these accounts to Companies House, as specified in the Companies Act. These accounts become publicly accessible records and can be accessed by anyone for a small fee.
These Financial Accounts will need to be completed by Accountants with a report from the Directors and the Accountant. Small companies can produce abbreviated accounts. Check with your Accountant as to the reports which you need to submit for your small business.
Your financial accounts will enable investors to look at the performance of your company. The bank may also require a copy to help secure overdrafts or small business loans.
The basics of self-employed financial accounts
If you are self-employed, you will still need to produce accounting records once per year, although these need not be as comprehensive as company accounts. You will use this information to complete your self-assessment tax return.
If you are self-employed, it is worthwhile setting your financial year-end to the 31st March, in line with the nominal tax year. It makes it much easier when completing your tax return and can save money if you are using an external accountant or bookkeeper to maintain your accounts.
Management Accounts basics
Do you know from your accounting reports how much money your small business will have in the bank in six months? You should have a rough idea. If not, how can you budget for staff, premises and other outgoings?
The tools that give you this information are management accounts.
Management accounts are reports which help you make decisions in running your business. Cash-flow statements and forecasts, stock reports, fixed asset registers, purchasing processes – these are all tools that help you keep your finger on the pulse of your business.
Every business is different and requires different reports, depending on the size and type of company. Some companies produce these accounts monthly; others will present some of these reports on a weekly – or even a daily basis.
Accounting Basics Courses
If you want to learn more about the basics of accounting, it may be worth looking into an accounting course; these can either be completed at home in your spare time or a part-time college course. You can learn anything from the basics to becoming a fully qualified accountant. All the accounting bodies run courses, which generally start in September. The Open University also runs a Certificate in Accounting, which is a one year course.
If you are looking into a course because you work in accounting and want to learn more, it may be worth asking your employer if they would fund the course.
Accounting Regulating Bodies
If you are looking for an accountant to complete your accounts regularly or year-end figures, it is worth checking the qualifications of the accountant you use. All accountants should belong to one of the main regulatory bodies. For further information, look at accounting regulatory bodies.
Accounting software and free accounting software
While it is not a requirement to use a software package to handle your business accounts, modern software packages streamline the whole accounting system – producing management accounts at a touch of a button and significantly reducing the amount of time spent on bookkeeping.
There are lots of different packages available to help your small business, from free software you can download from the internet to major financial systems costing millions of pounds.
Look at our accounting software review section for more information on the most popular accounting packages available, including the free software downloads.
The most popular software packages include XERO and Quickbooks.
When setting up your accounts software, it is essential to ensure you have a chart of accounts that works for your business. It sets up all the Nominal codes and is the basis of reporting.
Accounting Basics – History
We have produced a short introduction into the accounting history, explaining how it all started and who first invented the double-entry system.
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