Creating great products and services, building awesome teams and winning customers are the expertise of small business owners and startup entrepreneurs. Yet, some of them fail in basic bookkeeping. As a business owner or entrepreneur, you should understand what types of accounts your bookkeeper uses to organise your finances, which will enable you to review your success (or failure) in a day.
Here are some basic types of bookkeeping accounts that you should know.
Accounts Payable
Accounts payable is the total amount of a business’ short term obligations to pay suppliers for products and services which it purchased on credit. If accounts payable are not paid within the payment terms agreed by with the supplier, payables are considered to be in default, which may cause a penalty, interest payment or revocation of additional credit from the supplier. But it’s a little less painful if you have a clear view of everything through your accounts payable account. Remember that paying bills early qualify your business for discounts.
Accounts Receivable
When you sell products and services to a customer but you don’t collect payment immediately, that’s means you have “receivables” and you must track accounts receivable. Account receivable is a documented invoice that is being issued to the customer through a billing procedure. Keep it up to date so you can send timely and accurate bills or invoices.
Cash
All your business transactions should pass through the cash account. Bookkeepers often use two journals for this account: cash receipt and cash disbursement. Cash receipt is the record when the cash payment has been given out for the sale of a product. Meanwhile, cash disbursement is a payment of money to settle an account such as an expense, interest payments for loans and account receivable.
Inventory
This is a company’s sales of products and its production or purchase of the products. Some companies try to find the proper amount of inventory to avoid lost sales, disruptions in products, high holding costs, etc.
Loans Payable
This account tracks what you owe and what’s due. If you borrowed money to buy items for your business, this is for you. A loan payable charges interest, which is usually based on the earlier receipt of a certain sum of money from a lender.
Payroll Expenses
For many businesses, this is the biggest cost. Payroll is your investment for the people who are working for your business. Keep this account up to date for you to meet tax and other government reporting requirements.
Purchases
This is the track record for any purchases you make for your business (raw materials, finished goods, etc). It’s a key component for calculating the “cost of goods sold” (COGS), which is subtracted from your sales to find your gross profit.
Owner’s Equity
Owners’ equity is the total assets of your business, minus its liabilities. The owners’ equity account tracks the amount every owner puts into the business.
Retained Earnings
This account tracks any of your profits that are reinvested in your business and are not paid out to owners. Retained earnings are the running total of money retained since your business started. This account is specifically important to investors and lenders who are monitoring your business’ performance over time.
Sales
This account is where you track all incoming revenue from what you sell. You should record your sales timely and accurately to know where your business stands.
Let a bookkeeper do the job for you. Consider hiring one of the best bookkeeping services today.