Want to turn a passion into a money-making venture? Industry expert ready to turn contacts and knowhow into a brand? Over doing all the heavy lifting as a boss reaps the rewards? Congratulations, these are the mindsets of a business owner in the making.
Before jumping off into a new business, however, it’s important to get another mindset down, and that is the concept of accounting. Having an idea and talent for a San Diego business is fantastic, but without accounting knowledge, business owners can find themselves with mounds of financial paperwork and no working knowledge on what to do with it all.
Where to start? Become up close and personal with these 10 terms every accountant and bookkeeper use daily:
1. Accounting Period
A specified time period in which financial information is collected within a business. While an accounting service or bookkeeping service may occasionally use a fiscal year, such as the first of October through the last of September, most for-profit businesses prefer a calendar year as their accounting period.
This is anything and everything a company owns, including everything from an office chair or clothing rack to intellectual and trademark property.
3. Revenue & Net Income
Revenue is all the cash a company makes over an allotted period (weekly, monthly, quarterly, or yearly.) A bookkeeping service or accounting service then takes the business’s expenses for that same allotted period and deducts them from the revenue to determine a net income.
What the business must pay for long-term and short-term in areas such as outsourced services, rental space, employee salaries, taxes, utilities, and so forth.
The dollar amount a business is worth in total based on its assets minus liabilities.
6. Accounts payable (AP)
Outgoing money from a business, which includes purchases, labor, inventory, rent, utilities, and so forth.
7. Accounts receivable (AR)
Incoming money to a business, which includes membership dues, fees, payments, purchases, and any other money the company receives from others.
Capital is different than fluid funds. It refers to cash that’s invested into the business, such as startup funding, stock investments, or large item investments that add value to a business.
While some business assets can appreciate in value over time, such as might be the case in commercial real estate purchases, most of a company’s working assets depreciate in value over time. An example would be a top notch computer system bought for $3,000 dollars four years ago. Today, as new technology has emerged, the $3,000 computer is worth pennies on the dollar. It’s therefore not as valuable to the business as it once was – straight line depreciation. However, depreciation can take an alternative route called accelerated depreciation. This is more like a car purchase in that it takes a huge chunk off value at onset but declines less over the long run.
10. 80/20 Rule / Pareto Rule
An accountant or bookkeeper uses this rule in figuring work to value in a business model. It states 80% of results derive from just 20% of the work done. It’s useful to business owners to see that time should be spent on that 20% that’s bringing the highest value, whether that be the top 20% of a company’s San Diego consumer base or the top 20% of their manufacturing efforts.
In closing, it can be daunting, perplexing, and highly time consuming to handle a business’s financials. This remains true whether a new small business owner needs to be more focused on getting business operations off the ground or they’ve established themselves and are focused on growing a thriving brand. Using a professional bookkeeping service or accounting service enables business owners to focus on running their business at all stages verses being tied down micromanaging the books.