> Usually small businesses are terrible at accounting and finance, but even they typically have some idea where their bank accounts are and what is in them
I want to know how to not be terrible at accounting and finance.
This was on an article about FTX's "creative" accounting practices.
Obviously, I have no intention of being creative with the accounting for my future business, so I need to know about accounting. But what do I actually need to know?
Here's what I know this far, thanks to learning about GnuCash and scattering to use it for my family's finances and budget:
* The static accounting equation. [Assets - Liabilities = Equity]
* The dynamic accounting equation. [Assets - Liabilities = Equity + (Income - Expenses)]
* The account types. (The ones in the dynamic account equation.)
* What each account type is used for.
* Credits vs. Debits. (And I use those terms in GnuCash as well.)
* Which account types are decreased or increased with credits and debits. (Well, I use the chart in [2] as a shortcut.)
* The fact that every transaction must have at least one debit and one credit. (That's called "double-entry," correct?)
* The fact that the sum of all credit minus the sum of all debits in one transaction must equal 0.
* The fact that income accounts are for recording the gain of money from outside. (Bad definition, but that's what makes sense to me.)
* The fact that expense accounts are for the recording the loss of money to the outside. (Again, bad definition.)
* That liabilities are unfunded obligations.
* That assets are either money, physical goods, or the promise of payment from someone else, etc.
* That equity is basically the catch-all of everything else I own. (I used it for the opening balances when I started. And yes, that's the worst definition of all.)
* That the movement of money should be tracked in detail. For example, if I pay for something with a credit card, I shouldn't just record the money leaving my bank account; I should have an account for the credit card and record it there, and only when I pay the credit card bill should I record money leaving my bank account.
What else do I need to know? What else would be good to know?
Currently, I'm putting these principles in practice with my family finances, including budgeting, but what other skills should I learn?
Note that I'm not asking about taxes or other country- or location-specific things. This is only about universal accounting, at a level needed for a typical non-fintech small business.
[1]: https://news.ycombinator.com/item?id=33657492
[2]: https://www.gnucash.org/docs/v4/C/gnucash-guide/basics-accounting1.html
A few tips,
Know the difference between your balance sheet and a P & L statement.
understand what a trial balance is
Don’t have 300 pages of expense accounts, you should be able to produce a financial snapshot at any of time of 1-2 pages
Quickbooks generally will do everything you need, the invoicing system is nice and can be integrated easily for credit card payments and recurring billing
Banks generally won’t count items older than 60-90 days on your A/R as an asset
- The main thing when you are small to focus on is accurate high quality bookkeeping, rather than broader accounting. Almost all of the points you listed above are generally considered bookkeeping concerns (which ledgers to use, debits, credits, etc). So in terms of material to read and learn, bookkeeping is your starting point.
- Most small business accounting software will take care of more than half of the points above automatically - Xero, Quickbooks etc, just pick one and use it - but it is always useful to somewhat understand the underlying principles.
- The only accounting principles you really need to know are having a decent understanding of the balance sheet, P&L and cash flow statement - which are all interlinked. It is wise to be be able to understand each line item on them and to know how changing a figure in one would change figures in the other two and be able to do that even with just pen and paper. This is just useful as a business owner, and is quite a large topic which requires some study and practice.
- Actual statutory accounting I would entirely leave to a 3rd party as it's mostly just for tax and GAAP filing purposes. From day one I just hired a small external accountant and at year end gave them access to our books and let them prepare our filed accounts, I also paid them to file the quarterly tax returns even though our accounting software prepared the statements. That was a good choice as after we'd grown eventually I ended up having the accounts audited by PWC and it meant I could just point them at our accountant and leave them to it. It also means you won't make any silly filing mistakes.
- Set calendar reminders and do your bookkeeping, payroll etc every single month like clockwork, for years I just did it on the 28th of every month, and only later once we were large enough to hire an actual bookkeeper did we start doing it weekly.
- Lastly, once you're under way the things to keep your eye on as a small business is: your cash flow, your working capital requirement (keep it as low as you reasonably can) and your debtor and creditor days (which is part of your working capital requirement). Those are the things most likely to cause you issues.
Also, don't worry too much about it, it's a learning curve - as long as you improve your skills and tools in line with revenue it will be fine.