Starting or taking over your business’ accounting system can be confusing. So, let’s start by introducing some basic accounting concepts, principles & terms.
First, it’s good to ask yourself, “Why is accounting an essential building block in my business?”
Most people assume this is true and leave it at that. But in more concrete terms, accounting is a vital segment of your business because a well-managed financial system is a critical stepping stone to building a successful business.
Basic Accounting Concepts & Principles
Why and how do you use the information a good management accounting system provides?
Minimize Financial Risk & Maximize Your Profit
A thoughtfully designed bookkeeping system, accurate summary and detailed reports, timely reviews, and immediate action are essential if you have an investment to protect or potential risks to minimize.
A lack of financial controls usually means you’ll lose money through errors, mishaps, or cost overruns (even if the loss is not immediately visible).
Thus, it’s important to have a financial system that is robust and detailed enough to provide you with warning signs in time to avert losses before they occur. Additionally, this information can help you decide where to focus your time most profitably.
Job Costing is a process where you assign job-related costs to specific projects.
You can then compare the financial details of a specific job to its estimated costs and estimated income.
The next step is to take action to ensure that you keep costs and profits in line with your estimate.
The better you become at job costing – and taking action based on your knowledge – the more profitable each job becomes. As jobs become more profitable, so does your business.
Managing Employee Costs and Markups
Each employee should make your business more money than they cost (see “Labor Burden” below).
These are just a few primary accounting principles. The more you learn about implementing and maintaining an efficient accounting system, the more you’ll be in control of your business and its success.
Basic Accounting Terms
I often find that business owners and new bookkeepers can get intimidated by the terminology.
Even though you don’t typically need to know these terms to operate efficiently in QuickBooks (or to use and understand those valuable reports), let’s take a quick look at some of the terms experienced bookkeepers and accountants use ‘in the background.’
- Double-entry Bookkeeping – Every transaction has two parts. In accounting, each transaction is the equivalent of a two-sided coin. For example, if you invoice a customer for services you’ve performed and subsequently receive a payment from them, your bank account increases, and your accounts receivable (the money you are waiting to receive) decreases. Two accounts are affected, right? (Your bank account and your Accounts Receivable account.)
- General Ledger – The main listing of accounts, and entries into those accounts, is referred to as the “general ledger.”
- Debit – In accounting, a debit does not always mean a reduction. Instead, it simply means left, as in the left side of the account ledger in a double-entry bookkeeping system.
In asset and cost accounts, a debit represents an increase.
- Credit – This term represents the right column of the account ledger.
Credit entries increase liability, equity, and income accounts.
- “Fully-loaded” Labor Burden – This means discovering how much your employees really cost per hour they work for you. After you determine that amount, you can mark up their hourly rate to an amount that guarantees you’ll earn the right profit$ for their time on jobs.
You’ll also be able to assign that (fully-loaded labor burden) cost to the jobs they work on so you can see more accurate job cost reports.
Labor burden includes a wide variety of costs, including (but not limited to):
- Employee compensation
- Payroll taxes
- Workers’ compensation insurance
- Health insurance
- Retirement benefits
- Phone, Internet, and other communication costs
- Company vehicle usage (including gas, oil, maintenance, licenses, and insurance)
- Tools and equipment usage
- Estimated annual bonuses
- Employer-paid snacks, meals, parties, entertainment
- Training fees, seminars, etc.
Continuing To Learn How To Manage Your Accounting System
Now that you know just a few (of the many) basic accounting concepts, principles, and terms, are you ready to learn how to conquer your own business accounting system?
Through BuildYourNumbers.com, my team and I teach business owners, financial managers, and bookkeepers exactly how to do this. You can learn more about this topic or check out our affordable QuickBooks desktop subscription training series. Or, if you’d like individual coaching or have any questions, please give me a call or send me an e-mail today. I am here to help…
“We were a small build-to-inventory manufacturing company struggling with an inappropriate bookkeeping software program when we decided to convert to Quickbooks. Diane Gilson did an excellent job during installation and follow-up – at a reasonable cost. Diane’s input was timely, not overwhelming, and urged us forward when we needed a push. We continue to be very pleased with the results.”