Accounting, it’s all about the numbers. That’s what most think, but accounting is really a story. Your financial data (even though it is expressed in numbers rather than words) tells a story of where your business has been, where your business is currently, and where you can go in the future. Accounting is one of the functional pillars of your business; it’s important to get it right … the first time.
Understanding Your Business and Industry: An understanding of your business and industry is imperative to answering several key questions when designing your accounting system:
“What basis of accounting should I use?”
“What information do I need to track to make informed business decisions?”
“How should I track the information?”
Selecting Your Basis of Accounting: Selecting my WHAT? The basis of accounting is the framework used to record your business transactions. There are several different frameworks. The most common include:
- U.S. GAAP (United States Generally Accepted Accounting Principles) – an accrual based accounting framework in which revenues and expenses are recorded when earned and incurred, respectively. (Recommended)
- Income Tax Basis – a framework in which recording of revenue and expenses depends on the tax regulations; eliminates the need for converting from one basis of accounting for recordkeeping to another for tax return purposes.
- Cash Basis – a framework in which revenues and expenses are recorded when cash is received or paid, respectively. There are two different methods of cash basis accounting: pure and modified. The main difference is under the modified cash basis some transactions follow U.S. GAAP (ex. fixed assets are capitalized and depreciation is recognized). Here’s more on cash versus accrual accounting methods.
- Regulatory – a framework in which a regulatory agency prescribes the method.
Determining What Information to Track: The key is to capture all of the transactions that occur in your business (cash and noncash) in the simplest and most efficient manner.
Speaking of noncash transactions –a common mistake in accounting is not accounting for your trade work. Look for an upcoming blog related to accounting for bartering transactions (trade).
Based on your business or industry, you may need to consider tracking your business transactions in more depth. Below are several considerations (not all inclusive but should give you an idea):
“Should I be tracking direct and indirect costs related to manufacturing or construction contracts so I am able to view the profitability?”
“Do I have different departments, product lines, divisions, programs, etc. that I should be tracking so I am able to view the profitability?”
“Do I pay commissions and should I be tracking transactions, such as revenues, by each sales representative to determine the proper calculation for those commissions?”
“Do I work in several states and should I be tracking transactions, such as revenue and payroll, by state for tax return preparation?”
“What sales tax jurisdiction do I need to track for sales tax reporting?
“Do I need to track certain items such as meals, donations, etc. for tax return preparation?”
Once you figure out what information you need to track, you can select an accounting software solution and design your accounting system.
So what’s next? Check out our upcoming blog about the basics on how to track your financial information.