3 Accounting Concepts All Business Owners Should Understand

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A successful entrepreneur should be well-rounded. You need to know the essentials of running a business if you want to succeed. Though you don’t need to be a Certified Public Accountant (CPA), learning accounting concepts is necessary. As you run your business, you need to get the gist of how these things work.

Here are three accounting concepts you need to know:

1. What Are Accounts Payable?

When running a business, you need to invest in people, resources, and facilities. Whether it is for paying utilities or salaries, the company needs to keep track of these expenses. In large companies, these departments are separate. But for some, it is in one department.

The Role of Accounts Payable

Accounts payable plays a significant role in every business. From paying incoming invoices to bills, it fulfills three essential functions. These are vendor payments, internal payments, and business travel expenses.

This section maintains internal revenue service, payment terms, and vendor payment information. It can be possible with manual intervention or through software. This department also handles purchases before and after the transaction. It also handles monthly reports of the amount that the company currently owes.

This section administers internal payments, whether it is for petty cash or sales tax exemption. These also include expenses for postages, office supplies, or lunch meeting expenses. Employees should put all the necessary details in case of a reimbursement request. Doing this is needed to have a black and white record.

  • Business Travels
    Some businesses need their staff to travel several times a year. Doing this needs plane tickets, hotel, car rental, and restaurant reservations. Whether they need to attend a convention or meet a client, this section can help arrange these expenses.  

After the trip, the department will check and compare the funds spent. If it needs some reimbursement, proper receipts and detailed reports are necessary.

2. What Are Accounts Receivable?

Accounts receivable is the amount of money the business yet to receive. It can be for products or services sold but not yet paid. 

A company’s balance sheet includes account receivables. Businesses see these as current assets or outstanding balances from debtors.

As such, you and your client should have an explicit agreement about the due dates of incoming payments. This represents the extended line of credit between a company and its client.

An outstanding balance becomes a long-term asset on the sheet if it takes a debtor more than a year to pay for it. The same goes for the encashment of checks. The accrual basis of accounting states that these debts will be offset by allowance. This is because of the possibility that the company will no longer get the money back.

3. What is Cash Flow?

Cash flow is the amount of cash or cash assets running in and out from a business’ coffers. It is the movement of money within the company. Cash received is the income, while cash spent is the expenses. 

A cash flow statement is a report or financial statement about the company’s usage or sources of cash. Cash flow falls into three categories: investment, operations, and finance.

Types of Cash Flow

Below are the inclusions under the different types of cash flow:

Operating Activities

  • Sale and production costs
  • Building inventory
  • Raw materials purchasing
  • Vendor payments
  • Advertising
  • Interest on paid or received cash
  • Income from sales
  • Income from taxes
  • Income from deferred tax
  • Amortization and depreciation

Investing Activities

  • Equipment and properties
  • Purchase of bonds and stocks
  • Money loans
  • Cost for merger and acquisitions costs

Financing Activities

  • Repurchasing stocks
  • Outgoing stocks in dividends
  • Incoming cash from the issuing debts like bonds
  • Investors and shareholders

Why Should You Learn These Concepts?

As an entrepreneur, you need to learn these concepts. It is the only way you’ll understand how things work. Through this, you can track your income, revenue, and losses. This information will guide and help you keep your business on the right track. 

It is also a great help for business owners to make essential decisions in the business. For example, you should not buy an asset or take more loans if you don’t have enough capacity to pay. Also, if an employee makes some anomalies, you can see it before it becomes worse.

Conclusion

Every business owner needs to learn accounting concepts to be more effective. You don’t have to become an expert in accounting or financing. You only need to learn the basics, so you will know the ins and outs of how money runs in your operations.

An organized and well-maintained accounting process allows for easier business transactions. Also, it paves the way to a better relationship with your partners and investors. The same thing goes for your relationship with employees and vendors.

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Danielle England

DomainPBN Founder, SEO Consultant, Learner and online 24 hours since 1990