by Scott Whitaker
When you're starting out your small business, it can be hard to make sense of the accounting side of things, specifically how to code transactions and how it all works. Even when you're a veteran, you might rely on someone else to do this for you.
But understanding a few basic accounting principles is absolute key, to keep the finger on the pulse of your financials and understand how your decisions might impact them.
Here are a few basic principles that will help you keep your financials in order and get better insights into your business.
What is a chart of accounts and how do I make it work for me?
A chart of accounts is a simple way for your business to categorise every transaction (money) that comes in and goes out of your business. In Saasu you have a built in chart of accounts made up of accounts that act as categories for all of your transactions (you can create more when needed).
These accounts track everything, but we can see them in five main buckets – Assets, Liabilities, Equity, Income, Expenses and Cost of Sales.
Here's an outline of each:
Assets: Everything your business owns that has a measurable value. This could be office furniture; cars, inventory or invoices that people still owe you money on (Accounts Receivable).
Liabilities: Everything your business owes a measurable amount of money on. This could be a bank loan or purchase invoices that you still owe money on (Accounts Payable).
Equity: This is money that the business owes to its owners, such as money you put into the business, shareholder money and money left over after paying all the bills (earnings).
Income: This is money that has been earned through Sales (also can include interest from bank accounts and other sources).
Expenses: This is money that has been spent in the day to day running of your business, such as paying the electricity bill, gas for the car, rent etc.
Cost of Sales: This is used to capture the cost of buying in inventory to sell, so it helps calculate your profit. For example, if I purchase an item for $5 and sell it in my store for $8, my cost of sales is $5.
In accounting, we use the accounts to categorise every transaction. This helps us, as business owners, to understand where money is being spent and earned so we can make better decisions on how to manage our business.
Here's an example to explain:
You make a service sale for $50 + GST ($55 in total) and you want to enter this in Saasu.
– Click on Sales > Add
– On the Edit Sale page enter the relevant information, select the Income: Sales account and the G1 tax code
When you save this, Saasu will do the following to your accounts to categorise the information:
Asset: Accounts Receivable – Debit $55 (waiting for payment)
Income: Sales – Credit $50 (to show income earned)
Liability: Tax Collected on Sales – Credit $5 (to show money owed in tax)
How does this help me run my business?
- Understand where your business is
Your chart of accounts will help you understand many things about your business. The first is what you own, what you owe and how much money has been made for the owners (shareholders of the company) – this is called your Assets, Liabilities and Equity in your chart of accounts. It is best represented by your Balance Sheet report (Reports > Balance Sheet). This will show you all the Assets that the business owns, minus all the Liabilities the business owes, to leave you an amount of Equity, which is money owed to the owners of the business.
Expert tip: Create a ratio to measure changes in your business – Equity: Liabilities is a useful one. This will tell you how much your business is financed by debt to others, such as the bank. The more this becomes the more you will have to keep up with repayments and interest payments on debt which can hurt small businesses.
- Understand how profitable your business is
The Profit and Loss reports in Saasu (Reports > Profit and Loss Summary/Detail) will help you understand how every transaction marked to an Income account, minus every expense and cost of sales (goods), equals the profit of your company. This report helps you identify where you're spending too much money and reduce this in order to reduce your expenses and increase your profit.
Expert tip: Go searching for information; use the Profit and Loss detail report to understand where your money is being spent and how much of a return is being made. As your cost of sales and expenses increase so should your income otherwise you will soon be unprofitable. Run reports over different periods; if your expenses and cost of sales are increasing but your income is not, there may be some inefficiency in your business or you may need to raise your prices.
- Search for issues
Sometimes your accounts are just off balance to what you expect them to be and in Saasu we have a good report to find any issues. The General Ledger Detail report (Reports > General Ledger Detail) allows you to run a report for all accounts or just focusing on one over a certain time period to see all the transactions marked against that account. This can be very useful in chasing down errors or identifying discrepancies.
Just a quick note to say that Scott’s post is not to be taken as financial advice. They’re simply insights drawn from his experience as an Associate CPA. If you need financial advice for your business, please contact a professional.