Start Business Structure

Start Business Structure

This is the continuation of a page about accounting. Click here to link to the first part one of Start Business Structure.

Let’s review a couple of points. You need to know something about accounting. Don’t be afraid of learning accounting, just remember the all-important equation, what a profit and loss statement is and the importance of a balance sheet for Start Business Structure.

Assets = Liabilities + Owners Equity Click here for prior page

Profit and Loss Statement Click here for prior page

Balance Sheet Click here for prior page

Now let’s discuss the four remaining questions about start business structure.

Start Business Structure: Cash vs. Accrual Accounting

One of the first accounting questions you will have to decide when you set up your business is should you be on a CASH Basis or an Accrual Basis? Most small businesses start out on a cash basis because it’s easy.

If you choose to use an Accrual Basis you “book” sales and expenses as they happen, not when either receive or make a payment. For example your bills are put on your financial statement when you receive them, regardless of when you plan to pay them. Using an accrual basis for you accounting is MUCH more accurate.

When you use a cash basis, your business is run like your checking account. When you deposit money that’s when you “book the sale” and when you write a check that’s when you “book an expense”. It’s easy but not necessarily completely accurate. If you don’t have much money you’re going to tend to wait to pay your bills. From an accounting standpoint, you’re going to look like you’re not losing very much money, but you actually are losing money. So, if you’re worried about doing a good job tracking profit and loss you may want to use the accrual method for your business.

On the other hand, if you are running a business where you are paid for sales right away and you tend to pay your bills as they come in, a cash basis will probably work just fine for your business.

Many businesses start on a cash basis to begin and then switch to an accrual basis as they grow and their financial matters become more complicated. This is fine. Just be sure that you change at the end of your fiscal year (usually 12/31) because you can’t change methods in the middle of your accounting year. The IRS will not allow you to do this.

Start Business Structure: Chart of Accounts

Once you determine whether to use a Cash or Accrual basis, you can select your chart of accounts. A chart of accounts is not as difficult as it sounds. It’s simply which accounts are you going to use to run your business from the standard account equation:

Assets = Liabilities + Owners Equity

Examples of Asset accounts are: Bank Accounts (Cash), Inventory, Investments, Plant & Equipment. Assets are broken down between Current (Liquid can be used now) or Long Term (Fixed assets like building and expensive equipment).

Examples of Liabilities are: Credit card charges, Utility bills, and Long Term Payables like Loans Outstanding

Examples of Owners Equity include: Sales from Store, Sales on consignment, sales on the internet, Cost-Of-Goods-Sold. Owners’ equity also includes expense accounts for payroll, taxes, raw materials etc.

Don’t spend a lot of time picking your chart of accounts and keep it very simple to begin with. You can add new entries to your chart of accounts as you need them. They don’t have to be there day one.

Start Business Structure: Double Sided Entry

Now that you have your chart of accounts you’re ready to start making DOUBLE-SIDED entries. Double-sided entries have to balance to zero using the standard accounting equation. For example let’s say you want to pay your credit card bill of $250 and you’re on a cash basis:

You subtract $250 from Cash (debit Cash)

You add to an Expense Misc Office Supplies for $250 (credit Misc. Supplies)

Using our account equation:

$250 is subtracted from an asset and $250 is added to expense so that the net effect to our equation is zero. That’s how all accounting transactions work and why they are called double sided entries. When you think about adding an accounting transaction think about what parts of the account equation it effects and make sure the net effect is zero. Another way of putting it is to make sure your Credits = Debits.

Start Business Structure: Using QuickBooks

Once you understand these terms I highly recommend you do your own accounting using QuickBooks. It should be fairly straight forward and you won’t lose track of your finances. Generally if you outsource your accounting they make it overly complicated and you lose the ability to truly understand what is really happening with the finances of your business. This isn’t good.

Also, outside accountants don’t really value or understand your business, so they won’t help you come up with ideas for improving your profits or reducing your costs. If you’re the one entering the transactions you’ll naturally spend time thinking about how to increase your revenues and lower your expenses. Those are very valuable assessments and important to making your business as successful as it can be.

Start Business Structure: Conclusion

Once you understand the basics of accounting you should be ready to set up the accounting system for your business. You will also be able to compare what you thought would happen with sales and expenses (from your business plan) to what is actually happening. This will allow you to adjust accordingly. Good Luck!!