I know, I know, accounting is not in the least sexy or exciting or creative, but it is necessary if you own a business.  You know, one of those necessary evils, but it doesn't have to be evil, or even difficult.  All you need is a few basic tools and a good accountant/bookkeeper that knows how to explain things in terms you can understand.  Ok, so maybe that's the hard part, finding someone like that.  The key, I think, is to be open to learning about it, don't automatically assume that you won't ever understand it or that you can't get the concepts, if you believe that, it will be true.

I want to share with you one of the biggest mistakes I see in small business accounting - recording assets and liabilities properly.  Ok, I may have just lost you there, but I promise I will help you understand if you just stick with me for a few minutes.  Assets are the economic resources owned by an entity; entailing probable future benefits to the entity.  In other words, they are things like computers, equipment, vehicles, buildings, etc that are necessary to run your business and help you make money.  Liabilities are amounts owed by an entity to others.  These are usually loans, mortgages, credit cards, notes, etc., money you received to help you pay for assets or operating expenses, that you have to pay back.

These two elements of accounting are critical to a company's financial statements.  These are the items on the balance sheet.  They are based on the simple accounting equation, which is Assets=Liabilities + Owners Equity.  I know this may not sound simple to some people, but if you own a business, it is really important for you to understand because these numbers can tell you a lot about the financial condition of your business.

Most small business owners do not understand the importance of a balance sheet or how to record these items.  They only seem to care about profits and losses.  This is a mistake, because it does not give you a true financial picture.  If you own a business, take the time to learn business and financial terms, to understand the numbers on your financial statements and what they mean, to look at your cash flow and to know how different things that happen with your business will affect you.  If you judge the success of your business only by the bank balance, you will probably not be in business very long.

The mistakes in recording these items in your books can be costly.  For instance, if you make a payment on one of your loans, say for a vehicle, and you code it to an expense account, you are overstating your expenses.  This entry should go to the liability, which is a balance sheet account, it should not reduce your profits.  If you didn't set up your assets and liabilities, you are probably coding everything to expense accounts and your books will not be correct.  If you give those reports to your CPA to prepare your taxes, it will result in your tax return not being correct, because you will end up claiming too many deductions and not paying enough taxes.

The bottom line is, if you don't know how to set up your books or record things properly, I encourage you to get some help.  I can usually look at a QuickBooks file and tell you fairly quickly which things are not coded correctly, any accountant, bookkeeper or QuickBooks consultant should be able to do that for you.  If I can be of assistance, please contact me.  You can also go to Intuit.com and search for a qualified ProAdvisor to help you in your area.  Whether you are just starting out, or have been in business for awhile, don't let this important part of your business go another day without being correct.  You will be glad you took care of this when you can get an accurate picture of the financial condition of your business and know that your records are correct.

If I can help you, contact me at Teresa@Winning-Edge.net.  I welcome your comments and feedback, just go to the Leave a Comment section below, fill in your information and click on Submit Comment.  If you find this blog useful, I would love for you to subscribe so that you will be the first to know when new entries are posted.  If you have a suggestion for a topic you have questions on, please e-mail it to me at the address above.