Accounting is the initial step to a successful business operation, but it can be difficult to learn if you’re just starting. Luckily, there are some basic concepts that every new entrepreneur needs to know to keep track of finances. These concepts will help you understand how your company grows over time and what changes you might need to make going forward!
This blog will walk you through some of the most important things you need to know about ecommerce bookkeeping. Discover these accounting principles and how to utilize them in your new online business!
1. Accounting Method
Cash and accrual accounting are the two accounting methods small business owners should get a good grasp of.
Cash basis accounting is relatively straightforward—you make a financial record only when cash changes hands. For example, if you sell a product online, you would record the transaction of the sale when the customer pays you.
Accrual accounting is a little more complex: you record a transaction when it occurs, regardless of when cash changes hands. So, if you sell a product online, you would record the sale as soon as the product is shipped to the customer.
Both methods have advantages and disadvantages, so choosing the one that makes the most sense for your small business is important.
Bottom line: Understand different accounting methods and stick to one.
2. Conservation
The conservatism concept is one of the important basic accounting principles small business owners should be aware of. Essentially, it refers to the concept that negative cash flow should be recognized as soon as possible, even if the possible outcome is uncertain. In contrast, you record net realizable value transactions.
Small business owners should know this accounting principle for these reasons:
- It provides guidance on when to incur expenses and become a better budgeter.
- It can avoid financial difficulties by ensuring your latest accounting books are correct.
- It can give small business owners greater peace of mind knowing that they are taking the necessary precautions to safeguard their finances.
Bottom line: Realize expenses sooner than income.
3. Materiality
For small business owners, tracking each financial transaction is vital to the success of their enterprise. Operating a business requires constant vigilance in tracking both income and expenses. This financial record must be 100% accurate to allocate resources wisely.
Small business accounting is often subject to audits by government agencies and lending institutions, such as ecommerce sales tax reporting. In these cases, having a complete and error-free set of financial reports can mean the difference between a successful outcome and a costly one.
Furthermore, materiality refers to the significance of a given transaction. For example, a small purchase may not seem important at the time, but if it represents a trend of overspending, it could have significant implications. As such, small business owners should err on the side of caution when deciding which transactions to record on their accounting books.
Bottom line: Track every transaction, whether big or small.
4. Accounting Equation
What is the basic accounting equation? This equation is the foundation of all financial accounting and states that Assets = Liabilities + Equity. In other words, everything your business owns (assets) is equal to what your business owes to others (liabilities) plus capital (equity).
The accounting equation is important because it ensures that your books are always balanced. This is because the transaction affects both sides of the equation equally.
For example, if you buy a new piece of equipment for $1,000, this will increase your assets by $1,000 and your equity by $1,000 (since you are using cash from shareholders to finance the purchase). Similarly, debiting sales returns and allowances accounts worth $100 will decrease your assets by $100 and your equity by $100.
As you can see, the accounting equation is a vital tool for online business owners who want to keep their financial affairs in order.
Bottom line: Assets = Liabilities + Equity.
5. Accounting Period
Different accounting periods can apply to your business. You can choose whether to use monthly, quarterly, or annual reporting.
Monthly accounting periods are vital to small business accounting with many daily transactions. This way, you can see your business under a microscope. Monthly accounting periods can also be quite expensive, as you’ll need to hire an accountant to handle all the extra work.
Quarterly accounting periods are a good compromise between monthly and annual periods. You’ll still get a good overview of your finances, but you won’t have to pay for an accountant every month. Quarterly accounting periods are also less likely to produce large swings in your financial position, which can be helpful for businesses just starting out.
If your business is seasonal or, perhaps, doesn’t have a lot of transactions, you can choose to report and analyze yearly. You won’t need to hire an accountant as often, and you’ll only need to produce financial statements once per year.
However, annual accounting periods can make it difficult to track your progress over time, so they’re not suitable for all businesses.
6. Going Concern
Whether you’re ust starting out with your online business or you’ve been in operation for a while, it’s important to always think about the future. That’s where the accounting term “going concern” comes in.
This accounting concept says that businesses should continue to operate indefinitely, as long as they are able to generate enough income to cover their expenses. For online business owners, this can be a tricky balance to strike.
On the one hand, you want to reinvest some of your net profit into the business to help it grow. But at the same time, you need to make sure you’re not overspending and putting yourself at risk of financial troubles. Understanding asset financing and liquidation will give you an edge, so your new business keeps growing.
Bottom line: Always think your business will thrive.
Final Thoughts
Congratulations on your new business! As you get settled into this new and exciting chapter in your life, it’s important to take some time to implement the accounting basics every new business owner should learn.
We’ve outlined the most basic accounting principles for you here, but be sure to explore our other blogs for tips on how to implement these principles for the success of your new venture. Good luck, and may your business succeed!
