July 7, 2022
There are many different types of accounting, each with their own set of uses and benefits. In order to understand the ins and outs of your own finances, it’s important to know what types of accounting are used in your company or industry. Here’s a brief introduction to five of the most common types of accounting and how they work.
Bookkeeping involves recording financial transactions in a business ledger. This may seem straightforward, but it’s an essential part of running a business. These records that record money coming in and going out are needed to show auditors or tax officials how much revenue your company generated and where that money was spent. It's important for companies to keep track of income, expenses, assets, liabilities, taxes paid, and any other expenses related to running a business. Failure to do so can lead to severe penalties from governments or even legal troubles from customers over unpaid bills! From a personal perspective, bookkeeping allows you to analyze how well your business is doing—or what needs improvement. After all, there’s no point in improving if you don't know which areas need work!
Payroll accounting is a two-edged sword. The key to saving time (and possibly money) is to automate as much as possible. Make sure you have a good timekeeping system in place, invest in software that takes care of payroll taxes for you, track your hours, and—most importantly—make it easy for your employees to get their timesheets approved on a regular basis. If it’s not an easy process for them, they’ll just leave them unchecked. That’s how you get hit with surprise tax bills from payroll errors—and wasted hours from overtime left unpaid.
Businesses use invoicing to keep track of payments owed to them. Billing typically happens before invoicing, as businesses use it to inform clients when they’ll be invoiced and for what amount. Collections is part of accounting that keeps track of accounts that are due for payment but haven’t yet been paid. Without collections, it can be hard to even know which invoices or bills need to be sent out because you have no idea who hasn’t paid already.
When you’re a small business owner, you’re also your own bookkeeper, or at least have someone on staff who fills that role. One day a year, though—usually in early April—tax season rolls around and you need to turn over all your financial data to an accountant. If you do your own tax prep (and most small businesses do), it’s important to make sure that everything is ready to go by March 31. That way, once tax day arrives you can hand off everything as-is and get back to running your business sooner rather than later. Tax preparation is often one of those dreaded but necessary parts of being self-employed—but it doesn't have to be so bad!
Hiring a professional, such as an accountant or certified public accountant (CPA), is usually recommended for business owners. Doing so can help ensure you’re in compliance with tax laws while also potentially saving you money on taxes. In fact, it’s possible to hire a professional to prepare your taxes in just one or two meetings per year—though an annual meeting with your accountant may make sense if you don’t have much experience with accounting or reporting requirements.
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