Accounting 101: Basics Small Business Owners Must Know

basic accounting principles and tools

This is regardless of whether the customer has paid the invoice. This principle allows businesses to keep track of their accounts. It also helps prevent businesses from counting their profits before the earnings process is complete. Some business owners may find accounting confusing, especially if they were never trained in this area. In addition, their accountant may have never explained accounting principles to them in simple terms they can understand. Small business owners also need to determine whether they’ll use the cash or accrual accounting methods.

basic accounting principles and tools

Accrual accounting is used to record a transaction to implement the matching principle. Wrapping up all the previous statements, it’s hard not to admit that accounting plays a crucial role in running a business. All businesses have to come up with ways of capturing and reporting accounting data. To provide useful information and simplify decision-making, businesses will have to use consistent accounting methods, procedures and standards.

What is small business accounting?

You could outsource your bookkeeping to a freelance bookkeeper or bookkeeping service. If only bookkeeping meant hoarding the paperbacks I overbuy from my local bookstore — I’d be really good at that. Another common way to manage your expenses is by separating operating expenses from selling, general, and administrative (SG&A) expenses. It reinforces that you will share important information with stakeholders before you enter into a contract together. This gives each person a full and clear picture of your business before they make an agreement.

basic accounting principles and tools

Using artificial time periods leads to questions about when certain transactions should be recorded. For example, how should an accountant report the cost of equipment expected to last five years?


You’ll want one that provides advanced reports, such as inventory and expenses, so you can monitor your business’s financial health quickly. Although not included explicitly in Qualitative Characteristics of Useful Financial Information, objectivity may be considered a basic accounting principle. It encompasses verifiability and neutrality , in addition to independence to create useful company financial statements / financial information. Accountants record revenues in the period of time to which the revenues relate and contract obligations are performed. Software subscription revenue will relate to the month in which the software product is used. Service revenue is recorded in the time period performed or spread over 12 months if the service is continually performed as time elapses. When recording a transaction and preparing financial statements, transactions are dated and summarized by the period to which they relate.

Integrity Network members typically work full time in their industry profession and review content for as a side project. All Integrity Network members are paid members of the Red Ventures Education Integrity Network. Ask for a referral from a trusted friend or another entrepreneur. If you’re part of any business groups or networks, ask for recommendations there, too. If your budget allows, we highly recommend hiring a professional to help with your accounting. Ecommerce platforms like Shopify, BigCommerce, and WooCommerce often provide built-in payment gateways.

Financial Accounting Standards Board

While it’s important to consider depreciation in other areas of accounting, you’ll want to record exactly what you paid for something when calculating these costs. This is similar to one of the features in the monetary unit assumption of accounting principles. You won’t record a business purchase at its current value; list it with the original cost.

  • Materiality is reflected in those items which must be disclosed if they would result in a different decision by the user if not included in the financial statements.
  • Once you connect your business bank accounts and credit cards to a software, financial transactions show up in a queue and are grouped into categories.
  • However, small companies often manage distribution activities through inventory managers.
  • IFRS is used in the European Union, Australia, Canada, Japan, India, and Singapore.

Only regulated and publicly traded businesses must adhere to GAAP. However, about one third of private companies choose to comply with these standards to provide transparency. GAAP is not the international accounting standard, which is a developing challenge as businesses become more globalized.

QuickBooks Online

However, small companies often manage distribution activities through inventory managers. Also, when manufactured items are produced using a supply chain of vendors to obtain parts or materials for assembly, the tracking and accessibility of unfinished goods is another responsibility. A manager’s control system must be able to determine where a good is in the chain, how many are available, and when it can be delivered. The same function is required for the finished goods in a warehouse, so customer orders can be filled from the correct location.

What is the basic accounting principles?

The most notable principles include the revenue recognition principle, matching principle, materiality principle, and consistency principle. Completeness is ensured by the materiality principle, as all material transactions should be accounted for in the financial statements.

These basic accounting principles were created by the American Institute of Accountants following the Wall Street Crash of 1929. The goal was to ensure publicly-traded companies were following consistent accounting methods and help investors compare financial results from company to company and from year to year. There are 2 important factors to remember with monetary unit assumption. First, recordings are restricted to assets with an objective monetary value. For example, while excellent quality control might ultimately contribute to your business’s success, it can’t be recorded on a balance sheet. Also, this factor of key accounting principles doesn’t acknowledge inflation. If you purchased property or a significant piece of equipment 20 years ago, its cost is recorded as what you paid at that time.