Accounting Basics for Entrepreneurs

Point of Sale (POS)

  • Place where customers pay for products/services.
  • Examples: cash registers, credit card machines, website checkout pages.
  • Popular electronic systems: Shopify, Square, PayPal.
  • Invoices: itemized records for payment, common for freelancers.
  • Processing fees (2-4%) apply to credit card transactions; factor into pricing.

Business Bank Account

  • Separate from personal account for clear financial tracking.
  • Required information:
    • Tax identification number.
    • Official company name.
    • Proof of business entity (LLC, corporation, etc.).

Financial Reports

Income Statement (Profit and Loss Statement)

  • Tracks revenue and expenses over a period (month, year).
  • Net Income = Total Revenue - Cost of Goods Sold - Expenses.

Balance Sheet

  • Snapshot of financial health at a specific point in time.
  • Three sections:
    • Assets: what the business owns (cash, property, equipment).
    • Current Assets: Easily converted to cash within a year (cash, inventory).
    • Fixed Assets: Long-term use, not easily converted to cash (land, buildings).
    • Liabilities: debts and obligations (loans, mortgages).
    • Current Liabilities: Debts due within one year.
    • Long-Term Liabilities: Debts not due within one year.
    • Equity: what would be returned to shareholders after assets are liquidated and debts paid.
  • Basic Equation: Assets=Equity+LiabilitiesAssets = Equity + Liabilities

Cash Flow Statement

  • Tracks movement of money in/out of the business over a period.
  • Three sections (OIF):
    • Operations: cash from running the business (revenue, expenses, taxes).
    • Investment: cash from buying/selling property, plant, and equipment (PP&E).
    • Financial: cash from loans or dividends.
  • Net Cash Flow: Sum of operations, investment, and financial cash flows.

Accounting Software

  • Efficient for generating reports and invoices.
  • Examples: QuickBooks, FreshBooks, Xero.
  • Consider integration with POS systems.

Key Partners

  • Bookkeepers: handle data entry.
  • Accountants: manage projects and taxes.

Accounting Ratios

  • Metrics to assess company efficiency and profitability.
  • Use Investopedia to research specific ratios relevant to your business.

Taxes

  • File taxes according to requirements.
  • Resources:
    • Federal taxes: IRS.gov.
    • State taxes: Secretary of State's website or state department of revenue.
    • City taxes: City's website.