Lesson 1: A separate account will help you stay more organized, make your bookkeeping process faster, and most important of all, it will give a clear picture of the financial health of your business. You'll be able to see if you're actually making a profit.
Lesson 2: The main difference between the two types of accounting is the timing of recording transactions.
With Cash Basis, transactions are recorded when money is actually moved. It doesn't recognize accounts receivable or accounts payable. For most small businesses, Cash Basis is easier to maintain than Accrual Basis.
With Accrual Basis, transactions are recorded when money is earned or billed, not paid. Accrual Basis is more commonly used than Cash Basis. But this method doesn't provide an idea of your cash flow. It can look like the business is doing very well, but it might actually have $0.00 in the bank.
Lesson 3: A Balance Sheet is one of the big three financial statements. They show your transactions at a glance.
You will see how valuable the business is, beyond just the profitability.
Lenders and/or investors will need to see a Balance Sheet before working with your company.
You will have a clear look at how valuable your business is, beyond the profitability.
It's called a Balance sheet because your Assets must balance with Liabilities and Shareholder's Equity.
Lesson 4: The 1099-NEC is a form used when a business reports non-employee compensation.
The form is for businesses to report the compensation of independent contractors paid more than $600 in a tax year. A copy also gets sent to the contractor. For contractors registered as a C Corporation or S Corporation, a 1099-NEC isn't necessary.
Lesson 5: Income Statements
We already covered Balance Sheets. Now it's time to go over another of the big three financial statements.
Income statements show businesses if they need to increase income or decrease costs or maybe even both. A company can check on fiscal goals with income statements as well! Referring to the income statement can show if the approach used is successful or not. Analysis can help find better practices for higher net income.
The equation shown might seem intimidating. Let's break it down.
Operating Revenue - Essential Activities (Sales or Services)
Non-Operating Revenue - Interest, Other Activities not related to its core business operations
Gains - Other Misc. Income (Selling old equipment or property)
Expenses - Expenses related to the business functions (Advertising, Commissions, Shipping, Delivery, Salaries, Rent, etc.)
Losses - Income from sales < Costs to produce.
Lesson 6: Cash Flow Statements Cash Flow Statements are the last of the big three statements.
Businesses use cash flow statements to see cash flow through three separate sections. The three sections are operations, investment, and financing.
-Operations include transactions for operational purposes.
-Investments include gains and losses.
-Financing is an overview of debt and equity.
Lesson 7: General Ledger
The general ledger is used to record, sort, and summarize all of a company's financial transactions.
It's broken down into four segments: a journal entry, a description, debit and credit columns, and a balance.
The amount of total debits must equal the total credits with double-entry accounting systems.
Investors, creditors, or regulators would need financial statements, generated by the general ledger. If you notice a huge spike in expenses you can check out the general ledger to see where it is coming from or to fix any accounting errors with an adjusting entry.
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