Biz tip: Bookkeeping basics you can't ignore

According to Daniel Kehrer, writer for SCORE and managing director of BizBest Media Corp., if business owners don’t understand the different types of “accounts” used to organize their finances, they won’t have a clear financial picture of their businesses and can run headlong into cash-flow problems (details at http://tinyurl.com/ma22op7).

Here are the 10 most common types of bookkeeping accounts for a small business:

• Cash. All of your business transactions pass through cash accounts, cash receipts and cash disbursements, to track the activity.
• Accounts receivable. This is money due from customers. Keep it up to date so you can send timely and accurate invoices.
• Inventory. Products you have in stock to sell are like money sitting on a shelf.
• Accounts payable. Good bookkeeping assures timely payments, and that you don’t pay anyone twice. Paying bills early may qualify for discounts.
• Loans payable. If you’ve borrowed money for your business, track what’s owed and what’s due.
• Sales. Track all incoming revenue from what you sell so you know where your business stands.
• Purchases. Record the costs of raw materials or finished goods. It’s a key component of calculating “cost of goods sold” (COGS), which you subtract from sales to find your company’s gross profit.
• Payroll expenses. This is the biggest cost for many businesses. Keeping accurate and up-to-date numbers is critical for meeting tax and reporting requirements.
• Owners’ equity. This is the amount each owner puts into the business.
• Retained earnings. This is the profit that is reinvested in the business. It’s a running total of money retained since the company started. Investors and lenders use this to track how well the company has done over time.

Many business owners think of bookkeeping as an unwelcome chore, but it helps you run your business more effectively.