Accounting

By Entrepreneur Staff

Accounting Definition:

A business's bookkeeping system that tracks the money coming in vs. the money going out

Aside from every business owner's inherent desire to stay in business, there are two other key reasons to set up a good bookkeeping system:

1. It's legally required.
2. Bookkeeping records are an excellent business management tool.

Of course, staying out of jail is a good thing. And a good basic accounting system will provide useful financial information that will enable you to run your business proactively rather than reactively when it comes to important financial decisions.

While many businesses still operate using a manual (checkbook and receipts) bookkeeping system, it's generally not a good idea to use this type of system. It's far more efficient to go with an automated system, and there are now many bookkeeping software packages on the market that won't break your wallet.

Financially complex businesses, such as a manufacturing concern, can buy industry-specific software, but there also are many generic programs available that would suffice for most businesses.

A good accounting system meets three criteria. First, it's accurate; the numbers must be right. Automation will help ensure accuracy, but it won't guarantee it. Bookkeeping numbers should be checked and rechecked to maintain accuracy.

Second, it's relevant. The system provides information that's required and needed. The law requires that certain pieces of financial information be tracked for tax-reporting purposes. Obviously, these items (which comprise a basic income statement and balance sheet) must be measured and tracked. However, it's equally important to include information that you'll need to run your business successfully.

Third, a good accounting system is user-friendly. It shouldn't require a CPA to operate and interpret. Most of the Windows-based bookkeeping software packages on the market today are pretty user-friendly. They include tutorials and help screens that walk you through the programs. Find one with which you are comfortable, even if it doesn't have some of the bells and whistles of more complicated programs.

More From Accounting

Cash Flow

The difference between the available cash at the beginning of an accounting period and that at the end of the period. Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of asset

Cash Flow Statement

A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period

Cash-Basis Accounting

An accounting system that doesn't record accruals but instead recognizes income (or revenue) only when payment is received and expenses only when payment is made. There's no match of revenue against expenses in a fixed accounting period, so comparisons of previous periods aren't possible.

Accountant

A person whose work it is to inspect, keep or adjust accounts