Keeping track of income and expenses is essential, even if you don't own a business. And if you do own a business, things get even more complicated. There are paychecks to issue, taxes to track, and subcontractors to pay out. All of these details are a whole lot less challenging when you hire an accountant to oversee them. However, it is still important to know a little bit about accounting yourself. Dig into the articles on this website, and you'll gain a better understanding of accounting principles, what services accountants really offer, and the benefits of hiring these professionals to assist with your finances.
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What's Your Number? An Accounting Blog
Not Understanding Profits Can Lead To An Accounting Disaster
Dianne Graham
Few mistakes in the world of business accounting can be as catastrophic as not fully understanding what profits are and how to achieve them. It's easy to think that profitability means simply taking in more money than you spend. More factors come into play, though. Let's take a look at what you need to know about profits.
Receipts, Cash Flow, and Profits Aren't the Same Things
One of the easiest traps to fall into is the blind belief that money goes into a business and profits come out. After all, enough positive receipts and good cash flow should add up to profits, right? Business accounting services providers cringe when they hear such simplifications.
Receipts are just that: pieces of paper showing that transactions occurred. They're good to have, especially for legal and tax purposes, but they don't mean much in isolation.
With cash flow, you're getting closer to profits, but it's still not the same thing. A company can bring in positive cash flow for a variety of reasons even while it's failing to run a profit. Debt loads, interest payments, depreciation, taxes, and numerous other expenses can all drag a positive cash flow into an unprofitable scenario. The most you can say if you have a positive cash flow is your company's liquidity is improving.
Okay, What the Heck Is Profit?
For business accounting purposes, profit is what's left of total revenue after taxes have been paid, all operating expenses have been paid, and the cost of goods sold has been taken into account.
Notably, a cash accounting method could jack up your costs massively in a year. Tax agencies tend to frown on this practice because it can be used to illegally shelter profits from taxation.
Consequently, most business accounting services firms will encourage their clients to use accrual, where expenses and profits are only booked once sales have been realized. For example, a business that sold 10 widgets out of a 20-widget inventory would only express the profit for the 10 rather than including the expenses for 20. If you've ever seen a business that regularly does seasonal sales to reduce inventory, there's a good chance that they're trying to book the losses while using accrual.
How Do You Avoid Problems?
You have to commit to particular accounting methods. Using accrual is strongly recommended. Once you do this, other business accounting elements should fall into their proper places as long as you maintain a detailed ledger of expenses, depreciation, and taxes. Contact a company near you for business accounting services.
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