Nearly every small business owner is a master of creating a great product or service. They will, most likely, also build awesome teams and win-over tons of customers. However, when it comes to basic bookkeeping, nearly every small business owner will fail miserably.
Here are the ten most common types of bookkeeping accounts for a small business that you should know, whether you outsource your bookkeeping or do it in-house:
- Cash. All of your business transactions pass through the Cash account, which is so important that often bookkeepers actually use two journals — Cash Receipts and Cash Disbursements — to track the activity.
- Accounts Receivable. If your company sells products or services and doesn’t collect payment immediately, you have “receivables” and therefore you must track Accounts Receivable. This is money due from your customers.
- Inventory. Products you have in stock to sell must be carefully accounted for and tracked. The numbers you have in your books for inventory should be periodically tested by doing physical counts of inventory on hand.
- Accounts Payable. Money going out of your business is never fun. But it’s a little less painful if you have a clear view of payments due to your vendors via your Accounts Payable.
- Loans Payable. If you’ve borrowed money to buy equipment, furniture or other items for your business, this is the account that tracks what’s owed and what’s due.
- Sales. The Sales account is where you track all incoming revenue from what you sell. Recording sales in a timely and accurate manner is critical to knowing where your business stands.
- Purchases. The Purchases Account is where you track any raw materials or finished goods that you buy for your business. 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 nearly every business. Keeping this account accurate and up to date is essential for meeting tax and other government reporting requirements.
- Owners’ Equity. Basically, this tracks the amount each owner puts into the business. In order to be fair to all owners, your books must carefully record all Owners’ Equity accounts.
- Retained Earnings. The Retained Earnings account tracks any of your company’s profits that are reinvested in the business and are not paid out to the owners. Retained earnings are cumulative, which means they appear as a running total of money that has been retained since the company started.
Many business owners think of bookkeeping as an unwelcome chore. However, it is the single most important activity in order to run a more profitable and successful business.