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Ask HN: What Do I Need to Know About Accounting for a Small Business?

7 points by gavinhoward 4y ago

I am about to start a small software business, so when I read [1], which says, > Usually small businesses are terrible at accounting and finance, but even they typically have some idea where their bank accounts are and what is in them I want to know how to not be terrible at accounting and finance. This was on an article about FTX's "creative" accounting practices. Obviously, I have no intention of being creative with the accounting for my future business, so I need to know about accounting. But what do I actually need to know? Here's what I know this far, thanks to learning about GnuCash and scattering to use it for my family's finances and budget: * The static accounting equation. [Assets - Liabilities = Equity] * The dynamic accounting equation. [Assets - Liabilities = Equity + (Income - Expenses)] * The account types. (The ones in the dynamic account equation.) * What each account type is used for. * Credits vs. Debits. (And I use those terms in GnuCash as well.) * Which account types are decreased or increased with credits and debits. (Well, I use the chart in [2] as a shortcut.) * The fact that every transaction must have at least one debit and one credit. (That's called "double-entry," correct?) * The fact that the sum of all credit minus the sum of all debits in one transaction must equal 0. * The fact that income accounts are for recording the gain of money from outside. (Bad definition, but that's what makes sense to me.) * The fact that expense accounts are for the recording the loss of money to the outside. (Again, bad definition.) * That liabilities are unfunded obligations. * That assets are either money, physical goods, or the promise of payment from someone else, etc. * That equity is basically the catch-all of everything else I own. (I used it for the opening balances when I started. And yes, that's the worst definition of all.) * That the movement of money should be tracked in detail. For example, if I pay for something with a credit card, I shouldn't just record the money leaving my bank account; I should have an account for the credit card and record it there, and only when I pay the credit card bill should I record money leaving my bank account. What else do I need to know? What else would be good to know? Currently, I'm putting these principles in practice with my family finances, including budgeting, but what other skills should I learn? Note that I'm not asking about taxes or other country- or location-specific things. This is only about universal accounting, at a level needed for a typical non-fintech small business. [1]: https://news.ycombinator.com/item?id=33657492 [2]: https://www.gnucash.org/docs/v4/C/gnucash-guide/basics-accounting1.html

jimmydean12 4y ago
I did my own books up to 250k in sales. After that I got a book keeper and an accountant. At 5 mil in sales I got an accounting firm. It should have happened around 2-3 mil A few tips, Know the difference between your balance sheet and a P & L statement. understand what a trial balance is Don’t have 300 pages of expense accounts, you should be able to produce a financial snapshot at any of time of 1-2 pages Quickbooks generally will do everything you need, the invoicing system is nice and can be integrated easily for credit card payments and recurring billing Banks generally won’t count items older than 60-90 days on your A/R as an asset
- gavinhoward 4y ago
  Wonderful tips, thank you! I have a few questions. > I did my own books up to 250k in sales. After that I got a book keeper and an accountant. At 5 mil in sales I got an accounting firm. It should have happened around 2-3 mil I was going to have an accountant check my work, no matter how many sales I get, but are you talking about having an accountant actually record all of the transactions for you from 250k in sales? As in, you don't work the accounting yourself at all except to check the numbers afterward? If so, why? I feel...uneasy...about not knowing where every dollar is going as it's going. Also, what would matter more? Volume of sales in dollars, or volume of sales in how many sales are made? > Know the difference between your balance sheet and a P & L statement. Let's see if I do. A P & L (profit and loss, correct?) statement is a statement of whether the company is in the red or black, over time. A balance sheet is a snapshot of the assets, equity, and liabilities of the business at a point in time. Am I correct? > understand what a trial balance is This is a new one for me, so I looked it up. From what I understand, it's a sort-of balance sheet to check that the debits and credits match up. I don't really get its purpose in the context of accounting software, though. > Don’t have 300 pages of expense accounts, you should be able to produce a financial snapshot at any of time of 1-2 pages This is a great tip, and also exactly the kind of mistake I would make without someone telling me beforehand. > Quickbooks generally will do everything you need, the invoicing system is nice and can be integrated easily for credit card payments and recurring billing I'm sure this is true, and I would encourage other small business owners to default to this as suggested. But I'm a FOSS freak, and only work on Linux, so I'll stick with GnuCash. Also, I may have found out ways to use Bash and SQLite's command-line interface, with GnuCash's SQLite file format, to script GnuCash, making my use of it immensely powerful. > Banks generally won’t count items older than 60-90 days on your A/R as an asset A/R is Accounts Receivable, right? That's money owed to your business by someone else, correct? If so, thank you for letting me know this tidbit. However, why do banks do this?

jimmydean12 4y ago
I’m just going to write the responses rather than trying to quote. Hopefully the result is clear enough Accountant - you prepare everything, send to accountant prior to tax deadline. They prepare your taxes for you. Most accounting firms have various levels of service, this is the most basic and “unaudited” one. In various scenarios when you have a public company, you would have fully audited services where your accounting firm would go over every detail posted in your accounts, that’s not needed. For an accountant to take your G/L from accounting software and prepare your taxes shouldn’t cost a lot. You do not have an accountant do daily entries, that would be expensive and .. highly unusual. Basically you are your own book keeper. Typically gross sales matters most, not so much the number of sales and it is because everything you’re doing relates to taxes. If you had 500 errors for sales under $20 it isn’t that big of a deal, if you had 20 errors on sales over $500 it’s a much bigger deal. (This is relative, to show a point, in reality you want every penny to balance with no errors) I kind of got off topic but when you start talking millions an accounting firm with various specialists have a lot more input and help than 1 accountant who is independent can provide and that was my point in my original post. Profit and loss / balance sheet - I mention this only because I meet high paid E suite executives everyday who don’t clearly understand the difference, it’s just good to know. Here’s a basic overview link .. https://www.indeed.com/career-advice/career-development/balance-sheet-vs-p-and-l https://www.indeed.com/career-advice/career-development/bala... Trial Balance - Accounting software I have seen usually uses this method, it is called the double entry system of accounting. I have never heard of gnu cash, but after a quick google I found you this article which explains the theory. https://lists.gnucash.org/pipermail/gnucash-user/2018-July/078415.html https://lists.gnucash.org/pipermail/gnucash-user/2018-July/0... You will want to check your trial balance prior to sending to accountant. Don’t waste a lot of time thinking about this right now. In fact overall I don’t want you to get overwhelmed or too far into the weeds on any one topic. Try and get a basic high level understanding (which you are doing) then get setup and start focusing on your business (not so much accounting, this is what your accountant is for at year end) Chart of accounts, one more thing - don’t change them during the year. Change them at year end from one year to the next. Eg, you don’t want to explain that from periods 1-8 in week 3 you posted Starbucks to account 5200 but then week 4 of period 8 through period 12 you added account 5203 and started posting there.. it’s just confusing Software - I understand, in fact I haven’t used quickbooks in years, we switched to a custom ERP that runs on Linux which also does accounting. It is industry specific so no need to mention the name, But it’s no where near as sweet as quickbooks for user friendliness. It does other amazing things for our industry though and can import and export in archaic standards to our vendors and B2B customers that were developed over 20 years ago. Yes A/R is accounts receivable, and banks just consider the money unrecoverable after a certain period of time. This only applies if you want funding or have an annual review on a business line of credit with the bank. It’s important to remember though if you are coming into such a situation. Also, good luck! I love entrepreneurs !
- gavinhoward 4y ago
  The result was clear enough. Thank you. :) It makes more sense that I would just give an accountant my G/L (General Ledger?), and it makes sense that gross sales matter most. It also makes sense that more input is good past a certain threshold. I'll definitely go with a firm at that point, but I admit that I don't want accountants to save me money on taxes; I want to have bulletproof accounting so that the IRS doesn't audit me or finds absolutely nothing to worry about if they do. Thank you for the two links. I had found the first, and the second only confirmed what I thought. I think any misconceptions I have from here can be correct by an actual accountant. I actually check my trial balance every week. (I didn't know that's what I was doing, but that's what I do.) Other than that, I'll try to leave it up to my accountant. (I can be a control freak.) I definitely would have made the mistake of changing accounts in the middle of a year, thank you. If banks consider old A/R's unrecoverable, that means they generally are, and that means I should not allow customers to get lax on paying them. That's a great tip, thank you. And thank you for the encouragement and help!

Alexx 4y ago

A few thoughts having gone through a similar journey from 0 to several million in revenue. - The main thing when you are small to focus on is accurate high quality bookkeeping, rather than broader accounting. Almost all of the points you listed above are generally considered bookkeeping concerns (which ledgers to use, debits, credits, etc). So in terms of material to read and learn, bookkeeping is your starting point. - Most small business accounting software will take care of more than half of the points above automatically - Xero, Quickbooks etc, just pick one and use it - but it is always useful to somewhat understand the underlying principles. - The only accounting principles you really need to know are having a decent understanding of the balance sheet, P&L and cash flow statement - which are all interlinked. It is wise to be be able to understand each line item on them and to know how changing a figure in one would change figures in the other two and be able to do that even with just pen and paper. This is just useful as a business owner, and is quite a large topic which requires some study and practice. - Actual statutory accounting I would entirely leave to a 3rd party as it's mostly just for tax and GAAP filing purposes. From day one I just hired a small external accountant and at year end gave them access to our books and let them prepare our filed accounts, I also paid them to file the quarterly tax returns even though our accounting software prepared the statements. That was a good choice as after we'd grown eventually I ended up having the accounts audited by PWC and it meant I could just point them at our accountant and leave them to it. It also means you won't make any silly filing mistakes. - Set calendar reminders and do your bookkeeping, payroll etc every single month like clockwork, for years I just did it on the 28th of every month, and only later once we were large enough to hire an actual bookkeeper did we start doing it weekly. - Lastly, once you're under way the things to keep your eye on as a small business is: your cash flow, your working capital requirement (keep it as low as you reasonably can) and your debtor and creditor days (which is part of your working capital requirement). Those are the things most likely to cause you issues. Also, don't worry too much about it, it's a learning curve - as long as you improve your skills and tools in line with revenue it will be fine.

gavinhoward 4y ago
Thank you for this. A lot of what you said lines up nicely with what the other commenter said. I'll start practicing what you suggested. I do weekly bookkeeping for my family's finances, and I wrote a script to check it for inconsistencies. However, I'll also use it as a way to learn more deeply about the balance sheet, P&L, Cash Flow, and their links. Thank you.