How to understand financial accounting

As a small business owner, it’s important to have a grasp of your finances to enhance your operations and performance. But financial terms and accounting can be difficult to understand when you’re not an accountant. 

In fact, less than half of small business owners believe they can understand and use financial skills. So, if you’re wondering how to understand financial accounting, you’re not alone. 

This guide will cover how to understand financial accounting as a business owner, including:

• Why it’s important to understand financial accounting 
• How to understand financial accounting for small businesses   
• How Countingup can make your financial accounting easier 

Understanding financial accounting will help you track the financial position of your business, or how the cash flow and income are performing. This information is necessary when it comes to investments, selling, and reporting tax information. High business performance makes you more investable. Plus, clear financial records can help determine how much to sell your business for. As for taxes, you may need to do a Self Assessment tax return, which relies on accurate income reporting. 

Financial accounting knowledge will help you read and analyse your financial statements more effectively. This way, you’ll get valuable insights into your company’s overall performance and profitability. Understanding financial accounting can also be important for tax purposes as you can spot errors and improve your accuracy. 

Plus, if you understand your finances , you can better understand your small businesses debt load. You can also spot trends that hurt your business, improve your budget, and plan for financial growth. 

Part of learning to understand financial accounting is knowing the right terms to comprehend the data. This will help you avoid going into your business finances blind. Let’s start with the basics:

Financial accounting is a method that involves collecting, summarising, and reporting earnings and expenses from business operations over time. 

It looks at different forms of financial data, including:

• Revenues: The money earned from business operations, calculated as the average sales price by the number of sales. 
• Assets: Things owned or leased by the business. Including cash and things that you can convert into cash.
• Liabilities: Things that the business owes, including expenses and debts. 
• Equity: The cash value of the business if you were to liquidate it. 

In accounting, there is the cash method and the accrual method. Accrual accounting records transactions as they occur, while cash accounting records them only when there’s been an exchange of cash. Ultimately, financial accounting determines a business’s net income to report for taxes. It can also help determine that business’s performance.  

This accounting method requires  financial data, including:

• Income statement or profit-loss statement:  Summarises how much you earn and spend for your business over a given period. 
• Balance sheet: Evaluates the overall value of the company, outlining the assets, liabilities, and liquidity. 
• Cash flow statements: Shows how much cash is flowing in and out of a business over a given time. 
• Annual reports: This report outlines your businesses yearly finances, often using infographics to tell a story with the numbers. 

Once you have this information together, you can look at the sheets to analyse your business finances. To truly understand your business’s financial health, you’ll need to compare these statements side by side. 

The cash flow statement can help you understand if your business brings in money frequently enough to cover regular expenses. Plus, your income statement can show you where you can cut down your business spending. 

You can spot unnecessary expenses and where you could find cheaper solutions. If you have excess cash, you can invest this in growth or put it aside in savings. You’re also legally required to keep your business’s records for about six years, so it’s good to have all of your sales and expenses accounted for. 

Without accountancy knowledge, the financial data may appear confusing. But you can learn about financial accounting with a bit of patience and time. As a result, you can make more informed decisions for your business. 

The first step in learning is setting aside time. Schedule time into your day to look at and make sense of your business finances. Focus on real-life applications through the daily operations of your business. And take the time to read some of our other guides, like: 

• 12 must-know business accounting terms
• Balance sheet explained: 5 steps for preparing a balance sheet for beginners 
• What are assets and liabilities in business?
• Accounting problems faced by small businesses

If you hire an accountant to do your small businesses taxes, ask them to go over your statements with you so you can learn more about them. To save time and more confidently keep track of your finances, we recommend using accounting software for your small business. 

With the right accounting software and the tools it comes with, you can increase your understanding of your finances and streamline the way you manage them. 

Countingup’s two-in-one business account and accounting software offers great features to save you time and help you understand financial accounting better. 

For starters, you can create and process invoices to receive and track the money you earn for your business. Countingup allows you to invoice customers on the go.

With the app, you can: 

• Create an unlimited number of customised invoices (free)
• Add a logo to invoice templates
• Send invoices to customers
• Receive a notification when an invoice is paid
• Match a payment to an invoice
• Duplicate an invoice
• Change an invoice’s due date

This software can help you organise and log your business expenses with ease. Countingup offers automatic expense categorisation using HMRC approved categories. This makes it simple to keep track of, analyse, and prove your expenses when needed. Learn more about how Countingup helps you keep track of your expenses here. 

With your financial data all in one place, you can better manage everything and be aware of your cash flow. This can improve your confidence in your business finances . But even more than that, apps like Countingup provide you with cash flow insights, which will help you track your overall business performance. Having this information clear and accessible will help you understand the finances of your business much better. 

The Countingup business account comes with free accounting software that helps thousands of small businesses keep on top of their financial management. Designed specifically for one-person businesses, this unique two-in-one app makes running your business much easier. 

Keep your business finances running like clockwork. Download the Countingup app today.