Some people are great with numbers. Others showcase their other talents while bookkeeping remains a mystery. Wherever you fall on that spectrum, at Clear Accounting Solutions, numbers are our thing and we’re here to help with all things accounting. Whether you’re a small business owner, individual filing your taxes, or anyone else who might not know where to being with their bookkeeping and accounting, here’s some info on the basics to get you started.
Now you know the basic terms. Unfortunately, that’s not all you need to know in terms of basic accounting knowledge. Bookkeeping of all kinds comes with a lot of paperwork and forms to fill out. To get started there, here are a few forms to know about including where to find them and what their purpose is.
W4 Form: If you’ve ever had a new job, you’ve probably filled out a W4 form. This form shows employers how much federal income tax needs to be withheld from your paycheck. Withholding means that there is a certain amount of your paycheck that gets taken taken out and sent to the government. Its crucial to fill out this form correctly to avoid additional payments later on in the year and so the correct amount is withheld.
I9 Forms: The purpose of an I9 form is to verify employees identities and their authorization to work in America. All employees must fill out these forms to work legally in this country, whether or not they are a citizen. If employees are not U.S. citizens, they must include some form of documentation showing their eligibility to work in this country such as a work visa or work permit.
W2 Forms: W2 forms are also crucial for small business bookkeeping. If you make more than $600 in a year from a single employer, even as a freelancer or non full time employee, you must fill out this form. The IRS says this form must be filled out for all employees for whom:
1099-MISC Form: As the name states, the 1099-MISC Form essentially takes care of all income that falls into the “miscellaneous” category. This can include income, other forms of payment, bonuses, and a wide variety of other payments. These forms are especially common for independent contractors, as they often have less uniform payment structures that can vary from client to client.
Copies of invoices, receipts and other financial records: financial recording keeping is the bread and butter of all accounting. Without thorough records of purchases and expenses, you may be missing out on deductions as well as giving your business a wider margin for error. Making quick copies of all of these documents or tracking them digitally is an easy way to make sure you don’t fall behind on these transactions and your day to day record keeping does not slip through the cracks.
If you remember one accounting formula from your college accounting class, it’s probably this one. “The Accounting Equation” as it’s often called dictates:
This basic accounting formula is a tool to figure out what you own minus what you owe, and draw conclusions accordingly.
Debt-to-Equity Ratio = Total Liabilities / Total Equity
This formula will help you to figure out how sustainable your business is at its current standing. It illustrates the amount of your business’ funding that comes from other sources such as investors and loans, compared to the amount of profits that come from your business operations.
To use this formula, you’ll need to know:
Your total liabilities: in other words, everything you owe to other parties. This includes loans, rent payments, payments for capital you have purchased on credit and any other sort of payment you owe.
Your total equity: which is the sum total of your company’s worth, and how much the owner of the company you actually own and how much belongs to other stockholders.
A “good ratio” depends on what stage your business is in and what your goals are. A good rule of thumb is that if your debt to equity ratio is too high, that means you owe a lot more than you own, and this can be a red flag for many investors. Overtime, this ratio should go down as your company starts to earn more and owe less.
This is a simple formula, but it’s an important one to keep in mind. This formula details that all of your company’s expenses subtracted from your total revenue equals your net income. If your company is generating a ton of revenue that’s great, however if you are spending three times that much to generate sales, your business will end up in the red. It’s important to keep your expenses in check and monitor both your spending and earning.
Profit Margin= Net income/ Sales
As stated above, your net income is the difference when you subtract expenses from revenue. Sales is the amount of total sales your company has made. The dividend of these two numbers will give you your profit margin, or the amount of money you are making from sales. If this number is high, that’s a great sign for your company’s financial health because it means your sales are highly profitable. If this number is low, however, that’s a red flag, and you may need to reevaluate your sales model.
Break-even volume=fixed cost /sales price –variable cost per unit
This handy formula essentially tells you how much product you need to sell before you break even (and from there, how much more you need to sell to make a profit). This formula takes a few variables into account:
With this outline of basic accounting, you’ll have a better idea of how these factors impact your business. If credits and debits still mystify you, have no fear. From basic bookkeeping to contract CEOs and so much more, at Clear Accounting Solutions, we are at your service and are happy to help with a variety of bookkeeping needs. To learn more about our services or to talk to one of our experts, visit our website today!