How to: Accounting Basics for the Fashion Start-up
Whether you keep your accounting in-house or hire outside help, you still need to have a foundational grasp of the basics. Knowing the terminology, understanding the methods, and becoming comfortable with the practice of accounting itself is critical to your business and its financial stability.
So, where to start?
Accounting is a broad topic, ranging from mathematical calculations to laws and regulations that must be followed for legal purposes. But for any of it to make sense, you must first learn the language.
- Debits and Credits – these are building blocks of accounting, regardless of the method you use. In your bookkeeping, for every entry, there must be a debit and credit, and all debits must equal the credits. For this reason alone, you must be meticulous when working on your company’s financial data.
- Assets and Liabilities – these two make up your balance sheet. If you are entering a transaction, after you debit and credit the amount, you must determine where the entry should be located on the balance sheet.
- Asset – an asset is defined by investopedia.com as something that you have bought or own that can increase the value of your business or something that can generate cash. There are either current or fixed assets. Current assets are expended within one year whereas a fixed asset continues to provide value over time.
- Liability – a liability is the exact opposite of an asset. As defined by investopedia.com, a liability is a debt or obligation that arises during the course of business operations and is vital to a business because it is used to finance business operations. Common liabilities may include loans or mortgages. Just like assets, there are current and long-term liabilities. Current liabilities are debts paid within one year.
Once you make sense of your company’s assets and liabilities, and how to debit and credit transactions, there are a few tips to keep in mind that will make your accounting process flow much smoothly.
- Bookkeeping – keeping a detailed report of your company’s transactions will make your accounting life easier in the long run. Either manually or electronically through an application like QuickBooks, having an internal record of your transactions will offer helpful guidance for future expenses.
- Inventory – regularly take inventory of your assets and liabilities. This process is critically important, especially for a start-up. If you are looking to take out loans or borrow money, any lender will want to see the good and the bad. Assets and liabilities also illustrate how you are making your revenue and what you are spending the money on.
At first, mastering the accounting portion of your business may seem overwhelming and can create math anxiety. But mastering accounting basics is entirely possible and will prove worthwhile. Understanding and being aware of your company’s financial state is vital to all of the other business operations. Instead of hiding from accounting, embrace it, use it to ensure financial health and make it your company’s unique advantage.