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

> 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

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?

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!

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.