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Wednesday, January 30, 2013

ABC's of Accounting

Making a profit is the holy grail of any profit oriented business.  Accounting is the method needed to track profitability.   Accounting is the tool for information gathering in a logical fashion to determine what actions are necessary to run a profitable business.

Step 1:   Create a Chart of Accounts.    What you spend on, what you receive, where they come from and how often does each item appear.   This classification lets you make decisions and gives you proof of the transactions running the business.

Step 2:   Each transaction is recorded in a Journal and summarized by these accounts in a Ledger.   Journals depict Cash you received (receipts)  and Cash paid out (disbusements).

Step 3:   This information is summarized to produce  a General Ledger and is the basis for a Trial Balance.    The Trial Balance is listing of the receipts and disbursements.
If you are a positive (+) balance - YOU MADE MONEY.    If you have a negative  ( -balance then you didn't make a profit.  

Now you can look at the figures that make up this data and see where you spent your money and where your income is coming in.    Now you make decisions on what to do to turn a negative balance around or how to do more in order to gain greater  positive profit.

This system is employed in finite time frames.   Initially it should be done every week to
be sure you are on the positive (+) track or running a business that is (-) losing money.

HINT:   Do not shirk this job.    If you are too busy, engage someone to do it for you.
            Once you are on a profitability (+) track, it's ok to do this monthly, summarize
            quarterly, and of course yearly for our friends in the IRS.

Mike Lupo
SCORE Counselor
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