Accounting for Entrepreneurs – A Kickstart Guide

Accounting for Entrepreneurs – A Kickstart Guide

Looking to kickstart your entrepreneurial journey? Our comprehensive guide on Accounting for Entrepreneurs is just what you need! Gain the financial know-how to take your business to new heights.

Get a clear understanding of the basics of accounting and learn how to manage your finances like a pro. Invest in yourself and your business today with our Kickstart Guide."

1.       What is Capital?

2.       Are you spending / Utilising Capital wisely?

3.       Difference between CAPEX vs OPEX

4.       What is Operating Cycle?

5.       What is Single Entry Accounting vs Double Entry Accounting?

6.       Do you need to Hire Accountants / Buy Accounting Software?

What is CAPITAL?

In simple terms, Capital is an initial fund, that you raise/bring to setting up the business. We all know that, for any business, money is a must to start with. That Initial Money, which is diverted from your personal wallet, into Business is called Capital.

 

Anything you buy, for business is done through either CAPITAL or PROFITS (Which you will be generating, on doing business)

 

if for an example, you want to start your business with Loan Money, through any banks or financial institution, even-then, they would not get the full money, to kick start the business, as a promoter contribution, you have to fund at least 10% or 20% of total budgeted required fund, and that money is your CAPITAL.

 

Additional Notes:

Where you can see this Capital in your books?

if you already own a business and you have successfully ran it more than 12 months, then by this time you should have met an Auditor and got your financials in hand.

Look at the Balance Sheet, if its traditional format BalanceSheet(B/S) Capital  will be reported on left-hand side, under “LIABILITIES” section, else its Modern-day vertical B/S, Capital is reported under "Shareholders Equity / Owners Equity".

 

Equity is nothing but Capital in Corporate Terms.  

 

7.   Are you spending/utilising your Capital wisely?

Checking your capital frequently is important for a businessman.

 

For any business, there are 2 types of spending happen,  1. Capital Expenses and 2. Operating Expenses Let us discuss both.

 

1. Capital Expenses (CAPEX) means anything that creates value for longer period and not dispensed or utilised within an Operating Cycle and which helps to keep business going on for the longer period. Example. Buying assets for business. Paying advances for premises. 

 

2. Operating Expenses, means buying stock for trading, paying salaries, and spending on general supplies and admin expenses. Simply anything that you spend on day to day running the business or all spending which is utilised fully within an Operating Cycle.

 

What is the Operating Cycle?

 

Operating Cycle is nothing but, a set of activities basically (Business Operations) executed mandatorily for every business during a period. Actually, the Operating Cycle is not a single set of activities, instead, there are many. On a General notion, 12 months is considered an Operating Cycle, however it differs with the Nature of Business. To start with, we can consider 12 months as the Operating Cycle, which goes hand in hand with the R2R cycle.

 

Predominantly, these 3 cycles will be part of Business Operations (BUS-OPS)

a.       Revenue to Cash Cycle

b.      Expenditure Cycle – Procure to Pay (P2P)

c.       General Ledger and Reporting Cycle – Record to Report (R2R)

 

Revenue to Cash Cycle :

Process of taking Order, Shipping products or delivering services, billing customers and collecting Cash from sales.

 

Expenditure Cycle: (P2P – Procure to Pay)

Process of Placing Orders,

Receiving shipment of products or Delivery of Services

Approving Invoices

Making cash Payments

 

General Ledger and Reporting System (R2R – Record to Report)

Process of recording, classifying and categorizing an Organizations economic transactions and producing summary financial reports.

 

Do you need to Hire Accountants / Buy Accounting Software?

It largely depends on the nature of business and your understanding of the accounting concepts..

(a)   Hiring Accountant: This means you can share your transactions with an accountant, to have it recorded in accountant software, for a pre-determined fee, if you are a novice to the accounting world i.e if you lack both (nature of business and understanding of accounting/tax concepts) you have to hire an accountant.

(OR)

(b)  Buy the accounting software on your own. If you have prior knowledge in dealing with accounting software or you have some basic accounting knowledge, you can kick start either Tally, Zoho, Quickbooks, or Xero.

 

Special Note :

Even accountants recommend you buy accounting software since it is very difficult to record your transactions without software.

 

I would advise, that you first meet an Auditor or Business Consultant or Tax Consultant, at least 3months before jumping into actual business, to get an understanding of business, taxes, and other regulations

 

What is Double Entry and Single Entry bookkeeping?

 

Single Entry Bookkeeping is like maintaining your list of expenses in your pocket diary, whereas Double Entry Bookkeeping is like a business-man's mindset. If I give you Rs. 1000/- what i will get it back? 

 

Do we simply spend any money, without getting anything in return. Surely not!!! Let us see some examples

 

1. Paying Salaries --> in Single entry we simply write, Salaries Paid Rs. 10000/- but in double entry, we recognize the efforts provided by your employees, and ask a specific question, how it is paid? Cash or Cheque. If it is paid in Cash, then

 

Salaries Account (Exp)       Dr        Rs. 10,000 -à Notional Account

To Cash Account             Cr         Rs. (10,000) à Real Account

 

At this moment, you are looking at 2 Accounts, which is Salaries A/c and Cash A/c. Double entry is always a See Saw game model, when one account is getting added and the other account is getting reduced.

 

Let me walk through this. Salaries account is added (simply notional) and the Cash account is reduced, if in case it is paid through a bank cheque, then Bank Account is reduced. ((it is real, we paid it).

 

Just in case, you assume, the salary is been paid only 5^th of Subsequent month, how you will account in the current month?

And there is a question, why it should be accounted in the current month, when it is paid in the subsequent month?

 

For Business, we don’t spend the cash / receive the money on real-time basis. There is always a lag between delivery and payment and most of the time both will not happen in same period/ same month.

 

In the above example, salary services from employees were received in current month, but payment was made only in subsequent month. Hence to record such events, we take the help of Double entry accounting

 

In the Current Month

Salaries Account (Exp)                                    Dr         Rs. 10,000 -à Notional Account

To Salary Payable/ Outstanding           Cr         Rs. (10,000) à Notional Account

 

In the Subsequent Month

Salary Payable / Outstanding Account (Exp)                                Dr         Rs. 10,000 -à Notional Account

To Salary Payable/ Outstanding  Cr         Rs. (10,000) à Notional Account