You may have different accounts than these, but most entrepreneurs have these basic accounts to keep track of. How this is set up will depend on what accounting software you use. Later, we’ll talk about different choices that may work for your needs.
- Cash – This is the main account which every transaction actually either goes into or comes out of. It’s your main business bank account where all transactions occur.
- AR – Accounts receivable are the accounts where you have sent an invoice to someone and they owe you the money. Keeping up to date about this type of account is imperative if you want to ensure good cash flow.
- Inventory – This is how much product you have on hand to sell. If you sell digital products, this will not be an issue for you. It only works with physical products.
- AP – Knowing what is going out of your business in terms of expenses is very important. This will affect the cost of doing business. If your business costs 1000 dollars just to keep the doors open but you only have 500 dollars coming in, you’ve got a serious shortage. If you don’t track this, you won’t realize what’s happening.
- Loans Payable – This is a little different because you can deduct interest on the loans as well as the payment on things that you use for your business. How you deduct loans depends on how you set up your accounting system. For example, if you’re on a cash basis you can actually deduct the full price of items bought on credit – even if you haven’t pay for them yet, then deduct the interest too.
- Sales – This is the account that shows all revenue coming in from what you sell, regardless of whether it’s physical, digital, or a service. If the money was made on a sale, then it should go here. If you sell books in the traditional way, you should also have a “royalties” account in order to keep track of that separately.
- Purchases – If you have raw materials or finished goods used to create your products, such as wood, nails, paint and so forth for your woodworking business, then you should keep track of them here. This is how you calculate “cost of goods sold”. If you don’t have physical products, you don’t need this.
- Expenses – This is anything you buy that is for your business directly. For example, if you purchase accounting software for your business, this is deductible from your income and therefore something you should keep track of.
- Payroll Expenses – If you have employees, you’ll have to keep track of all of your payroll expenses separately from other things that you purchase. Not only for your own use; the government requires that you keep accounts for your payroll taxes and other employee expenses. If you don’t have employees, you might have an account for contractors instead.
- Owners’ Equity – When you add money to your business, it is considered an investment and goes into owners’ equity. You might instead have a “Capital” account and an “Owners’ Draw” account. This keeps track of money you put in and take out of your business.
- Retained Earnings – This is where any profits that you make are re-invested into the business and not ever given to the owners of the business. This total continues to run forever as long as the business is opened. This helps you track how the business is doing over time.
*This article is not intended to replace professional business advice and planning. Always contact professionals regarding any business advice, financials, planning, operations, and/or management.