By the Numbers: Accounting Basics

Although we freely admit that accounting isn't our favorite activity, some elements of it are enjoyable. For example, at the end of every month, you have the opportunity to look at the profit-and-loss (P&L) statement to see how well your business is doing — on paper. It's like getting a checkup (for better or worse) and viewing a summary of every activity you performed during the month, as it relates to the bottom line of your business. If all is well, yippee! If you encounter problems, a profit-and-loss statement is bound to expose your points of weakness.

If you're still not sure what a P&L is, let alone what it means to your business, don't worry. You'll soak it up in no time, along with several other important pieces of financial information in the following sections.

Determining periods and methods

Before you can walk, you have to crawl. When you're starting a business, one of the first things you have to do is select your tax year, or the defined period that you use to provide an annual snapshot of the financial state of your business.

You can choose from several types of tax year:

  • Calendar year: This method is defined by the wall calendar you buy at the beginning of every year. The 12 months that are encompassed start January 1 and end December 31. Your calendar-year accounting system follows the same pattern: Move from month to month and then start all over again on the next January 1.
  • Fiscal year: Although this type of tax year also has ...

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