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Every business naturally depends on its finances to survive, and accounting is a fundamental part of those finances. However, sometimes small startup businesses and self-employed individuals don't quite appreciate the full scope of what's involved in small business accounting, so in this post we're going to give you an overview of the basics you'll need to understand to help your business thrive.

Accounting Methods
There are two basic methods of business accounting: cash basis accounting and accrual accounting. Cash basis accounting is typically used by smaller businesses, and transactions are recorded at the moment that money actually changes hands between the parties involved. Accrual accounting is based around when the agreement to transfer funds takes place, rather than when the transaction actually occurs.

For example, consider a business that sells hand-made furniture which has just sold a £2,000 piece to a customer. If you're working on the cash basis method, the sale is recorded as soon as the customer hands you money or completes their digital payment. Under the accrual method, the sale would be recorded as soon as the customer commits to the purchase, even if it takes some time for a cheque or bank transfer to arrive. The same process occurs for expenses: if the business receives a utility bill for £1,200, the cash basis method would record the expense when the money is debited from your bank account, while the accrual method would record the expense as soon as the bill is received, regardless of whether it had been paid or not.

Functions of Accounting
Knowing exactly how much you earn and how much you owe at any given time is essential to running a business, but accounting is much more than simply keeping track of financial transactions. Of course, that's a major part of it, but accounting can be divided into two general functions: financial accounting, which tracks the incomings and outgoings of the business, and management accounting, which is concerned with budgeting, managing costs, and some degree of forecasting future financial opportunities and debts.

Management accounting is the function that is typically underappreciated by the small business or self-employed individual. This is often due to a limited supply of resources available to dedicate to proper management accounting, but this shortage of resources is also what makes it such a vital aspect of a successful business. Management accounting can help to ensure that vital resources are directed where they are most beneficial, as well as ensuring that all payment processes are as optimised as possible.

Accounting Insights
Accounting, when properly conducted, brings a wealth of information to decisionmakers that allows them to make the right decisions in a timely manner. Small businesses need to ensure that all stakeholders are up to date on the current financial state of the company, otherwise important opportunities might be overlooked.

For self-employed individuals, it will be up to you to determine what value can be gained from examining the patterns of your financial transactions. Careful examination can highlight areas of your work that are the most lucrative, and allow you to focus your efforts on either improving other areas of the business or streamlining towards areas that provide the most value.