50 Common Question and Answer about Accounting

Accounting Basics

1. What is accounting?
Accounting is the process of recording, organizing, and reporting your business’s financial transactions.

2. Why is accounting important for my business?
It helps you understand profitability, manage cash flow, stay compliant with taxes, and make informed decisions.

3. What’s the difference between bookkeeping and accounting?
Bookkeeping records transactions; accounting analyzes, summarizes, and reports them.

4. Do I need accounting even if my business is small?
Yes. Poor accounting is one of the top reasons small businesses fail.

5. What accounting method should I use?
Most small businesses use cash basis; growing businesses often switch to accrual basis.

Cash vs Accrual Accounting

6. What is cash-basis accounting?
You record income when received and expenses when paid.

7. What is accrual accounting?
You record income when earned and expenses when incurred, regardless of payment timing.

8. Which method is better?
Cash basis is simpler; accrual provides more accurate financial insight.

9. Can I switch accounting methods later?
Yes, but it should be done carefully with professional guidance.

10. Which method does the IRS allow?
Most small businesses can use either, depending on size and structure.

Financial Statements

11. What is a Profit & Loss statement (P&L)?
It shows your income, expenses, and profit over a period.

12. What is a Balance Sheet?
It shows what you own (assets), owe (liabilities), and your equity at a point in time.

13. What is a Cash Flow Statement?
It shows how cash moves in and out of your business.

14. Which statement is most important?
All three are important; cash flow is often the most critical for survival.

15. How often should I review financial statements?
At least monthly.

Income & Revenue

16. What counts as business income?
Any money earned from business activities.

17. Should I record income even if I haven’t been paid yet?
Yes, if you use accrual accounting.

18. What are undeposited funds?
Payments received but not yet deposited into the bank.

19. Should refunds reduce income?
Yes, refunds should offset revenue.

20. How should discounts be recorded?
Separately, so you can track their impact on revenue.

Expenses

21. What is a business expense?
A cost that is ordinary and necessary for running your business.

22. Can I deduct personal expenses?
No. Personal and business expenses must be separated.

23. What is a deductible expense?
An expense allowed by tax law to reduce taxable income.

24. What are capital expenses?
Large purchases that provide long-term value (equipment, vehicles).

25. How are capital expenses recorded?
They are depreciated over time, not expensed all at once.

Banking & Reconciliation

26. Why should I separate business and personal accounts?
It improves accuracy, credibility, and legal protection.

27. What is bank reconciliation?
Matching your accounting records to your bank statement.

28. How often should I reconcile accounts?
Monthly.

29. What happens if I don’t reconcile?
Errors, fraud, and inaccurate financial reports may go unnoticed.

30. Should all bank accounts be in accounting software?
Yes.

Payroll & Contractors

31. What’s the difference between employees and contractors?
Employees receive wages and benefits; contractors are paid for services.

32. Why is correct classification important?
Misclassification can lead to penalties and back taxes.

33. What payroll taxes must I pay?
Federal, state, and sometimes local payroll taxes.

34. What are 1099s?
Tax forms issued to contractors paid $600 or more.

35. Should payroll be recorded in accounting software?
Yes, including taxes and benefits.

Sales Tax

36. Do all businesses collect sales tax?
No, only businesses selling taxable goods/services in certain states.

37. What is sales tax nexus?
A connection that requires you to collect sales tax in a state.

38. How should sales tax be recorded?
As a liability, not income.

39. When should sales tax be paid?
According to state filing deadlines.

40. What happens if sales tax is not paid?
Penalties, interest, and possible audits.

Internal Controls & Best Practices

41. What are internal controls?
Procedures that protect your business from errors and fraud.

42. Why do small businesses need controls?
Because limited staff increases risk.

43. What’s a simple internal control?
Separating who spends money from who records it.

44. Should books be closed monthly?
Yes, to prevent changes to finalized periods.

45. What is a closing date?
A locked period in accounting software that prevents edits.

Professional Support

46. When should I hire a bookkeeper?
When transactions become frequent or complex.

47. When do I need a CPA?
For tax planning, compliance, and financial strategy.

48. Can software replace an accountant?
No. Software records data; accountants interpret it.

49. What records should I keep?
Invoices, receipts, bank statements, contracts, and tax filings.

50. What is the biggest accounting mistake small businesses make?
Not reviewing financials regularly.