Introduction to Basics of Accounting
Accounting for small business might seem like a term that is towering all the other processes. As it is new, it may take some time to get things right and make it on the right track.
All this can be done perfectly by maintaining even the nitty-gritty details of income and expenses along with financial information of business transactions.
This is an imperative task to manage money effectively without getting into any trouble. Apart from this, small business owners have to be cognizant about the performance of past and present for effective management of accounts. In this post let us throw light on some of the accounting basics for small businesses.
Bookkeeping for small businesses
Before jumping into how bookkeeping is done, it is essential that you understand what exactly bookkeeping is and how it is different from the term accounting.
Bookkeeping for small businesses is a daily process that records transactions categorizes the same and reconciles the bank statements.
Accounting, on the other hand, is a high-level term used to describe the process of business analysis and derive invaluable insights from the data collected by the bookkeeper. As a starter, you can choose one of the various bookkeeping methods that follow
- You can go for a simple DIY method with software or just an excel spreadsheet.
- You can outsource the bookkeeping process
- Once your business is speeding on its track, you can hire an in-house bookkeeper or accountant.
If you are planning to handle the accounts on your own, you have to decide which system of bookkeeping that you want to follow. Bookkeeping is of two types: single-entry bookkeeping and double-entry bookkeeping.
Single-entry bookkeeping: the transactions are entered only once in the asset column under this system. For example, when a customer pays you cash, you enter the amount paid in the asset column.
Double-entry bookkeeping: in this system, for each entry made a corresponding entry is made. For instance, for each debit, a credit is entered. This comprises ledger, journal, etc.
Let us pass on to some important aspects of bookkeeping
- Journal entries: every business entry is recorded in a journal which is also known as the books of original entry. Using the double-entry bookkeeping system, data is recorded in chronological order. The entries made in the journal comprises two accounts- the credit and debit. If you are hiring an accountant, they will make the process easier by using a special journal to record transactions that keep recurring such as purchases, sales, cash receipts, etc. the transactions that don’t fit under the special category are noted under general.
- Ledger: a general ledger is a collection of accounts that exhibits the entire transactions made which is measured in terms of the monetary unit. The ledger is also called the book of final entry.
- Unadjusted trial balance: to check whether the total credits meet the total debits a trial balance is prepared. The accounts are taken from a ledger and it is prepared into a report. In the report, the balance of credit and debit should be equal. If there any imbalance is then, then it means, the trial balance has some pitfalls which have to be rectified. Remember that some errors caused by double posting or omission of entry may remain intact even after the debits equal credits.
- Balancing the entries: at the end of an accounting period, the accountant is to prepare to adjust entries to update the accounts in the statements. This process is done for consolidating income and expenses, depreciation, allowances, deferrals, and prepayments.
- Financial statements: the financial statements are final products accounting systems that comprise income statement, statement of equity changes, balance sheet, cash flow statement, and notes.
- Closing entries: to start and prepare for the next accounting system, the temporary accounts are closed while the balance sheet accounts which are known as permanent accounts remain open. The final step in the accounting cycle is to put together a post-closing trial balance to see whether the credit and debit amounts are equal.
Setting up a small business accounting system
- The first step to set up a small business account is to open a bank account for business. The bank account should be a different one from your personal account.
- The next step is to choose the right accounting method to record your financial transactions. The accounting method is of two types; one is cash and the other is accrual. Cash is a method where the income and expenses are recorded at the time of cash transactions. The accrual method is easier as it records data even if a transaction is decided.
- Record transactions with the help of an accountant or a software
- Compile a chart of accounts to take a look at the progress of the business and locate all transactions. Chart of account is a list that consists of all business transactions.
- Decide the payment terms. If you are giving credits to the customer maintain a proper system of an invoice to notify them.
Outsourcing your accounting needs
One common matter of speculation for many is whether the small business needs to hire an accountant. The answer to this question may vary from business to business.
But one thing to remember is as the business grows, the finances get more complex. To manage the complex numbers you surely will need an accountant to manage the accounts.
Also if you start hiring full-time or part-time employees, the management of paying tax and reports becomes more important than ever.
In this case, outsourcing the core accounting task will help you from derailing tasks by meeting them at the right time. It also gives you a lot of valuable time that you can invest in building your business.
While choosing an accountant you have to take into account a lot of factors including location (whether local or remote), certifications, experience in handling accounts of small businesses, strategies to save money, and more.
No matter if your business is small, you have to be very crucial about maintaining your accounts properly to understand your progress and make the necessary decisions to scale the growth of your business. Right from day one, you have to record every financial decision that you make for a better future.