Business and accounting goes hand in hand. Even if you ask successful entrepreneurs if it’s really necessary, you’ll probably get a response like “If you want to fail then don’t do it.” or “Of course! It’s one of the keys to success.” For small businesses, you don’t have to hire an accountant to do it. You can do it on your own! This post will serve as a guide to how. It will teach you the basics, the prerequisite, and the things that you should record on your bookkeeping.
Let’s start with the basics. Accounting for small businesses is not really that complicated. In fact, it only involves processes of recording, tracking, and analyzing all financial transactions of your business. In other words, bookkeeping (recording financial transactions), creating financial reports and filing tax returns. It sounds like additional tasks I’m afraid. But it is necessary to avoid cash flow confusion and to easily do paperwork especially tax filing.
First things first, before you start bookkeeping or even start your business, you should consider opening a separate bank account from your personal one. This is to avoid using your business money for personal expenses or vice versa. Doing this will surely get you close to your business goals like profiting and its growth. There are two kinds that you should open:
- Business Checking Account: This is the bank account where your business income should go and your expenses should come from. It will be easy to track cash flow with this.
- Business Savings Account: This is where you should put all or at least half of your business profit. Your saved funds in this account can be used for business growth, emergency costs, etc. You can also use this account to separate tax payments cost from the business money.
Next you should determine where you want to record your business transactions. Nowadays, accounting or bookkeeping programs are available for your convenience. Though most of them are a bit pricey. But you can manually use spreadsheets on your computer or phone. A physical ledger is out of date but it’s good to have one too. You can use it just in case your computer or phone isn’t available.
The last one is storage. Any transaction receipt should be stored somewhere like in a file cabinet. But never forget to save a digital copy. It will be easier there and more secure. You can either use a scanner to make a digital copy or you can use your smartphone and download a scanner app. Yep! That’s a thing now. Your digital receipts, tax records, and bookkeeping files should be stored online too. You can try to use cloud storage systems like Dropbox, Sync, Google Drive, etc.
Bookkeeping and Accounting
First of all, the IRS requires that all businesses should keep financial records. There’s no excuse not to do bookkeeping. But what is bookkeeping actually? It is the process of consistently recording daily transactions of your business. You can either do this manually or use a program for your convenience.
Now, effective bookkeeping should set up and tracked the following nine accounts to act as adequate financial information for accounting:
1. Cash- records of Cash Receipts and Cash Payments (also used to complete the Cash Budget).
2. Accounts Receivable- records of credit accounts if it’s allowed. Use for generating invoices and send out bills to your credit customers.
3. Inventory- a record for tracking product inventory.
4. Accounts Payable- If you buy items for your business and you use credit, you will have Accounts Payable. This account is what you owe your suppliers.
5. Loans Payable- Use for tracking your due dates and payments for business loans.
6. Sales- Use for recording credit or cash sale.
7. Payroll Expenses- Use to record cost for paying employees if any.
8. Purchases- Records of purchased finished goods or raw materials.
9. Owner’s Draw- Amount the small business owner takes from the firm.
However, depending on the nature of your business, you may not need to use some accounts. But to effectively book keep transactions you must use a double-entry method. That method means every entry to an account requires a corresponding and opposite entry to a different account.
The information above seems to be overwhelming, right? For now, yes. But here are where bookkeeping is mainly use for:
- Monitoring business progress.
- Creating financial statements.
- Identifying your income sources.
- Deductible cost tracking.
- The basis in property tracking.
- The basis for your tax returns.
And then using your bookkeeping records, you may now proceed with your accounting ledger. But you must choose the method too, and there are two cash basis and accrual accounting.
On Cash-basis, you record income as you earn it, and record payments when they are made. This is more suitable for small business that offers services and not products. On the other hand, accrual accounting you record expenses and income when they are incurred, regardless of when the cash is exchanged.
Using your accounting records, you can create a financial statement including the income statement, statement of cash flow, the statement of retained earnings, and the balance sheet. These statements will allow you to see your business status.
Note: Accounting and Bookkeeping Software are nowadays available too. Some can now create financial statements according to your entries. I suggest trying one just to get the hang of the whole accounting process itself. Then later on you can probably DIY.
Don’t get me wrong. Some startup, especially e-commerce small businesses don’t really do the accounting part. Some just stick with bookkeeping their income and expenses. After all, their tax is just minus a certain percentage of their profit. That works too. But as your company goes bigger, it’s either you try learning more about accounting or hire a bookkeeper and a CPA.
See Also: PREPARING YOUR ACCOUNTING BOOKS