You may have heard somewhere or from someone that even a small business needs accounting books. Now you’re looking for ways on how to set it up. That’s actually correct! No matter how small a business is, having an accounting book or bookkeeping is a must. It let you take control of your finances and more importantly– make smart decisions.
Now, how to set it up? There are five steps in order to do so. Those are:
1st Step : Opening a Business Bank Account
2nd Step: Picking a Recording Method
3rd Step: Choosing a Bookkeeping Method
4th Step: Setting up a Chart of Accounts
5th Step: Deciding on Payment Terms
I’ll talk about all of those steps in this so you can create your own accounting books in no time.
Opening a Business Bank Account
I choose Opening a Business Bank Account as the first step because it is actually a pre-requisite for a business to operate. This is actually a rule to succeed– personal money should be separated from business money. Therefore, you should open another bank account for business purposes only. That way you will be able to avoid spending your business money on your personal expenses and vice versa. It will also be easy to track business cash flow and reconcile bank statements with your books.
Picking a Recording Method
Next is another pre-requisite in setting up your accounting books, you must choose how your business transactions will be recorded. There are three methods. Each has its own advantages but that is for you to decide. These methods are:
- Record by Spreadsheet – Even if the traditional way is by using a physical ledger or accounting book, I don’t want to recommend that. Not only that it is prone to errors but it is also time-consuming. In business, time is gold. So the cheapest way to record business transactions in a time-saving way is by using a spreadsheet on your computer like Excel, or Google Sheets. You can also do it on your phone. But always remember to save it on your computer’s storage and also in cloud storage.
- Use an Accounting Software – If you think you can still do your own bookkeeping but also wants to save more time– investing in accounting software is what you need. It automates almost all accounting processes, organizes your books, and provides accurate calculations.
- Hire an Accountant – If you want a professional to handle your books so you won’t even worry about it, then you may want to consider hiring an accountant. It can be an in-house bookkeeper or an outsourced accountant (an organization that handles many companies’ books). However, keep in mind that this might be expensive for a small business.
Choosing a Bookkeeping Method
There are two methods for recording transactions– 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 means you record expenses and income when they are incurred, regardless of when the cash is exchanged. A double-entry accounting system is best suitable to this method.
Setting up a Chart of Accounts
In financial statements, there’s a bookkeeping tool that lists all the accounts. It’s called a chart of accounts. To create it, simply divide your business transactions into categories such as assets, liabilities, equity, revenue, and expenses. Using this tool will allow you to compile statements, review progress, and locate transactions
Tip: Assign a set of numbers for each account. Then number every transaction by the account it falls under. For instance, numbers 200-299 are for Liabilities entry. That means you have to use one of the assigned numbers whenever there’s a liability transaction.
Deciding on Payment Terms
For payment terms, revenue is what you’ll include as an entry to your accounting books once you get paid. If your customers pay upfront then the entry is easy as that. However, if you allow credit or payment on a later date you must track it on your books as an accounts receivable entry.
Best Accounting Books for Small Business
Seeking more knowledge is a good thing. It only shows that you are willing to learn and wanted to know more. So here are the best accounting books I could recommend for you to read:
- “Simple Numbers, Straight Talk, Big Profits” by Greg Crabtree
- “Accounting for the Numberphobic” by Dawn Fotopulos
- “Finance for Nonfinancial Managers” by Gene Siciliano
- “The Accounting Game: Basic Accounting Fresh From the Lemonade Stand” by Darrell Mullis
- “Profit First” by Mike Michalowicz
- “The Tax and Legal Playbook: Game-Changing Solutions for Your Small-Business Questions” by Mark J. Kohler
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less“ by Mike Piper
- “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” by Thomas Ittelson
- “Small Time Operator: How to Start Your Own Business, Keep Your Books, Pay Your Taxes, and Stay Out of Trouble” by Bernard B. Kamoroff
- “Accounting for Small Business Owners” by Tycho Press
Learning how to set up and how accounting books work for your business could take time. But it is definitely a fruitful one. Even if you have decided to hire an accountant, having knowledge about it would help you keep track of your business’ financial aspects.
See Also: FINANCIAL STATEMENTS