Few small business owners are accounting experts, yet knowing how to perform accounting for a small business might help you succeed.
Accounting is critical to the success of any organization. It assists the company in tracking revenue and expenses, claiming lucrative tax deductions, adhering to numerous regulations and loan covenants, and providing information to investors, managers, and other stakeholders to help them make better business decisions.
Accounting for a small firm is mainly made up of two components:
- Bookkeeping. The practice of recording and tracking your company’s financial transactions is known as bookkeeping.
- Financial statements. Financial statements are reports that summarize transactions and illustrate how the business is doing.
Let’s take a closer look at each of these elements.
What is the best way to perform accounting for a small business?
Here are some simple procedures to help you get started tracking financial data for your small business, preparing financial statements, and filing taxes.
Step 1: Decide on your accounting method.
The method you’ll employ to record financial transactions is one of the first accounting decisions you’ll have to make in your small business. The following are the two most common accounting methods:
- On a Cash basis. When money changes hands, you record revenue and expenses using the cash accounting technique. For example, only when a consumer pays you do you record revenue from a sale.
- On Accrual basis. You record income when you make a sale and expenses when you incur them using the accrual accounting approach, regardless of when money changes hands. When you sell to a customer on credit, for example, you record revenue even if the consumer doesn’t pay the invoice for 30 days or more.
Although the cash basis is simpler to use, the accrual method of documenting transactions provides a more accurate picture of actual revenue and expenses over time. Most small businesses that don’t carry inventory choose the cash basis. Large and inventory-heavy businesses may need to use the accrual method.
Step 2: Establish a business bank account and credit card.
Open a company bank account and a business credit card, and use those accounts to handle all of your business’s income and expenses instead of your personal checking account or credit card. Keeping a clear record of company activities is much easier with a separate bank account.
Step 3: Put accounting software to work for you.
It’s time to link your business bank account to your accounting software once you’ve established one. Most reliable accounting software can automate the accounting process by linking to your bank account and ensuring that all transactions are shown in your financial statements.
The most important thing is to make sure that every transaction is recorded correctly and in the correct account. To do so, you must review your transactions on a regular basis. For instance, the programme might have classified a transaction as “Office costs” when it should have been “Software subscriptions.” You’ll get more useful results from your accounting software if you categorize transactions into the appropriate categories.
Step 4: Keep track of accounts payable and receivable.
Keep track of all vendor invoices (also known as accounts payable) and make sure you have enough cash on hand to pay suppliers on time. You’ll avoid late fees and keep your merchants pleased if you do it this way. If merchants provide discounts for paying early, you should take advantage of them to save money.
Keep an eye on any outstanding customer payments as well (a.k.a. accounts receivable). Slow-paying clients can affect your capacity to pay your own obligations, and the sooner you recognize and address payment collection issues, the better.
Step 5: Maintain accurate financial records.
You may be wondering whether you need to preserve copies of invoices, receipts, and other accounting records now that you have a business checking account and an accounting system to capture all of your financial transactions. Yes, it is correct.
If any taxing body decides to audit your company, the auditor will require more than bank statements and accounting system reports. They’ll also want to examine supporting material that demonstrates:
The transaction’s start date
Whom you paid and how much you paid
A description of the purchase that proves it was a business expense.
Step 6: Make adjustments to your diary entries.
You (or your accountant or CPA) must record adjusting journal entries at the conclusion of the accounting period to record any transactions that do not affect your bank account. Adjusting journal entries are divided into three categories:
- Accruals. If you adopt the accrual accounting system, you’ll need to use accruals. They ensure that all sales and expenses that occurred during the period are shown in your financial statements. For example, even if you won’t cut payroll checks until after year-end, you’d record accrued wages and payroll taxes for hours worked by your employees during the last week of the year.
- Deferrals. Deferrals are also only necessary if you use the accrual method. They account for cash received or paid in advance that actually belongs in the following accounting period. For example, if a client pre-pays for services you haven’t yet performed, you would record the payment as deferred revenue until you perform the service.
- Other adjustments. You may need to account for other transactions that didn’t go through your business checking account or credit card statement, such as:
- Purchasing business supplies with your personal credit card
- Correcting errors, such as the purchase of a piece of equipment accidentally recorded as supplies expense instead of a fixed asset
- Recording depreciation expense
- Estimating reserves, such as an allowance for doubtful accounts
Step 7: Generate financial statements
At the end of the month, quarter, or year (or any time in-between), you can generate financial reports from your accounting software.
Depending on your business, you may use several different financial reports. Here are the most common financial reports used in small business accounting:
- Balance sheet. A balance sheet summarizes your business’s assets (what you own), liability (what you owe), and owner’s equity at a point in time. This gives you a snapshot of the current health of your business and whether you have the resources to expand or need to cut costs.
- Income statement. An income statement, also known as a Profit and Loss or P&L statement, summarizes your business’s revenues, costs, and expenses over a particular period. It can be useful for comparing your sales and expenses to your budget.
- Cash flow statement. The cash flow statement tells you how much cash entered your business during a particular period, how much cash you spent over that same period, and how much cash you have on hand. This helps you make cash flow projections and ensure you have the cash on hand to pay bills.
How Finanshels can help
For most entrepreneurs, learning how to do accounting for a small business isn’t exactly a passion project, but it is necessary for getting the financial information you need to run a successful business.
Of course, if the demands of running a business mean you just don’t have time to learn QuickBooks, or if you’d rather leave your bookkeeping to a professional, try **Finanshels** (that’s us). We give you a team of bookkeepers to handle your bookkeeping and simple software for keeping track of your business finances.