Basic Guide To Small Business Accounting
You can use small business accounting to keep track of how much money comes in and goes out of your business accounts. This includes sales, purchases, payments and liabilities. This is a vast topic, but when it comes to small businesses, it is all about bookkeeping, financial reports and tax returns.
Accounting allows you to see how well your company is doing and where it can improve. You can use this knowledge to develop more effective short- and long-term strategies. Accounting may not be the most exciting aspect of running a business, but it is extremely important.
We know SMB bookkeeping seems really intimidating at first, but it is actually not that difficult once you grasp the basic goals of accounting: keeping track of your company's finances and gathering information for tax purposes.
This is done in three simple steps:
1. Keep all of your company's sales and purchase receipts. You need the information in these receipts to make summaries of your company transactions.
2. Enter these receipts in a ledger. The ledger gives you an overview of your revenue, expenses, and any other financial information you are keeping track of.
3. Combine data from your ledgers to create financial reports. These reports provide further information about the company's financial health. The most important ones include the balance sheet, cash flow analysis and profit and loss forecast.
Once you learn how to create these reports, see if you can figure out ways to streamline your system. You can read further articles like this one, take courses and use software for accounting.
Accounting vs Bookkeeping
Accounting and bookkeeping are similar in that they are both concerned with recording transactions and keeping track of your company's finances, but there are some important differences.
Accounting begins with bookkeeping. Bookkeeping involves tracking daily expenses, keeping records, categorising expenses, account reconciliation, managing invoices, payroll and paying suppliers. It has to do with many essential operation aspects of your business. The good news is that it can be automated to save time.
Bookkeeping provides the foundation that accounting can build on and analyse costs, prepare financial statements, and make sure your company is ready to file taxes. As a small business owner, you will want to learn about GAAP or Generally Accepted Accounting Principles that describe how to evaluate and report a company's finances.
Basic Accounting Terms You Need To Know
If you run a business, you will likely come across the following terms:
● Revenue / Income: The money your company makes from selling goods or services or through other commercial activities.
● Expenses / Expenditures: The costs your company incurs in order to generate revenue. This means things like rent, paying your employees, raw materials for products, office supplies, marketing etc.
● Accounts Payable: Money your company owes to lenders, vendors, freelancers and so on. They are registered as liabilities on the balance sheet.
● Accounts Receivable: Money that's owed to your company for the goods or services you sell. This could be from clients, customers or anybody else you have a business relationship with. They are referred to as assets on the balance sheet.
● Assets: Land, stocks, equipment, patents, accounts receivable – any liquid or non-liquid assets your company owns.
● Liabilities: Business loans, income taxes, accounts payable – any debts or obligations your company owes.
● Equity: The amount of money that would be returned to a company's shareholders or owner if all the assets were liquidated and all the debt were paid off. In other words, it is what you get when you subtract liabilities from assets.
● General Ledger: A comprehensive record of all company transactions, such as sales, expenses, and credit. Financial statements are generated using the general ledger.
● Chart Of Accounts: An index of all the financial accounts in a company's general ledger. It lists your company accounts and transaction categories like cash, liabilities, equity, revenues and expenses.
● Journal Entry: A record of a business transaction in a company's accounting books. Accountants and bookkeepers use journal entries to keep the general ledger up to date. Each journal entry will have a reference number, date, amount and description of the transaction.
● Trial Balance: A report that shows the balances of all accounts in the general ledger. It is used to check for errors.
Accounting Software And Tools
If you want to do your own accounting or bookkeeping, you're going to need accounting software like QuickBooks. Manual data entry is obsolete in today's business world, and it's also unsafe because it is easy to make mistakes.
You will get the most out of your accounting software if you integrate your other financial tools like receipt apps, payroll software and banking services. This allows the software to create categories, flag discrepancies and make account balance adjustments. You will also be able to get financial reports in a matter of seconds.
Financial Reports
There are three fundamental financial reports small businesses need: the balance sheets, income statement and cash flow statement. Accountants make them using bookkeeping records. These reports are crucial if you plan to expand, as investors frequently use them to determine if investing in your company is a good idea.
Balance Sheet
One of the most important financial statements to understand is the balance sheet. It summarises your company's assets, liabilities, and owner or shareholder ownership over a specified period of time. It essentially reveals your company's net worth and provides a snapshot of its health.
Income Statement
This report sums up your company's income and expenses over a certain period of time and is also referred to as a profit and loss statement. You can use this report to see whether your company is making a profit or losing money.
Cash Flow Statement
The cash flow statement gives you a summary of your company's cash flow over a specific period of time based on sales, expenses and other investments.
Conclusion
Small business entrepreneurs face a unique set of challenges when it comes to managing their finances because their initial startup funding may not be sufficient to pay all of their operating costs. They need to know how much money is coming in and going out as accurately as possible. Knowing your company's income and where it comes from means you know how much you can afford to spend.
