Whether you enjoy working with numbers or fancy yourself a creative type, hiding the true state of your company’s finances is never fun. This is especially true for startups.
If you own a small business, you would be wise to invest some time and energy into learning the fundamentals of business accounting to help you avoid costly mistakes and potential legal ramifications.
Accounting Fundamentals for Small Businesses
It is important to know the fundamentals of accounting whether you or an accountant are handling the financial records of your firm. If you can read and prepare these fundamental accounting records, you will have a far better grasp of the success and financial well-being of your organisation. Consequently, you’ll be in a stronger position to manage your own finances and expand your firm.
Accounting is the process of keeping track of, analysing, and making sense of a business’s financial transactions. Accountants help business owners keep track of their money, meet their legal obligations, and make better business decisions.
There are the basic rules that all accountants should know. Let’s look at the basics of accounting for your small business so you can understand it better.
Revenue Recognition Principle
According to the revenue principle, a business’s income is made and recorded at the point of sale. This means that revenue is made when the buyer buys the goods or performs the services for which the goods are sold, not when the seller accepts the cash for the transaction.
When you buy goods or services for your business, it helps to keep track of your assets by writing them down. It’s important to write down the cost of everything you buy and figure out how much those assets will lose value over time.
The Matching Rule
Costs must be matched with income earned in the same accounting period and written down in the same time period that the expense was made. If sales of goods or services are counted as income, then the cost of those things should also be counted.
Full Disclosure Principle
There should be enough information on financial statements so that they don’t mislead in any way. With this goal in mind, your company’s important partners or customers will find out information that is important to them.
The Objective Truth
Accounting data should always be correct, with no opinions added. Make sure there are vouchers, receipts, and invoices to back up the data. In this case, it helps to be objective so that you can trust financial results.
How to Do Accounting for a Small Business
If your business isn’t very old yet and you don’t know how to keep track of its finances, this might sound really scary. But it’s not too hard once you know the basics and have the right tools in your toolbox.
Get an account at a bank.
No matter how small your business is, you should have a separate business bank account from your personal one.
The main benefit of having a commercial bank account is that you can pay fees and get money through an account that can be tracked. You also have access to account reports and records so that your business’s finances don’t have a lot of gaps.
Set up a bookkeeping system.
Bookkeeping is the regular job of keeping track of money coming in and money going out. People used to do this with ledgers, but now you can use professional bookkeeping software or even online Google spreadsheets and Local Excel documents with classified columns to enter daily items.
Small transactions can add up, so it’s important to keep track of them. Some small businesses have bookkeepers who keep the books up to date every day or every week.
Keep track of all the costs.
You must keep track of transactions and fees from the start of your business. The most basic part of accounting, especially for small businesses, is keeping track of all the money the business spends.
When it’s tax time, you’ll pay less in taxes if you can deduct all of your business costs from your business income. As a business owner, you can then better look at and track the growth of your business.
Set up a way to send out bills.
Unless you run a store or restaurant, it’s likely that your small business will charge customers or clients by sending them an invoice. You can use software like Freshbook, Wave, and Quickbook to send invoices to your customers electronically.
By making invoices, you also keep track of how much money your business is owed. When a customer pays you, you can mark the invoice as paid and count the money as income.
Figure out the money coming in.
Accounting is about more than just keeping accurate records for the tax system. It is also about figuring out how much money your business is making (or not making). You can do this by adding up your total sales (gross revenue) and your net income (the total sales minus the total expenses).
Obviously, the most important number is the net income, because it tells you whether or not you are making money after all your costs.
Figure out the tax.
Accounting for small businesses can be a lot of work and complicated, which can make some small business owners feel like they can’t handle it. That’s because filling out a tax return can be confusing and scary. As long as you file your taxes on time, everything will be fine.
Whether you do your own business taxes or hire an accounting firm, you need to be able to give accurate financial information for the whole fiscal year. Only if you keep track of your money throughout the year will you be able to do that.
Tips and tools for small business accounting
No matter what stage your business is in, if you follow these tips, you can improve your accounting strategy and the financial health of your business as a whole.
Use the right equipment. Accounting software that is reliable and easy to use can help you streamline and simplify your accounting tasks and keep better track of your money. Software like QuickBooks, Freshbook, and Wave, which were mentioned above, are easy-to-use tools for small business owners who are just starting out.
Get your partners and key staff involved. No matter what department they work in, all key executives and managers should know the basics of your company’s finances and how they can help keep accurate records and make accurate predictions.
Setting up the right internal procedures is important for a small business. Internal accounting controls make sure that everyone on your staff is responsible for your company’s financial success. They also cut down on fraud and other unexpected risks or losses and make sure that your financial information doesn’t get into the wrong hands.
Accounting for your small business is not as hard as you might think. The more organised you are, the easier it will be to keep track of your books and money.
When your small business grows, you may need to hire a chartered accountant to help you with all of these things. Ask other business owners for recommendations, and make sure to find people who know about your business and care about it.