Basic record keeping is the first step toward successful accounting for small businesses. Small businesses are defined as those that have less than five employees, are independently owned, are not members of an association, are not paying wages to family members and have not filed with the IRS to be taxed as a corporation. The definition of small business can vary depending on the industry or region. What’s most important is how you define it for your accounting purposes.
Do you have a small business but are worried about the high costs of hiring an accountant to do your books? Do it yourself bookkeeping can seem like a intimidating task to take on. This article will show you how easy it is to set up basic bookkeeping for your small business.
How to Do Bookkeeping: Basics Every Small Business Owner Needs to Know
Basic Bookkeeping Terms You Need to Know
Accounts Payable: Accounts payable is the account which is used to track all of the money that you owe to a third party, such as supplier companies, banks, governments or anyone you borrowed money from. An easy example to think about is a mortgage as when you take one out, you sign a contract telling the bank you’ll pay them over a period of time in instalments.
Accounts Receivable: On the flip side, accounts receivable is the account that keeps track of all the money that third parties owe to you. Again, it can be customers, banks, companies or anyone that purchased or borrowed from your business.
Assets: Assets are simply all the things you or your company owns to help you successfully run the business. It can range from cash, buildings and land right through to tools, vehicles and furniture.
Balance Sheet: A balance sheet is a detailed report which breaks down the financial situation of your business. In this report, you’ll find aspects such as assets, liabilities and the capital of your business. The point of a balance sheet helps to show what your business owns and owes.
Bookkeeping: Obviously, this is one you need to know or should already know. Bookkeeping is the recording of financial transactions on a day-to-day basis. It helps to make sure that records of individual financial transactions are accurate and up-to-date.
Capital: This is simply the money or other assets which personally belong to you as the owner and not the actual profit you generate from your business or self-employment.
Costs of Goods Sold: This is another simple one, as it’s simply all of the money you spend on products or services which you plan to sell to customers.
Depreciation: Depreciation is when an asset loses value over time which can happen through wear and tear, for example. The decreased value is what’s measured as depreciation.
Equity: Equity is all of the money you invest in the company as the owner plus all the accumulated profits. As a small business owner, your equity is shown in a capital account.
Expenses: This is all of the money that you spend to operate your business which isn’t directly related to the sale of goods or services.
General Ledger: A general ledger account is an account you use to store, sort and summarise all of your transactions. These accounts are arranged in the general ledger which also features the balance sheet and the income statement.
Income Statement: This is the financial statement which presents a summary of your financial activity over a certain period of time. After working out the revenue earned, the costs of goods sold and the expenses, it works out your net profit or loss.
Journals: Journals are the place bookkeepers store their records of daily transactions. For every active account you use, such as cash, accounts payable and accounts receivable, you’ll have separate journals for each one.
Liabilities: Liabilities are basically all of the debts you owe. This can range from loans you’ve taken out to any unpaid bills you might have yet to pay.
Payroll: If you have a small business and you have employees, then payroll is the way you pay your employees. It’s a big part of bookkeeping and involves reporting a lot of payroll aspects to the government. This includes taxes that need to be paid on behalf of employees, compensation and more.
Revenue: Revenue is all of the money you collect in the process of selling your services and goods. There are even some companies that collect revenue in other ways, such as selling assets their business doesn’t need.
Trial Balance: Trial balance is how you test to be sure your books are in balance before pulling together all of the key information for the financial reports and closing the books for the accounting period.
The above terms are really the most basic bookkeeping terms you should be aware of – to begin with. To continue learning more bookkeeping phrases along with easy-to-understand definitions, than be sure to check out and bookmark our glossary blog which we regularly update so you’re never left confused.
Why bookkeeping matters
1. You need it to do your taxes
You need to know your net profit in order to do your taxes, and to figure that out, you need to know your total income and expenses. And the only way to know that for sure is to have accurate, up-to-date books.
2. It tells you where your money is going
Getting your books together and producing financial statements is the only way to gauge the financial health of your small business.
Are sales up? Are your shipping costs too high? Will you have enough money next month to cover payroll? Is cash flow increasing or decreasing? The only way to know for sure is to start bookkeeping.
3. It ensures that you don’t miss out on tax deductions
Keeping an accurate, up-to-date set of books is the best way to keep track of tax deductions (expenses that you can deduct from your taxable income).
The more information (and supporting documents) you can give your CPA at tax time, the more deductions you’ll be able to legitimately claim, and the bigger your tax return will be.
The IRS also has pretty stringent recordkeeping requirements for any deductions you claim, so having your books in order can remove a huge layer of stress if you ever get audited.
4. You need it to borrow money
If you need to borrow money from someone other than friends and family, you’ll need to have your books together. Doing so lets you produce financial statements, which are often a prerequisite for getting a business loan, a line of credit from a bank, or seed investment.
Lenders and investors want a clear idea of your business’ financial state before giving you money. They can’t do that without looking into things like revenue, cash flow, assets and liabilities, which they’ll search for on your balance sheet, income statement and statement of cash flows.
5. It helps you catch errors quickly
If you wait until the end of the year to reconcile or get your financial transactions in order, you won’t know if you or your bank made a mistake until you’re buried in paperwork at tax time. Regularly organizing and updating your books can help you catch that erroneous overdraft fee today, rather than six months from now, when it’s too late to bring up.
Tips to Help with Business Financial Record Keeping
- Establish Business Bank Accounts
A business must be distinguishable from the owners, and the easiest way to accomplish this is to establish bank accounts specifically for the business. Not only does this allow for the business to be distinguishable from the owners, it also separates business activities and expenses from personal ones. A business bank account allows for you to easily track business income and expenses.
2. Avoid Using Cash
Spending cash without the proper documentation makes it especially difficult for business owners to keep and maintain proper business financial records. It is easy to forget how and where cash was spent without the proper documentation. It is recommended to use a credit or debit card, or check instead of cash as there is a paper trail to follow and this practice will help to keep track of expenses. When you use cash instead of other methods of payment, you could also potentially be missing out on taking advantage of write-offs, as there is no documented proof. If you need to use cash, pull money out of the ATM and make a note on the receipt as to the purpose of the withdrawal.
3. Schedule a Specific Time Each Week
If you are going to be keeping and maintaining your businesses records, be sure to schedule a specific time each week you can devote to keeping your records current. Take some time each week to review your income and expenses, and manage your accounts receivable and payable. Establishing a set schedule will help to ensure that you stay on top of your financial record, and will give you the necessary overview of how your business is doing, and allows for you to control your cash flow.
4. Purchase the Right Accounting Software
Purchase the right accounting software that will be the most beneficial for your business. If you are not sure what software you should purchase, consult with your accountant who will be able to provide you with professional advice. Purchasing an online software allows for you to be able to access your accounting information anywhere you have an internet connection. This also makes it easier for your accountant to access your files. An online program will continually backup your files to a cloud based storage, but it is still recommended that business owners maintain a hard copy as well. With a desktop accounting program, you’ll need to get into the habit of regularly backing up your files to ensure no data is lost. Additionally, you’ll have the upfront cost of purchasing the program along with continual upgrades to maintain the program.
5. Tax Obligations
Keeping and maintaining accurate accounting records means that you are able to meet all of your tax obligations and regular filing requirements without having to worry about paying a penalty or interest for a missed or late payment. In order to support the claims, you are making, you will need to keep records and receipts for all acquisitions for your expenses. If you have employees on your payroll, you’re required to enroll for payroll tax, also known as Pay As You Earn (PAYE), and remit on a monthly basis. For business that deals in vatable good, having good accounting records will help immensely in filing your monthly Value Added Tax (VAT) tax returns. This is where having a reliable accounting software proves to be valuable, as all of this required information will be available to you through your program; helping you to streamline and automate your business processes and helping you to stay compliant.
Conclusion
A small business bookkeeping doesn’t have to be a daunting task where you’re constantly worried about making a mistake. It shouldn’t take more of your time than it absolutely has to, and you shouldn’t have to pay a significant sum of money for an outside service.