For a small business owner, there are many things that you have to handle single-handedly, from administrative to technical work, along with managing the finances and accounting data of the company.
And for small business owners, the thought of accounting becomes a nightmare because accounting involves recording, classifying, listing financial transactions, etc. The small business owner has to show reports to their stakeholders and keep the information properly for transactors to fill out taxes. Thankfully, the modern software system has made the task of business accounting simpler than in the traditional manner.
Accounting software can help small business owners upload all their information to cloud-based platforms and help accountants have accountability for financial data. In this article, We will provide a brief guide to small business accounting.
Understanding the Importance of Small Business Accounting
Small Business Accounting refers to analyzing, recording, and tracking the company’s financial transactions. Accounting is essential for small businesses as it helps provide insight into a company’s finances and forecast with accurate data. Using this information, small business owners can decide their pricing, investments, expenses, hiring, future growth of the company, etc.
Before understanding how to do small business accounting, it’s essential to familiarize yourself with the most common financial terms.
Here is a list of the most common accounting terms that will make it easy for you to understand accounting methods.
- Accounts Payable – The account payable is the debt that the company owes to its suppliers.
- Accounts Receivable – Accounts receivable is the money that other companies or suppliers need to pay your business for the products or services you provided them on a credit basis.
- Asset – The valuable assets that the company holds include property, land, etc.
- Equity – Equity is the valuable portion held by the shareholders. For instance, if the shareholders hold 25% equity, then the company’s profits and gains will be shareable with them.
- Expense – The cost involved in operating the business is the company’s expenses, which include the rent, salaries of the employees, electricity bills, loans, EMI payments, etc.
- Journal Entry – The journal entry includes the financial transaction entry in the journal ledger.
- Liabilities – The depreciation debts owed by the company, whose value depreciates with time; for instance, the liabilities are the hardware equipment, which requires maintenance over time.
- Revenue – The profit, gains, or revenue generated after paying the liabilities of the company is finally known as revenue.
- Trial Balance – The trial balance includes all the account balances for a specific period.
Types of Financial Reporting
Financial reports are essential tools to help your business make informed decisions when the time comes. There are three types of financial reporting: the balance sheet, the income statement, and the cash flow sheet. All the given reports are tracked on a timely basis.
- Balance Sheet: It shows the company’s shareholder equity, assets, and liabilities.
- Income Statement: It shows the company’s revenue, expenses, and net income.
- Cash Flow Statement: It shows the company’s inflows and outflows of cash.
Before moving on to the other aspects of Business Accounting, let’s also understand the difference between bookkeeping and accounting.
Accounting involves the detailed analysis, interpretation, and tracking of financial information. Whereas bookkeeping is concerned with recording financial transactions only.
Another difference is that accounting is a more comprehensive way of understanding finances and is also important when paying taxes and auditing. However, Bookkeeping involves recording and keeping financial information.
How to set up a Small Business Accounting System
Setting up a small business accounting system is important for your small business, and the type of accounting system you choose depends on the size of your business, its complexity, and your personal preferences. Here are a few key steps to make starting your small business accounting system easier.
1. Establishing a Legal Structure
Businesses can have different legal structures, which determine how they will be taxed and provide legal protections.
- Sole Proprietorship: A business that is owned and managed by a single individual.
- Partnership: A business entity owned and operated by two or more individuals.
- Limited Liability Company: A legally recognized company owned by one or more individuals who are not responsible for its debts.
- Corporation: A business structure is considered separate from its owners for tax purposes. The corporation structure is complicated and expensive, but some benefits include added legal protection and lower corporate taxes.
2. Open your Business Account
Separate your personal and business funds by opening a business bank account to track revenue and expenses effectively
3. Accounting Method
There are two ways of recording and reporting financial transactions in accounting that are available to you:
- Cash Basis Accounting – Cash Basis Accounting means your revenue is recognized when it’s received, and expenses are only recognized when paid. With its limited understanding of income and expenses, it might nevertheless present a false picture of a company’s financial health.
- Accrual Basis Accounting – Accrual accounting enables a company to record revenue and expenses when transactions occur, even before money is received or disbursed. With this method, however, a more accurate picture of the financial situation of the company becomes more challenging to track and manage.
4. Tracking Your Expenses
Tracking your expenses can help you deduct them from your taxes. Expense tracking methods include using Excel spreadsheets, accounting software, or receipt scanning. Below are some expenses that you can deduct.
- Payroll
- Software
- Professional Fees
- Equipment and Office Supplies
- Transportation
- Marketing and Advertising
5. Have a Bookkeeping System
When you have a bookkeeping system, you can actually keep track of your expenses, income, and financial statements. You can have a bookkeeper and automated accounting software.
6. Payment Acceptance Methods
There are multiple payment methods, such as cash, check, and card payments. For e-commerce websites, you can use payment applications like PayPal, Venmo, Zelle, CashApp, etc.
7. Setting up a Payroll System
When you have a team of people, you need to set up a payroll system for wage calculations, such as Gusto, Paycor, Paychex, or Wave Payroll.
8. Pay the tax obligation
As a small business owner, you have to calculate your taxes on your income and profit. With the help of an accounting system, you can pay your taxes and keep track of them.
9. Applying for Small Business Funding
You may need small business loan support when starting or investing in growth resources. To be eligible for a business loan, you must provide a lender with the most accurate records of your business finances. Certain financial statements, such as a balance sheet, income statement, and cash flow statement, might be required.
10. Calculate Gross Margins
The difference between the amount you receive from selling your product or service and the money you spend to produce it is known as the gross margin. Divide the selling price by the cost of the goods sold to obtain the gross margin.
Some Essential Tips for Small Business Accounting
- By keeping all the sales invoices, you can record any cash received from sales
- Save all receipts to check your expenses
- Record your personal money sent to your business
- Don’t use business cards for personal use, and vice versa; don’t use personal cards for business.
- Have a Federal Taxpayer Identification Number (TIN), which you can use for verification.
- Create a separate folder on your personal computer, and keep your invoices, receipts, and other legal agreements there.
Get Accounting for Your Small Business!
You cannot deny how robust and easy your business finances become with accounting done correctly. Business Accounting is the best way to make your business accountable for its expenses, investments, assets, and liabilities. You can get to know the worth of your business. With the help of a software accounting system, the whole scenario of small business accounting has become easier and hassle-free with additional features for analyzing and predicting growth based on the previous performance of the business.
