Small business accountants are responsible for monitoring, documenting, and evaluating a company’s financial activities. Accounting procedures provide the framework for comprehending your company’s financial health. Metric accounting procedures will help you monitor your cash flow, control spending, and ensure your company adheres to tax laws and rules.
For you to make well-informed business decisions, you must use good accounting methods. Proper accounting records, for example, can assist you in deciding when to expand your business, hire more employees, or invest in new machinery. Additionally, accurate accounting enables you to quickly address problems by spotting trends that may point to future problems, such as dropping sales or rising expenses.
Accounting also plays a key role in meeting legal obligations. Keeping thorough and well-organized records is essential for a variety of tasks, including filing taxes and giving stakeholders financial reports. This lowers the possibility of making mistakes that can result in fines or legal problems. Furthermore, transparent accounting standards foster confidence among lenders, investors, and clients.
In summary, small business accounting is not just about keeping the books balanced. It involves learning about the financial health of your company, making data-driven decisions, and making sure all legal obligations are met. Your company’s long-term growth and success are supported by this foundation.
Learn the Basics of Small Business Accounting
Anyone managing or operating a business has to have a basic understanding of small business accounting. You may better understand financial statements, manage your money, and interact with financial specialists if you are familiar with some basic phrases and concepts.
Important Accounting Terms
Grasping the language of accounting is the first step in mastering small business financial management. Below are some of the fundamental terms you’ll encounter:
- Assets: These are resources owned by your business that hold value. Assets can be tangible, like equipment and inventory, or intangible, like patents and trademarks.
- Liabilities: These are the debts or obligations your business owes to others. Liabilities include loans, accounts payable, and any other financial commitments.
- Equity: This represents the owner’s share in the business after liabilities are subtracted from assets. It reflects the residual interest in the business.
- Revenue: This is the income generated from your business activities, such as sales of products or services.
- Expenses: These are the costs incurred in running your business, including rent, utilities, salaries, and materials.
- General Ledger: The general ledger is a comprehensive record of all financial transactions made by your business. It’s the primary source for creating financial statements.
- Journal Entry: A journal entry is a record of a financial transaction in a general ledger. Each entry typically includes the date, amount, and accounts affected.
- Trial Balance: A trial balance is a report that lists the balances of all your business’s accounts at a specific point in time. It helps ensure that the ledger is correctly balanced.
These terms form the foundation of your business’s financial language. Understanding them allows you to interpret financial statements better and make informed decisions.
Types of Financial Reporting
Financial reports are essential tools for understanding the financial health of your business. They provide a snapshot of your business’s performance and help you make informed decisions.
Balance Sheet
The balance sheet is a financial statement that provides a snapshot of your business’s financial position at a specific point in time. It lists your company’s assets, liabilities, and equity, giving a clear picture of what your business owns and owes.
Assets are divided into current and non-current categories. Current assets, such as cash and inventory, are expected to be converted into cash within a year. Non-current assets, like property and equipment, are long-term investments that your business holds.
Liabilities are similarly categorized into current and non-current. Current liabilities include obligations like accounts payable and short-term loans, while non-current liabilities include long-term debt.
Equity represents the owner’s stake in the company, reflecting the net value after all liabilities are subtracted from assets. A well-balanced sheet indicates financial stability and is a key indicator of your business’s health.
Income Statement
The income statement, also known as the profit and loss statement, summarizes your business’s revenues, expenses, and profits over a specific period. It gives you a better understanding of your company’s profitability by indicating whether or not you are turning a profit.
The income statement starts with revenue, the total amount earned from sales. From this, the cost of goods sold (COGS) is subtracted to determine gross profit. Operating expenses, such as salaries, rent, and utilities are then deducted to calculate operating profit. Finally, any taxes or interest expenses are subtracted to determine net income, the final profit figure.
This statement aids in the evaluation of your company’s performance, the identification of income and spending patterns, and the formulation of well-informed budgetary and investment decisions.
Cash Flow Statement
The cash flow statement tracks the inflows and outflows of cash within your business over a period. It demonstrates how your company makes money and spends it, which is essential for keeping liquidity high and making sure your company can pay its debts.
The cash flow statement is divided into three sections:
- Operating Activities: This section includes cash transactions related to your business’s core operations, such as receipts from customers and payments to suppliers.
- Investing Activities: This covers cash transactions for investments in assets, like purchasing equipment or selling property.
- Financing Activities: This section tracks cash movements related to borrowing and repaying loans, issuing or buying back stock, and paying dividends.
Understanding your cash flow is essential for managing day-to-day operations, planning for future expenses, and making investment decisions. A positive cash flow indicates that your business is generating enough cash to sustain itself and grow.
Accounting vs. Bookkeeping
While accounting and bookkeeping are often used interchangeably, they are distinct functions within the financial management of a business. To properly manage the finances of your organization, you must comprehend the distinction between the two.
The practice of organizing and documenting financial transactions is called bookkeeping. This involves keeping tabs on earnings, outlays, sales, and acquisitions. Bookkeepers make sure that all transactions are appropriately categorized and documented in the appropriate account by keeping accurate records.
Accounting, on the other hand, goes beyond recording transactions. To offer insights into the financial health of the company, entails interpreting, analyzing, and summarizing financial data. Bookkeepers’ records are used by accountants to create financial statements, examine trends, and offer financial management guidance. In addition, they manage regulatory compliance, financial forecasts, and tax planning.
Bookkeeping is the foundation upon which accounting is built. Accurate bookkeeping is essential for accountants to generate trustworthy financial reports and offer insightful advice.
How to Set Up a Small Business Accounting System
Setting up an accounting system is crucial for managing your business’s finances effectively. All financial transactions are guaranteed to be accurately recorded by a well-organized system, which lets you monitor the success of your company and stay in compliance with the law.
Here’s a step-by-step guide to setting up a small business accounting system:
1. Establish a Legal Structure
The first step in setting up your accounting system is to establish a legal structure for your business. The legal structure you select will have a big impact on liability, taxes, and record-keeping needs.
Sole Proprietorship: This is the simplest form of business structure, where the business is owned and operated by a single individual. The owner is personally liable for all business debts and obligations.
Partnership: In a partnership, two or more individuals share ownership of the business. Partners share profits, losses, and responsibilities, but are also jointly liable for the business’s debts.
Limited Liability Company (LLC): An LLC provides the benefits of limited liability, meaning that the owners (or members) are not personally liable for the business’s debts. It also offers flexibility in management and tax treatment.
Corporation: A corporation is a separate legal entity from its owners. It offers limited liability protection to its shareholders but comes with more regulatory requirements and tax obligations.
Choosing the right legal structure depends on your business’s size, goals, and the level of risk you’re willing to assume. It’s advisable to consult with an accountant or legal advisor to determine the best structure for your business.
2. Open a Business Bank Account
Separating your personal and business finances is essential for accurate record-keeping and tax reporting. Opening a business bank account allows you to track your business’s income and expenses independently of your personal finances.
To open a business bank account, you’ll typically need to provide your business’s legal name, tax identification number, and other relevant documents, such as your business’s formation documents or operating agreement. Having a dedicated business account simplifies bookkeeping and ensures that your financial records are accurate and organized.
3. Choose an Accounting Method
Selecting an accounting method is another important decision in setting up your accounting system. The two main methods are cash-based accounting and accrual-based accounting.
Cash Basis Accounting: This method records transactions only when cash changes hands. Revenue is recognized when it is received, and expenses are recorded when they are paid. Cash basis accounting is straightforward and provides a clear picture of your cash flow, but it may not accurately reflect your business’s financial health over time.
Accrual Basis Accounting: This method records revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid. Accrual basis accounting provides a more accurate picture of your business’s financial performance, as it matches income and expenses to the period in which they occur.
Most small businesses start with cash basis accounting due to its simplicity, but as your business grows, you may need to switch to accrual basis accounting to get a more accurate view of your finances.
4. Track your expenses
Tracking your business expenses is crucial for managing your cash flow and ensuring accurate financial reporting. Using spreadsheets, accounting software, or manual record-keeping are a few ways to maintain tabs on spending.
Accounting Software: Many small businesses use accounting software like QuickBooks or Xero to track expenses automatically. With the help of these tools, you may group expenses into different categories, associate them with particular projects or clients, and produce reports that shed light on your spending habits.
Spreadsheets: For those who prefer a more hands-on approach, spreadsheets like Excel or Google Sheets can be used to track expenses. You may make personalized templates that let you track costs, group them, and figure out totals.
Manual Record-Keeping: Some businesses prefer to keep paper records of expenses, such as receipts and invoices. Even though this process can take some time, it’s crucial to make sure that all costs are precisely documented and safely kept for taxation.
5. Establish a bookkeeping system.
An accounting system is necessary to keep track of and arrange the financial transactions of your company. The size and complexity of your company will determine which bookkeeping system setup choice is best for you.
Hiring a Bookkeeper: If you have the resources, hiring a professional bookkeeper can save you time and ensure that your financial records are accurate and up-to-date. Account reconciliation, transaction recording, and financial statement preparation are among the duties that a bookkeeper can perform.
Using Accounting Software: For small businesses with limited resources, accounting software can automate many bookkeeping tasks. You may manage invoices, create financial reports, and keep track of your income and expenses with the use of software like QuickBooks, Xero, and FreshBooks.
Do-It-Yourself Bookkeeping: If you prefer a more hands-on approach, you can manage your bookkeeping manually or using Excel.
6. Choose a Method for Accepting Payments
How you accept payments from customers is an important aspect of your accounting system. There are several payment processing methods to choose from, depending on your business’s needs:
Credit and debit cards: Accepting credit and debit card payments is essential for most businesses. You’ll need to set up a merchant account with a payment processor like PayPal, Square, or Stripe to handle these transactions.
Online Payments: For businesses that operate online, offering online payment options is crucial. Payment gateways like PayPal, Stripe, and Shopify Payments make it easy to accept payments through your website.
Payment Apps: Mobile payment apps like Venmo, Cash App, and Apple Pay provide additional convenience for customers and can be a valuable addition to your payment options.
7. Set Up a Payroll System
If you have employees, setting up a payroll system is essential for managing their wages, taxes, and benefits. There are several ways to handle payroll:
Payroll Software: Payroll software like Gusto, QuickBooks Payroll, and ADP can automate the process of calculating wages, withholding taxes, and issuing paychecks. These tools also help you stay compliant with tax laws and regulations.
Manual Payroll: For small businesses with a few employees, manual payroll may be sufficient. However, this method can be time-consuming and prone to errors, so it’s important to double-check your calculations and stay organized.
Outsourcing Payroll: If managing payroll is too complex or time-consuming, consider outsourcing it to a payroll service provider. These companies handle all aspects of payroll, from calculating wages to filing taxes, ensuring that your payroll is accurate and compliant.
8. Set Up a System to Pay Tax Obligations
Paying taxes is a critical aspect of running a business, and it’s important to have a system in place to manage your tax obligations. This includes federal, state, and local taxes, as well as payroll taxes if you have employees.
To set up a tax payment system, start by identifying the taxes your business is required to pay and the deadlines for each. Next, create a schedule to ensure that you pay your taxes on time. You can use accounting software to track your tax liabilities and generate reports that show how much you owe. Finally, set aside funds regularly to cover your tax obligations so you’re not caught off guard when tax time comes.
9. Calculate Gross Margins
Gross margin is a key financial metric that measures the profitability of your business’s core activities. It’s calculated by subtracting the cost of goods sold (COGS) from revenue and then dividing it by revenue.
Gross margin = (Revenue – COGS) / Revenue
A higher gross margin indicates that your business is more profitable, as it’s earning more from each sale after covering the cost of goods sold. Monitoring your gross margin helps you assess your pricing strategy, manage costs, and make informed decisions about your business’s future.
10. Apply for Small Business Funding
One of the most crucial steps in expanding your company is to apply for small business funding. Keeping up-to-date financial records is crucial for obtaining finance, whether you’re looking for an investment, line of credit, or loan.
To apply for funding, start by preparing your financial statements, including your balance sheet, income statement, and cash flow statement. These records give investors and lenders a comprehensive view of the financial standing of your company. Next, investigate possible funding options, including credit unions, banks, and internet lenders, and collect the supporting materials you’ll need for your application.
Tip
Regularly review your accounting system to ensure that it continues to meet your business’s needs. Your company may need to recruit more employees, change your software, or modify your bookkeeping procedures as it expands to keep up with the rising complexity.
Small Business Accounting Software Explained
Accounting software is a valuable tool for automating and managing small business accounting tasks. By using software, you can save time, reduce errors, and gain better insights into your business’s financial health.
There are several accounting software options available, each with its own features, pricing, and suitability for different types of small businesses. Here’s a brief comparison of some popular options:
- QuickBooks:
QuickBooks is one of the most widely used accounting software for small businesses. It provides multiple functions, such as payroll management, tax preparation, spending tracking, and invoicing. There are desktop and internet versions of QuickBooks, with price tiers that accommodate different business sizes and needs.
- Xero:
Xero is a cloud-based accounting software that provides similar features to QuickBooks, with a focus on collaboration and ease of use. It provides features for financial reporting, spending monitoring, bank reconciliation, and invoicing. Because of its numerous pricing options, Xero may be used by companies of all sizes.
- FreshBooks:
Accounting software like FreshBooks is made for small businesses and independent contractors that want an easy-to-use, straightforward solution. It provides functions including time tracking, expenditure management, reporting, and invoicing. Strong customer service and an easy-to-use UI are two of FreshBooks’ best qualities.
- Zoho Books:
Zoho Books is part of the Zoho suite of business applications. It offers comprehensive accounting features, including invoicing, expense tracking, project management, and financial reporting. Zoho Books integrates seamlessly with other Zoho apps, making it a good choice for businesses already using Zoho products.
Choosing the right accounting software depends on your business’s specific needs, budget, and level of comfort with technology. By selecting software that aligns with your business goals, you can streamline your accounting processes and focus on growing your business.
