Small Business Accounting: The Basics & How-to Guide

Small Business Accounting: The Basics & How-to Guide

Whether you like to deal with numbers or think you are a creative person, as an entrepreneur, it’s never an easy task to cover up the financial health of your businesses, especially for small businesses.

Learning the basics of business accounting for your small business is a valuable career because it can save you a lot of time, money, and legal trouble.

Small Business Accounting: The Basics

No matter who is managing your business accounting, you or your accountant, it is wise for you to understand the basics of accounting. You will understand your business's performance and financial health if you can read and prepare these basic accounting documents. Therefore, you will have greater control over your business and financial decisions.

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Accounting is the process of systematically recording, analyzing, and interpreting financial transactions relating to a business. Business owners use accountants to track their financial operations, meet legal obligations, and make more effective business decisions.

There are the five basic principles of accounting. To better understand accounting for your small business, let's take a look at what the principles are.

1. Revenue Recognition Principle

The revenue principle states that the revenue of the business is earned and recorded at the point of sale.

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This means that revenue occurs when the buyer purchases the goods or performs the services for which the goods are sold, rather than when the seller accepts the cash for the transaction.

2. Cost Principle

It’s helpful to record your assets when purchasing products or services to keep your business expenses in order. It is important to write down the purchase price of anything you spend money on and properly estimate the depreciation of those assets.

3. Matching Principle

Expenses shall be matched with revenue recognized in the same accounting period and recorded in the meantime in which the sacrifice was incurred. If sales of goods or services are recognized as revenue, then the cost of those things should also be recognized.

4. Full Disclosure Principle

Information about financial statements should be completed so as not to be misleading in any way. Through this intention, important partners or customers will learn relevant information about your company.

5. Objective Principle

Accounting data should be consistently accurate without personal opinions. Make sure the data supports the data, including vouchers, receipts, and invoices. In this case, having an objective view helps to rely on financial results.

Small Business Accounting: How-to Guide

When your business is less mature, and you're not familiar with how to manage the accounting of your business, this might sound really scary. However, once you understand the basics and have the right tools in your toolbox, it's not too difficult.

1. Open a bank account.

No matter how small your business is, you should have a business bank account that is completely separate from your personal finances.

The main benefit of having a commercial bank account is that it allows you to pay fees and receive payments through a traceable account. You also have access to account reports and records so that no financial activity in your business is riddled with loopholes.

2. Set up a bookkeeping system.

Bookkeeping is the routine work of recording income and expenses. People used to use ledgers to do this, but now you can use professional bookkeeping software or even online Google spreadsheets and Local Excel documents with classified columns to enter daily items.

It's important to keep track of seemingly small transactions because they add up. Some small businesses have bookkeepers who update their books daily or weekly.

3. Track all the expenses.

From the outset of your business activities, you must keep track of transactions and fees. The most basic part of accounting, especially for small businesses, is to accurately record any costs incurred by the business.

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When tax season arrives, being able to take all of your business expenses out of your business income will help reduce your tax burden. As a business owner, then you can better analyze and monitor your business growth.

4. Establish an invoice system.

Unless you own a retail store or restaurant, your small business is likely to charge customers/clients by invoicing them. You can electronically send invoices to your customers using invoicing software such as Freshbook, Wave, and Quickbook.

By creating invoices, you also create a record of the money owed to your business. When your customer pays an invoice, you can mark it as paid and treat the money as part of your income.

5. Calculate the revenues.

The purpose of accounting, in addition to keeping accurate records consistent with the tax system, is to determine how much money your business is making (or not making). You can do this by calculating your gross revenue (the total sales) and net income (the total sales minus the total expenses).

Obviously, the net income is the most important number, because it is the one that tells you whether you are profitable after paying all your expenses.

6. Calculate the tax.

The burden and complexity of small business accounting may make some small business owners feel overwhelmed. That’s because filing a tax return can be a complicated and frightening prospect. While as long as you do file the tax return on time, it'll be fine.

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Whether you file your own business taxes or hire an accounting firm, you need to be able to provide accurate financial information covering the entire fiscal year. The only way to do that is if you keep track of your financial activities throughout the year.

Small Business Accounting: Tips & Resources

No matter what stage your company is in, following these suggestions can help you improve your business's accounting strategy and overall financial health.

Use the right tools. A reputable, user-friendly accounting software helps you streamline and simplify accounting tasks and better track your money. The software mentioned above like QuickBooks, Freshbook, and Wave are beginner-friendly tools for small business owners with functions apart from online invoice

Involve your partners/key staff. Regardless of their specific department, all key executive and managerial personnel should have a basic understanding of your company's financial position and how they can contribute to accurate record-keeping and forecasting.

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Establish proper internal procedures. Proper internal accounting controls hold everyone on your staff accountable for financial success, reduce the incidence of fraud and unexpected losses/risks, and ensure that your financial information does not fall into the wrong hands.

Final Word

Managing your small business accounting isn't as complicated as you might think. The more organized you are, the easier it will be to master your book and account.

Of course, when your small business is getting bigger, you may need to hire a chartered accountant to make all those a lot easier. Ask for recommendations from fellow entrepreneurs, and be sure to find people who know and care about your business.

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