Bookkeeping is an essential part of any small business because it allows business owners to keep track of their company’s financial transactions. Basic bookkeeping is the only way they can know for sure where their money is going and how much money they are making.
Being on top of their financial records helps business owners make better decisions and expand their profits. Proper bookkeeping paints a clear picture of a business’ financial situation and pinpoints the exact cause of any potential troubling financial aspects. In other words, simple bookkeeping done right gives a better idea of where owners are making money and where they are losing it.
The way a business owner benefits from bookkeeping services for their company is that they can ensure that their basic bookkeeping tasks are always accurate. Furthermore, working with a professional means that owners can benefit from additional bookkeeping tips when the volume of their workload is simply too much to handle.
Some small businesses resort to using a small business bookkeeping software, which can provide efficient bookkeeping for their company. Others may prefer to hire an expert to help them organize their finances especially if they have several receipts, income statements, taxes, and other aspects of their business finances to keep track of. We believe it shouldn’t get too far before asking the help of a professional accounting consultant to organize the business accounting. Prevention is always better than cure!
Choose a Bookkeeping Method
There are two main bookkeeping methods. One is single entry and the other is double entry. Single-entry bookkeeping is simpler since the business owner is required to record each transaction once. The single-entry accounting system is best for business owners who have one to two business transactions a month.
The single-entry accounting system has more limitations and it is not recommended for businesses that have daily transactions. Double-entry bookkeeping is used to create business profit and net worth reports. It allows owners to see mistakes early on because both sides of every transaction are accounted for. Basically, double-entry accounting provides a way to match the transactions together.
If you are thinking of investing in software solutions, whether it is accounting software or bookkeeping software, it is useful to know that both types of software use the double-entry bookkeeping method. With the double-entry bookkeeping system, each transaction will be recorded as credit and debit.
Use a General Ledger
Bookkeeping many years ago required a handwritten ledger which is no longer necessary. Manual ledgers take several hours to record transactions. Bookkeeping transactions can be recorded virtually using software, or on a spreadsheet. Spreadsheet software allows all transactions to be in one location.
All transactions should be recorded in the general ledger, including sales, invoices, and bills. If the small business is just in the startup phase and there are no funds to invest in software, Google Sheets and Excel is a free and simple bookkeeping solution to record transactions.
If more than one account is used, it is recommended to use accounting software because it allows all of the accounts to be seen in one place and covers the basics of bookkeeping to a greater extent.
Set Up Business Accounts
The general ledger will be used to record all business transactions. Bookkeeping accounts should not be confused with business bank accounts. Bookkeeping accounts that cover financial transactions are usually separated to create a clear financial picture of all the different accounts.
Separate accounts are needed even for basic accounting. For example, an asset account that includes the business assets. Businesses need to record transactions involving assets. A liability account is also needed. This account will record all the debts and monthly payments such as the rental fee for the workspace.
Income accounts, also known as revenue accounts, record the money the business brings in such as sales. Expense accounts or expenditure accounts record the money coming out of the business. This is made up of business expenses or in other words, money spent on the business, including employee salaries and any money spent on the workspace.
Equity accounts are meant to record stock shares. It’s important to separate the bookkeeping into different accounts because it splits the expenses into categories that are easier to see and monitor. Clear and transparent business accounts help business owners improve the accounting process and run a successful business.
If you are not sure what accounts you need for your business activities, it might be a good idea to meet with a professional accountant because each business structure requires certain types of basic accounts, according to their accounting method and financial activities. For example, if there are no stock shares, an equity account is not needed. However, if stock shares are obtained in the future, it is important to know how to set up an equity account and use it correctly.
The accounts listed above are the ones that most small business owners need. Your company will benefit from using some or all of them.
Record Every Transaction
After the financial accounts are created, every transaction the business makes needs to be recorded. This is the time to decide which accounts will be credited and which will be debited.
For example, maybe a new sales system was created for the company. This transaction will be recorded in the assets accounts because it’s something new the company has acquired.
The debt paid for the system and credit for the cash account will need to be recorded. Make sure to always put both for each transaction or the transactions will not match at the end of the month, which can be very difficult to deal with and will stand in the way of effective bookkeeping.
Balance Your Books
The books also need to be balanced and closed. It’s best to do this at least weekly, but it wouldn’t hurt to do it daily either. When balancing the books, post all the transactions made into the account.
Balance the account to ensure it reflects the correct amount. Make sure to follow this simple accounting equation:
Assets = Liabilities + Equity
If something does not match, go back through the books and see what went wrong and how to correct the business financial records.
Financial Reports
The bookkeeping process will create all the financial reports needed, including the balance sheet, the cash flow statement, and the profit and loss statement.
If using software, these reports are created automatically, a feature that can be extremely convenient and save a lot of time.
Final Thoughts
All small business owners need to make sure their business has an effective bookkeeping process so that they can keep track of financial transactions and the financial health of their company. Having bookkeeping software makes it easier to do double entries and allows businesses to balance the books more easily.
Working with an accountant provides a clearer picture of the business transactions over using a simple spreadsheet. Accounting consultants take the entire burden of handling business income, keeping accurate records, and dealing with tax returns from your shoulders and into their knowledgeable hands.
