These bookkeeping basics will help you understand how finances are of great importance to any small business.
Small businesses start with an idea, a vision and a purpose. These companies are creted to fulfill consumers' specific needs while providing financial freedom to the entrepreneurs who started them. Leaving the inspiring topic aside, owning a small business is hard work, and part of that hard work is maintaining your business afloat by managing your business finances to perfection.
One of the many tasks you will need to perform when opening a small business is bookkeeping. In this article, you will learn about a few bookkeeping basics that you need to learn by heart in caseyou want to perform this task on your own. If you find yourself short on time to do your company's bookkeeping, you should read this article about our virtual assistants. But, if you feel confident enough to do your own bookkeeping, or only want to know more about this task, keep reading below.
Bookkeping Basics: Learn the Ropes
Whether you choose an online service, hire an in-house bookkeeper, or take care of your company's finances yourself, there are a few points to be considered when managing your business's economics. By now, you must be wondering, what is bookkeeping? Really. In this next section, we will cover factors that you should take into account when deciding how to do your bookkeeping.
Company bookkeeping. Bookkeeping helps you separate your business bookkeeping from your personal finances. This separation is necessary to measure the success of your company. It will also ensure that you will not be held liable for any issues related to your company.
Taxes. Keeping the numbers tidy will also help with the company's taxes. You have more possibilities to maximize your deductions and speed up the tax return process. Organizing your taxes will let you work more efficiently with any accountant or tax professional.
Identify errors. We all dread errors within our finances because any mistake can become fatal. Bookkeeping helps you identify these errors and prevent them from happening. By managing your transactions, you can easily notice inaccuracies and where they come from (bank entities, a supplier, or customers.)
Organization. Bookkeeping consistency and organization are keys to its development. It will come in handy when applying for a business loan, buying new equipment, or taking any other important action for your company. If you possess all the financial information of your business, you will make better choices that will impact growth and stability.
According to Zoho, bookkeeping is the process of recording your company’s financial transactions into organized accounts on a daily basis. It can also refer to the different recording techniques businesses can use. It is an essential part of your accounting process for a few reasons. When you keep transaction records updated, you can generate accurate financial reports that help measure business performance. Detailed records will also be handy in the event of a tax audit.
Bookkeeping Basics for Small Businesses
Nowadays, getting bookkeeping or accounting software is fairly simple and can be completed with just a simple search on the web and checking some reviews online. These tasks have become much more automated, but it is still essential to learn how to manage them and what goes where.
Choosing an accounting software
Whether you try one of the professional software online or use an Excel sheet, one of the very first things to do when keeping track of your small business finances is choosing a platform. Learning a specific platform takes time, so make sure you commit to a program that is useful, resourceful, and easy to manage.
This software will not only help you keep an eye on your incomes and expenses, but it will help you to connect your business bank accounts, data entry, and reconciling transactions. In some cases, these tasks are tracked automatically by the software of your choice. But it is still recommended that you check for errors and that everything is completed correctly and on time.
If you are working with a professional, try to ask about programs or apps that are not only useful but also, both of you can handle. Take advantage of the individual's expertise and ask for a little walkthrough of the software you both chose.
Defining an entry system
Within accounting, there are two types of entry systems: Single-entry and Double-entry accounting. The differences between them will make an impact on the way you handle your finances in the long run. Study them in an extensive matter; both have pros and cons.
Single-Entry accounting. You'll need to record all of your transactions once in this system, divided into incomes and expenses. Single-entry accounting is the simplest of both methods and, likely, will be the one you choose when starting your small business. In this method, you only need to keep a record of payments you make (suppliers, landlords, employees, etc.) and payments you receive for products or services. As your company starts to grow, you may opt for the second option.
Double-entry accounting. The name is self-explanatory. In this method, you will have to enter every transaction twice. Data is written down both as a debit and a credit, commonly known as balancing the books. Debit is an entry that either increases an asset or expense account. Credit is an entry that either increases a liability or equity account or decreases an asset or expense account. Double-entry accounting is a better method because of its accuracy, although it is more complicated when you don't have an accounting background.
Accounting Methods
After defining the system you would like to use, you will want to look at the accounting method. Just as an entry system, there are two popular and effective options you can choose from. But just as with the entry system, whichever you choose will influence how you handle your company's economics.
Cash-based accounting. The cash-based method only records transactions when money changes hands, like paying suppliers or customers paying for a product. One of the advantages of this method is that you will not have to deal with "imaginary money." If you owe your supplier or a customer did not pay on time, you will keep it separately and only record it when the transaction completes. On the other hand, you'll need to keep track of invoices separately.
Accrual-based accounting. The Accrual-based accounting method is a mixture of the cash-based process and the invoices you are keeping separately. You will record invoices and bills even if the funds do not exchange on time. Accrual-based accounting is the most recommended method.
Categorizing transactions
Now that the first part of your bookkeeping basics is complete, you will need to ensure your transactions are correctly imported and accurate. It is recommended that transactions are recorded as soon as they happen or at the end of the day. Recording transactions on time will prevent mistakes and will help you in the next steps of the process.
Transactions include the following:
Income
Expenses
Assets
Liabilities
Equity
Remember to balance transactions and record them according to the entry system and the accounting method you chose.
Strategizing budgets and bills
Besides managing transactions, bookkeeping basics can also include estimating budgets and keeping track of the dues and bills. These are called receivables and payables.
Receivables include payments for finished products or projects. For receivables, you must monitor the transactions you receive. Invoices and statements are the best way to do so.
In contrast, payables are the bills and dues your company has to pay. These include vendors, investors, landlords, and all the services you contracted to run your business. Recording them in the software you choose will help your company make payments on time and avoid getting additional fees or interest.
Also, within payables, you can include payroll. Some companies have different payroll software; some use the same accounting software to manage payments to their employees. Whichever option you decide, ensure payments to your employees are also on time.
Bookkeeping for Small Businesses
As you can see from the terms above, bookkeeping is much more than just registering your expenses and earnings on a spreadsheet. Sure, there are many options Sheets or Excel can offer, but the fact is that a specialized software and finances knowledge is critical for the development of your small business.
Bookkeeping is a task that should not be taken lightly. That is the reason why want to help you with this daunting duty. If you are in need of someone to keep your company's fincances in check, you can contact us and we will match you with one of our expert bookkeepers. They can take care of your finances while you use the time you would've have invested filling ledgers on other things, like developing a new marketing strategy that will attract more customers or prepare special bundles for the holidays.
Why wait? Give us a call!