Keeping accurate financial records is essential to any business and can have a significant impact on its development and success. It is the cornerstone of your financial and accounting systems and can involve anything from entering data into a software platform to coordinating with certified public accountants.
It’s crucial to keep up with your books so that you don’t have any unpleasant surprises when reconciling your accounts or figuring out your expenses. The purpose of this primer is to provide you with foundational knowledge of bookkeeping for a small business.
What Is Bookkeeping And Why It Is Important For Small Businesses?
Bookkeeping is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions. This includes maintaining financial records, such as invoices, receipts, and payments, and using this information to prepare financial statements, such as balance sheets and income statements.
Bookkeeping is important for small businesses because it helps to ensure that financial records are accurate and up-to-date, which is crucial for making informed business decisions. It also helps to identify areas where a business may be overspending or underperforming, and can be used to plan for future growth and expansion. Additionally, bookkeeping is a legal requirement for most businesses, as it is needed to file taxes and comply with other financial regulations.
What Kind Of Bookkeeping Is Used By Small Businesses?
Small businesses typically use one of two main types of bookkeeping: cash basis or accrual basis.
Cash Basis
Cash basis bookkeeping records financial transactions when cash is received or disbursed. This means that income is recorded when cash is received, and expenses are recorded when cash is paid out. This method of bookkeeping is simple and easy to understand, and it is often used by small businesses that do not have a lot of inventory or accounts receivable.
Accrual Basis
Accrual basis bookkeeping records financial transactions when they occur, regardless of when cash is received or disbursed. This means that income is recorded when it is earned, and expenses are recorded when they are incurred. This method of bookkeeping provides a more accurate picture of a business’s financial health, as it takes into account all financial transactions, regardless of when cash is received or disbursed. This method is mostly used by larger businesses and is generally considered more accurate.
Many small businesses use a combination of both methods, using a cash basis for day-to-day transactions and an accrual basis for tax purposes, and financial reports. It’s worth mentioning that regardless of the type of bookkeeping used, the goal is to have accurate financial records that help business owners to make better decisions.
Bookkeeping Basics For Small Businesses
Bookkeeping basics for small businesses typically include the following steps:
1. Setting Up A Chart Of Accounts:
A chart of accounts is a list of all the financial accounts that a business uses to record and track financial transactions. Setting up a chart of accounts is an important step in bookkeeping for small businesses, as it provides a framework for organizing and categorizing financial transactions.
When setting up a chart of accounts, small businesses typically include the following types of accounts:
- Income accounts: These accounts are used to track money that a business earns, such as sales, service fees, and rent.
- Expense accounts: These accounts are used to track money that a business spends, such as rent, utilities, and payroll.
- Asset accounts: These accounts are used to track the value of assets that a business owns, such as equipment, inventory, and cash.
- Liability accounts: These accounts are used to track the amount of money that a business owes, such as loans and credit card balances.
- Equity accounts: These accounts are used to track the amount of money that is invested in the business by the owner or shareholders.
It is important to note that the chart of accounts should be tailored to the specific needs of the business, and should be reviewed and updated regularly. The chart of accounts should be easy to understand and navigate, allowing the business owner to quickly and easily find the information they need to make informed business decisions.
2. Recording Financial Transactions:
Recording financial transactions is an essential step in bookkeeping for small businesses. It involves recording all financial transactions, such as sales, purchases, and payments, in the appropriate accounts within the chart of accounts. This process helps to ensure that the business’s financial records are accurate and up-to-date, which is crucial for making informed business decisions.
When recording financial transactions, small businesses typically follow these steps:
- Gather all of the necessary information, such as invoices, receipts, and bank statements.
- Ensure that all transactions are properly dated and have accurate descriptions.
- Record the transactions in the appropriate accounts within the chart of accounts. For example, a sale would be recorded in an income account, and the purchase of inventory would be recorded in an expense account.
- Use a double-entry system of bookkeeping, where every transaction affects at least two accounts. For example, when a sale is made, cash is increased, and inventory is decreased.
- Review the transactions regularly to ensure that they are recorded correctly and that the business’s financial records are accurate.
- Using bookkeeping software can help automate the process of recording transactions and make it easier to track and organize financial information.
It is important to note that the recording of financial transactions should be done regularly so that the financial records are up-to-date and to ensure that the business complies with tax laws.
3. Reconciling Bank Statements:
Reconciling bank statements is an important step in bookkeeping for small businesses. It involves comparing the transactions recorded in the business’s financial records with those shown on the bank statement to ensure that they match and that all transactions are recorded. This process helps to identify and correct any discrepancies between the two sets of records and ensure the accuracy of the business’s financial records.
When reconciling bank statements, small businesses typically follow these steps:
- Gather all necessary information, including the bank statement and the business’s financial records.
- Review the transactions recorded in the business’s financial records and compare them to those shown on the bank statement.
- Identify any discrepancies between the two sets of records, such as unrecorded transactions or errors in the amount or date of a transaction.
- Research and correct any discrepancies, such as by contacting the bank or vendor for clarification.
- Record any necessary adjustments in the business’s financial records.
- Prepare a reconciliation statement, which will summarize the findings of the reconciliation.
It is important to note that reconciling bank statements should be done regularly, typically at the end of each month, to ensure that the business’s financial records are accurate and up-to-date.
4. Preparing Financial Statements:
Preparing financial statements is an important step in bookkeeping for small businesses. It involves using the information recorded in the financial records to prepare various financial statements, such as balance sheets, income statements, and cash flow statements. These statements provide a snapshot of the business’s financial health and performance, which can be used to make informed business decisions.
When preparing financial statements, small businesses typically follow these steps:
- Gather all necessary information, including the business’s financial records and chart of accounts.
- Organize and classify the financial information according to the chart of accounts.
- Prepare the balance sheet, which shows the business’s assets, liabilities, and equity at a specific point in time.
- Prepare the income statement, which shows the business’s revenues, expenses, and net income over some time.
- Prepare the cash flow statement, which shows the inflow and outflow of cash in the business over some time.
- Review the financial statements to ensure that they are accurate and complete.
- Share the financial statements with the management team, investors, or stakeholders as appropriate.
It is important to note that financial statements should be prepared regularly, such as monthly, quarterly or annually. It’s also important to understand the different financial statements and the information they provide to make the best use of them. Preparing accurate financial statements is important for business owners to make informed decisions, and for the business to comply with tax laws and regulations.
5. Keeping Accurate Records:
Keeping accurate records is an essential step in bookkeeping for small businesses. It involves maintaining financial records that are accurate and up-to-date, which is crucial for making informed business decisions, as well as complying with tax laws and regulations.
When keeping accurate records, small businesses typically follow these steps:
- Gather all necessary information, including invoices, receipts, and bank statements.
- Ensure that all transactions are properly dated and have accurate descriptions.
- Record the transactions in the appropriate accounts within the chart of accounts and ensure they are accurate
- Review the records regularly to ensure that they are accurate and that all transactions are recorded correctly
- Use bookkeeping software to automate the process of recording transactions and make it easier to track and organize financial information.
- Keep records for a certain period, as required by law.
- Keep backups of records, in case of any damage, loss or other unexpected events.
It is important to note that keeping accurate records should be done regularly and that records should be kept for a certain period as required by law. This helps to ensure that the business’s financial records are accurate and up-to-date and that the business is in compliance with tax laws. It also helps to provide a clear picture of the financial health of the business, which is crucial for making informed business decisions.
6. Using Bookkeeping Software:
Using bookkeeping software is a popular option for small businesses as it can help automate the process of recording transactions and preparing financial statements. This can help to save time and reduce errors, and it provides an efficient way to keep track of financial records.
When using bookkeeping software, small businesses typically follow these steps:
- Research and choose a bookkeeping software that meets the specific needs of the business.
- Set up the software by creating a chart of accounts and inputting any existing financial information.
- Record transactions in the software, such as sales, purchases, and payments.
- Reconcile bank statements in the software, which involves comparing the transactions recorded in the business’s financial records with those shown on the bank statement to ensure that they match and all transactions are recorded.
- Prepare financial statements, such as balance sheets, income statements, and cash flow statements, using the information recorded in the software.
- Review financial statements regularly to identify trends and patterns in the business’s financial performance, and make informed decisions.
- Use the software’s reporting feature to get a better understanding of the business’s financial health and performance.
- Keep the software updated with the latest version, and ensure to have a backup of the data.
It’s worth mentioning that many bookkeeping software integrates with other business software such as invoicing, inventory management and payroll, which can help small businesses to streamline their processes and save time. Additionally, most software providers offer customer support which can be helpful for businesses to get the most out of the software.
7. Reviewing Financials Regularly:
Reviewing financials regularly is an important step in bookkeeping for small businesses. It involves regularly reviewing financial statements and reports to identify trends and patterns in the business’s financial performance, which can be used to make informed business decisions.
When reviewing financials regularly, small businesses typically follow these steps:
- Gather all necessary information, including financial statements, reports, and other financial records.
- Review the financial statements and reports to identify trends and patterns in the business’s financial performance, such as changes in revenue, expenses, or cash flow.
- Identify areas where the business may be overspending or underperforming, and plan for future growth and expansion.
- Compare the current financial performance with previous periods, or with industry, benchmarks to evaluate the overall performance of the business.
- Use the information gathered to make informed business decisions, such as adjusting budgets, cutting costs, or increasing revenue.
- Review the financials regularly, such as monthly, quarterly or annually, to stay up-to-date with the business’s financial health.
- Share the financials with the management team, investors, or stakeholders as appropriate.
It’s worth noting that reviewing financials regularly is crucial for making informed business decisions and staying on top of the financial health of the business. Reviewing financials can also help identify any discrepancies, errors, or potential issues early on, which can be addressed before they become major problems.
Conclusion
In conclusion, bookkeeping is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions. It is important for small businesses because it helps to ensure that financial records are accurate and up-to-date, which is crucial for making informed business decisions. It also helps to identify areas where a business may be overspending or underperforming, and can be used to plan for future growth and expansion.
Additionally, bookkeeping is a legal requirement for most businesses, as it is needed to file taxes and comply with other financial regulations. To keep accurate records, small businesses should set up a chart of accounts, record financial transactions, reconcile bank statements, prepare financial statements, and review financials regularly.
Using bookkeeping software can also help automate the process and make it more efficient. Small business owners need to understand the basics of bookkeeping and stay up to date with any changes to laws and regulations.
If you are a small business owner and are looking for bookkeeping services, try to check them out here at small business bookkeeping melbourne.