Small Business Accounting 101: How To Manage Your Books
Once you start your small business, you'll probably handle most administrative tasks, including bookkeeping. Since accounting is essential to running any successful business, it's best if you become familiar with the basics of accounting.
But even if you're already outsourcing your accounting and bookkeeping tasks, it's still important to know the basics. It is critical to your success to understand your accountant's reports, the financial reporting framework for small and medium businesses, and to be able to accurately assess your business's financial health.
Here, we explain everything you need to know regarding small business accounting, including tracking and analysing your business's key financial measures to choosing the best small business accounting software and features
What is small business accounting?
Business accounting is a set of activities businesses perform to record, measure, communicate, and process information about their financial performance. It includes bookkeeping, tax preparation, and reporting.
Bookkeepers track transactions, such as sales, purchases, and invoices, and make sure those numbers add up correctly. They reconcile accounts, verify data accuracy, prepare reports, and issue statements.
A bookkeeper must know basic accounting principles, including double-entry accounting, debits and credits, accrual accounting, journal entries, and cash flow analysis. A bookkeeper must also understand standard business terms and practices, like depreciation, capitalisation, and amortisation.
Bookkeeping for a Small Business
The first step focuses on analysing financial transactions. The process of small and midsize business (SMB) accounting starts with identifying the business type, determining the purpose of each activity performed by your organisation, and classifying the expenses incurred during the operation of the company.
This information helps you understand what needs to be recorded and how it affects the balance sheet. In addition, you must identify the sources of funds used to finance operations.
For example, loans taken for purposes unrelated to business activities are separate from the company account. Personal loans are considered a nonbusiness expense.
Prepare Source Documents
Next is preparing source documents. A source or business document serves as the basis for recording a transaction. A source document contains data about the nature of the transaction, such as the date, amount, payer, recipient, and description of goods or services received.
The term source document refers to the original document and copies prepared for record keeping. Source documents include invoices, bills, receipts, contracts, purchase orders, checks, and bank statements.
After gathering the necessary information, you need to organise it. Organising records involves grouping them according to category and then subcategorizing them further. It would be best to group similar transactions, such as vendor payments, payroll, and rent.
It is best if you classify your transactions. Classify means to assign a code that describes the nature of the transaction. Each transaction has a unique code. For example, an invoice can have a code indicating whether the payment was by check, credit card, or debit card. Classification codes help you keep organised and quickly locate specific transactions.
You must post the transactions to the appropriate ledger accounts when ready to complete the process. Posting means entering the transaction into the books of account. Posting requires two steps: posting the transaction to the correct account and posting the account balance to the general ledger.
When you post a transaction, you enter the details of the transaction into the books. These details include the name of the party who paid the bill, the payment amount, the date, and any other relevant information.
Small Business Accounting Terms
Creating a small business takes time and effort, from brainstorming and researching ideas to strategizing and launching your new venture. And while bookkeeping is essential to managing your business, it probably isn't what attracted you to becoming an entrepreneur in the first place.
Hiring an accountant can help relieve some of the stress of bookkeeping and tax preparation, but don't delegate all financial responsibilities. Instead, work closely with your accountant throughout the year so you can understand your finances better and plan for the future.
To help, you need to understand some basic accounting terminology to increase your accounting acumen and improve your financial situation.
9 common business accounting words you should be familiar with:
- Cash flow is the amount of money flowing into and out of your business each month. If you have more income than you're paying out, you're "positive" for the month (cash-flow-positive).
- Profit and loss statements (also known as financial statements or P&L statements) are one of the most important documents used by small businesses to determine your company's profitability. It breaks down how a business reaches its net income, making it a good indicator of your company's management and operations.
- A balance sheet shows your company's current financial situation. It measures a small business's financial health by calculating its assets, liabilities, and shareholders' equity, which includes its existing assets, long-term debt, short-term debt, and stockholders' equity.
- Accounts payable include expenses that were not paid by the end of the month. It's money you owe suppliers for goods and services you've already received but haven't paid for. These payments are a liability on your balance sheets until the debts are paid off.
- Accounts receivable refers to money owed by your clients but not yet paid out. Even if the revenue has not been received, it is still an asset on your balance sheets.
- The general ledgers have the same accounts, but they will show all the details of each transaction that went through each account, including the dates that it happened.
- An adjusted trial balance is a summary account showing the final credits of all the individual accounts making up your balance sheets and profit and loss statements. It shows the starting balance for each of these accounts at some point in the past, i.e., opening balance.
- Operating costs are the money you spend to keep your business running. These include items like the cost of goods sold, administrative expenses, and R&D. Operating expenses usually last for one year and appear as expenses on your income statements.
- Capital expenditures, recorded as an asset on companies' balance sheets, are used for longer than one year. Depreciation of these expenses occurs regularly throughout the useful life of the asset. For example, computer hardware, furniture, or cars are all capital expenses.
Small Business Accounting Software
Business owners need reliable sources of financial information to help them manage their businesses. Accounting software has made the syncing of information more straightforward and more convenient. With the transition from traditional bookkeeping to digital accounting, cloud software has made it easier for small business owners to track finances without using bulky books and papers.
Cloud accounting software automates tasks requiring human intervention, such as calculating invoices and processing payments. You can also save money by not having to hire an accountant to do your books manually.
Benefits of Cloud Accounting Software For Small Businesses
- Organisation of reporting: Organised data makes it easy for you to analyse trends and spot problems before they become significant issues. Accounting software allows you to create reports that provide insights into how well your business is performing. Analytics helps you make better decisions about the future and how you improve profitability.
- Financial efficiencies: Cloud-based software saves time because it automatically updates whenever a company's financial situation changes. If you want to see what your sales are doing, you don't have to wait for your accountant to send you a report. Instead, you can access the information right away.
- Security and disaster recovery: Online storage means your sensitive financial information is safe from hackers. Your data is encrypted and limits access and exposure. In addition, online backups allow you to recover from any disaster.
- Accuracy of data: Online accounting systems can help you avoid common accounting mistakes. An online accountancy system will ensure that your financial data is always structured correctly and accurately. If new journal entries don't balance using an online bookkeeping program, the program will immediately alert you to the problem and help you fix it.
- Payroll simplified: Accounting software offers dedicated payroll programs. Accounting software enables you to automate employee pay, calculate health care and insurance contributions, and get precise payroll taxes information.
- Simplified tax compliance: You can easily file your taxes with HMRC. It's much simpler to get accurate tax information through an online accounting system rather than trying to figure out everything yourself.
How Do Deltek Accounting Systems Power Project Success for Small Businesses
Our mission is to deliver solutions that help our customers connect and automate the project lifecycle that fuels their business. We believe that better software means better projects. Our industry-focused expertise makes your projects successful and helps you achieve performance that maximises productivity and revenue.