Did you know there are 31.7 billion small businesses in the US? Unfortunately, as many as 20% fail within the first year. So how do you ensure you have time to concentrate on the things that matter, bringing in revenue?
One way is to streamline your accounting process and know what you are doing. Read on as we discuss the essential guide to small business accounting.
Small Business Accounting and Bookkeeping
Accounting and bookkeeping are both linked, in that they are methods of tracking your company finances. However, there are a few subtle differences. To be successful with your small business finance, then you need to have a grasp of both.
Bookkeeping is the general day-to-day process involved in a business. It could involve tracking expenses, doing payroll, paying suppliers, and managing invoices.
Accounting uses bookkeeping to prepare for the bigger picture. It could be preparing financial statements, taxes, or looking over your long terms costs.
Use a Business Bank Account
It is important to keep your personal and small business banking separate. If not, you will quickly find your job becomes a lot harder as you try to split what income and expenditure are yours, and which belong to the business.
Open a business checking account alongside a savings account. All you will need to begin is your business information, personal documents, and social security number. Some banks may also look into your credit history.
Once you have this in place, you will have peace of mind knowing you can track business expenses. It will also be much easier if you face an audit or during tax filing season.
Accounting Methods
If you are new to accounting, there are two methods you can use for managing a small business. It helps to choose one and stick with it, to ensure consistency in your accounting practice.
Cash Method
Of both, the cash method is the easiest for managing a small business. It involves noting down revenue and expenses at the point of contact when money changes hands.
A journal-style entry in a ledger will suffice for this method. It should have transaction dates listed in chronological order. A note about the type of transaction and the amount debited or credited should be noted.
Cumulative entries are then placed in the general ledger. This helps prepare a trial balance and overview of your current state of accounting.
Accrual Method
The accrual method is much more comprehensive but takes more work. It involves noting down revenue when earned, not necessarily when paid. Expenses get noted when they become accrued.
When using this method, your journal entries count as periodic income and expenses. For example, if you paid the building insurance for the whole year in one go, the expense would be placed in monthly adjustments.
The second method is better if you are dealing with suppliers and income that is often owed. You must also notify the IRS about your preferred accounting method and if you decide to change it.
Create a Chart of Accounts
A chart of account is the method of recording your transaction, be it with the cash or accrual method. This list of accounts stays in the general ledger and is comprised of five types of accounts.
Expenses are the general costs involved in running the business. They may include your payroll, rent, bills, and stock.
Revenue and income are the backbones of your business. These involve the payment made for any services or goods you have sold.
Assets are anything of value that your business owns. These include your stock, the equipment in your building, the money that is owed, and the money you have in your account.
Liabilities are any money that is owed by you to someone else. These could include loans or accounts you still need to pay to suppliers.
Software
Much of the burden of managing a small business can be taken from you with the right software. Entering data manually is a very archaic method that is prone to errors. Even if accounting is outsourced, you will find that software can help keep you on track with the day-to-day accounting methods.
You will get the most from the software if you can manage to integrate other systems into it. For example, you may have banking, payroll, and credit card payments all in one. With automation, you can drastically reduce your workload.
The software can produce reports for you, automatically categorize activities and even organize payroll and tax. If you are going to make one big investment at the start of your business, this is a great option.
Create a Calendar
When conducting your own financial services, it helps to create a calendar. This is because some jobs will need to be done daily, while others can be completed once a financial year. By setting them out, you space out the workload.
The most important to pencil in is the quarterly accounting tasks. These can include an estimation of quarterly taxes, the report and remit of sales tax, and writing off bad debt. Yearly tasks may include full financial reports, year-end inventory analysis, and year-end taxes.
Small Business Accounting
In summary, small business accounting can be done on your own. Set out a calendar, get your accounting method correct, and implement software to assist. As your business grows, you may consider outsourcing the process.
If you want to spend more time concentrating on the things that matter, then you need Propel CFO. We provide expert accounting to small businesses at affordable prices. Contact us here and get peace of mind while you build your company.