Accounting is a broad and complex subject, but small business accounting boils down to recording financial transactions, creating accurate reports for your business, and analyzing this data to make informed decisions. Knowing the finances of your company helps you plan out future success. Online accounting services can simplify your life by providing a one-stop-shop for all of your tax and bookkeeping needs! Due to the fact that this service is entirely online, you will be able to save money on office space and reduce the amount of time spent handling financials.
Accounting for Small Businesses: A Step-by-Step Guide
The following steps cover how to set up a basic accounting cycle for a small business.
1. Seperate your Business and Personal Account
Every business should have its own bank account to keep the money separate from personal funds. Having a company checking and savings accounts will help organise your revenue, prepare for year-end taxes, and plan for future expenses.
2. Keep an accurate account of all income and expenses.
Creating a system for documentation is one of the most important things an entrepreneur can do. Not only will it help with tax returns and deductions, but it also provides you accurate insight into your progress over time.It isn’t always an easy task to keep track of expenses when they come up unexpectedly, but fortunately, there are many ways we can take care of this problem before it gets too overwhelming.
3. Select an accounting system
For many small business owners, one of the hardest decisions is determining how their bookkeeping system should be structured. There are two primary accounting methods: cash-basis and accrual, but which method to use can depend on several factors specific to your company’s unique situation. Cash accounts only track income and expenses in terms of actual money collected or paid out. In contrast, with an accrual account, it doesn’t matter whether you have received money for something because the information will not be recorded until after that event occurs (such as revenue). This distinction makes deciding between these different accounting techniques more difficult than ever – especially when they both have advantages over each other depending on what type of work needs to be done by the organization.
Virtual accounting services are an excellent way for small firms to cut costs. They utilize cutting-edge technology and have remote access to their data, which enables them to communicate with the accountant from any location at any time.
Accrual accounting is a process that records transactions and requires you to use the double-entry approach when recording expenses. This means each transaction contains one entry for expense, which may or not be due on a specified date in exchange for cash. You keep track of these while they occur—irrespective if it’s an increase or decrease in your bank account balance.
4. Transactions on the Trial Balance
A double-entry accounting system is the most accurate way to keep track of all transactions, and it is also a reliable historical record. It starts with an understanding that every transaction needs two entries: one for what you’re paying out from your account (the debit) and another entry describing where or how much money was coming into your account (credit). A single page typically has three columns on which we can see these changes; at the bottom, there’s always a totals column showing total debits minus credits equal the net change in cash position – this helps us understand our basic financial situation as identify trends over time. But within those numbers are explanations detailing why things happened so we have more insight about each transaction listed above them too!
After making changes to our books based on historical records and current balances, we can generate financial statements such as income statements that provide insight into how well or poorly the company is performing.
5. Make adjustments to the Trial Balance
To have accurate financial statements, adjusting entries can be made monthly that reflect recurring expenses and income. For example, rent is paid annually, so if using the accrual method of accounting, then it should be reflected in a monthly adjustment entry which ensures that incomes are matched with appropriate debits or credits over time by updating for inflation through trial balance as this will ensure most accuracy on your records as opposed to outdated numbers from last year’s finances.
6. Financial Statements Generating
Following the trial balance adjustment, you can generate financial statements for your business. The retained earnings report describes all equity-related transactions that occurred during the accounting period – including stock splits and dividend payments to shareholders.
7. Balance and Close Your Books
If you’re new to accounting and find the entire process intimidating, there is no better solution than cloud-based small business accounting software. This type of tool automates all of these tasks for you, making bookkeeping as easy it can be!
Recognize your numbers and use them to grow your business
Starting a business can be intimidating, but with this checklist, you’ll always have your finances in order from the start. From establishing the correct type of bank account to evaluating what revenue per product that your new store will make today and tomorrow, each one is an important task for ensuring that everything falls into place as intended. Know More