Understanding the concept of bookkeeping for small businesses is not as difficult as wannabe entrepreneurs perceive it to be.
But if you are in doubt as to whether your small business is profitable enough, then these accounting best-kept secrets to be discussed will help you out.
I need not mention that we are in the tech era and as an online store business owner, you need to stop keeping paper and pencil accounting.
As important as bookkeeping for small businesses is, it’s equally important to know the accounting best hidden secrets.
Therefore, in this blog post, we are going to unravel some basic accounting notions and principles for your consumption.
Hence, endeavor to adopt them in your small business if you are passionate about managing your finance in the most professional way.
Importance of bookkeeping and accounting for small businesses
Regardless of the number of sales you are making in your online or brick-and-mortar store, without bookkeeping you are bound to fail.
That is to say, if you do not keep a proper record or accounting control of your business, things may end up going south for you.
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There is a need for you to have a real picture of the most important points of your business at an economic level.
After all, cash inflows or sales are not true or valid indicators to know the actual situation of a company.
As such, you need to effectively and correctly keep the accounting of your small business.
Bookkeeping For Small Businesses
When you establish a profit-oriented small business, it’s pertinent you know all the accounting concepts in other to understand the company’s financial capacity.
That is, knowing how much the company earns, how much it loses, how the money generated is being spent or used, and more.
In fact, before you take charge of your small business or put it on the right track, it’s incumbent on you to know how to read financial statements.
On this note, we’ve come to your rescue with this publication as we are going to unravel the small business accounting hidden secrets for you.
Types of Accounting Method
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In your sojourn to file your first tax return, there is a need for you to choose the best and most suitable accounting method for your business.
Hence, if you don’t know the types of accounting methods, we have, you may have problems choosing the most suitable.
Premise on this, we shall be discussing the types of accounting methods and how to choose the appropriate one for your business.
A. Cash Basis Accounting
This is a simple but unique form of accounting method. Its main function is to track all income the moment it is received and expenses when it is being paid.
B. Accrual-Based Accounting
Also, the Accrual-based accounting method counts money only when it is “won”, it doesn’t count it when it’s received or spent.
Let’s take for instance, if a client signs a huge contract, this accounting method will count the money as won, regardless of whether the customer has paid or not.
Although one could easily tell that this method is a bit complex but nonetheless, it gives an image of the organization in the long term.
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As a matter of fact, the method is somehow useful for SMEs when making fast scaling decisions or informing investors.
Note: if you can decide on which accounting method to adopt, it is advisable you consult with an accounting specialist for the most convenient method for your small business.
Small Business Accounting Best Hidden Secrets
All types of business forms require rational and logical accounting irrespective of their scale.
Thus, the first thing you should take your time to study is the basic principle of accounting notions and among them are:
1. Bookkeeping
Although there’s no definite definition for the concept of bookkeeping. Nonetheless, it remains the source of information for all types of financial statements.
It is also a book that is used to keep records of the financial activities of an individual or company at large.
You will agree with me that the main goal of accounting is nothing but to keep records.
It equally summarizes the financial transactions of a business or individual in a usable form that provides financial information.
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Most large companies manage or keep their accounting record through ledgers, and some computerized them with accounting software.
2. Balance Sheet
To fully understand the concept of bookkeeping for small businesses, there’s need to know what a balance sheet is.
A Balance Sheet can simply be explained to mean a picture of an organization at a given period of time; usually at the end of the month or year.
With a balance sheet, you analyze and review your business financial statement, and with this, you can know the current financial status of your business.
In addition, the Balance Sheet shows the company’s total and current assets like checking or savings accounts, loan receivables, etc.
Not limited to the above-mentioned, a balance sheet also shows the company’s total current liabilities, debts, loans to pay, etc.
It reflects the business Equity too. Equity includes all the retained earnings arising from both capital and investments.
Note that the format and categories of the Balance Sheet are usually based on the type or forms of business you are operating.
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Plus, the format is often in conformity with the Generally Accepted Accounting Principles or GAAP.
Such is the standard balance sheet format to follow for the preparation of your financial statements.
3. Capital
This is the money or funds the entrepreneurs used in kick-starting a business from the scratch.
It is all the money used or invested in establishing the business into a profitable venture.
More so, capital could also be referred to as the excess income over expenses used in contributing to earnings after the owner withdrawals and deposits.
4. Expenses
Other than the capital, expenses are the operations or events, or occurrences that consume money.
Expenses include monthly expenses like salary paid to the workers, loans for the business, electricity and water bill, rent, debts settlement, and cash out.
5. Income
This is the antonym of expenses, that is to say, it is the number of decreases witnessed in the owner’s equity.
Income, therefore, refers to the amount of increase witnessed in the owner’s equity as a result of the business activities, sales, and operations.
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Premise on the above, if you are passionate about starting a small business but need accounting’s best hidden secrets, the above discussed are what you needed to learn.
List of financial records you should keep
Without prejudice, bookkeeping can be time-consuming, messy, and sometimes, confusing.
Accounting is akin to a herculean task that takes up almost all your day. So if you are not good with numbers, you’ll definitely become overwhelmed with bookkeeping tasks.
In other not to be discouraged from keeping tabs on your financial records, we are going to present you with some items you need to track.
These items or financial documentation show the income generated, expenses, deductions, as well as credits shown on your business tax returns.
This documentation or financial records to keep track of may include:
- Accounts;
- Income;
- Bank statements and credit cards;
- Bills;
- Canceled checks;
- Previous tax returns;
- Forms W2 and 1099;
- Financial statements;
- Proof of payments; and
Any other record or documentary evidence that shows an item of income, expenses, deduction, or credit shown on your tax return
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Bookkeeping and Accounting Control CheckList
Accordingly, in a bid to understand the concept of Bookkeeping for small businesses, there’s also a need for you to have a bucket list.
Below are, therefore, the recommended checklist for keeping and maintaining your financial books:
Weekly bookkeeping and accounting tasks
The following are the recommended weekly accounting tasks to keep your financial record up-to-date:
- Enter all the transactions in your accounting software or better still, Excel spreadsheet.
- Carefully categorize your transactions the way they are classified on your tax return.
File all the necessary receipts to keep transactions in order.
Monthly Accounting Tasks
The following are the recommended accounting checklist to be carried out every month:
- Reconcile with your account manager or bank accounts to shield yourself against any income or non-sanctioned expenses.
- Prepare invoices (where applicable) and send them out in the shortest possible time.
- Review your financial records and other financial situations
- Pay vendors and any other bills to avoid late fee charges at all costs.
- Review pending invoices to process accounts receivable and ensure cash flow.
Keeping good financial records will make your work and life easier when it comes to the quarterly, bi-annual, and annual income taxes for your company.
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Conclusion
The importance of bookkeeping for small businesses can not be overemphasized. Most especially, when it comes to keeping track of daily transactions.
As a matter of fact, irrespective of the number of sales you are making in your online or brick-and-mortar store, without bookkeeping you are bound to fail.
Hence, if you study all the accounting best hidden secrets discussed in this post, your financial situation will definitely be balanced.