Bookkeeping for Small Businesses
Bookkeeping is the process of keeping track of your company’s financial transactions, so you know the inflows and outflows of your resources. It is a way for business owners to monitor the overall business financial health of the company. Whatever type of business you operate, an adequate, up-to-date bookkeeping system must be in place.
Small business owners may believe that bookkeeping is just another chore to keep their company going. While it is true that it may add to an already heavy workload, a robust bookkeeping system is necessary for a successful business. Every business owner should be familiar with basic bookkeeping to see where the money is going and how much they’re producing.
Is bookkeeping necessary for a small business?
Understanding bookkeeping basics is critical for any business, even for small businesses. Small business bookkeeping is an essential aspect of running a profitable firm. As small business owners, you must be aware of what is going on financially by keeping track of your cash flow through the financial reports, which bookkeeping allows you to do so.
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If you’re still not convinced about the importance of basic accounting to any firm, here are a few benefits small business bookkeeping can help you.
Organizing financial records
Being disorganized can lead to errors and missed deadlines, which your small business can’t afford. Small business bookkeeping helps you in organizing detailed financial information. Without bookkeeping, your financial data is dispersed and unable to provide an overview of your business’s finances.
Bookkeeping organizes all of that information into a single, easy-to-understand system. When it’s time to budget, apply for loans or grants, or determine whether or not you’re making a profit, bookkeeping makes it easy to obtain the information you need. It can also aid in the regular monitoring of your spending and income to ensure that nothing is overlooked or forgotten.
Preparing for tax season
Filing taxes at the end of each tax year can be extremely stressful and time-consuming for small businesses. However, if you are unfamiliar with the subject, you can consult with a certified public accountant or other tax professionals who can assist you with the tax filing process.
When you have a good bookkeeping software or system, you’ll have all your financial information ready to file your Self-Assessment tax returns. You can show the business records to your accountant instead of digging through your various documents, sales invoices, and receipts. In this way, you can save money and time instead of doing it yourself.
Accurate budgeting
A common cause of business failure is a lack of capital. Bookkeeping is essential since it allows you to budget your finances effectively. This method can assist you in organizing your income and expenses, which makes it easier to budget. You can evaluate historical data to develop a plan of action if you keep clear, structured, and accurate records.
A well-planned budget is crucial for it will enable you to plan how you’ll spend your money, calculate your estimated earnings and examine the gap between your business plans and reality.
Bookkeeping for small business: Where to start
It’s challenging to track and report the relevant information to the authorities without business bookkeeping. If you don’t manage your finances effectively, your company may run out of money and have to close its doors.
Furthermore, incorrect reporting or failure to file might result in penalties and fines. That’s why every firm needs an accounting system, which can be set up in just a few simple steps:
Create the right accounts
In the world of bookkeeping, an account does not refer to a personal or business bank account. It’s a list of all the financial transactions of a specific type.
These accounts include the following:
- Asset accounts – These are accounts used to track all of the resources the business owns.
- Liability accounts – These accounts keep track of all the obligations you owe.
- Revenue or income accounts – Used to track how much money your company makes.
- Expense accounts – Also known as expenditure accounts, expense accounts are used to track the money that leaves your company.
- Equity accounts – There are accounts used to track a business owner’s ownership interest.
Choose a bookkeeping method
Before you can begin keeping financial records, you must first select a bookkeeping method because the method you choose determines how and where each financial transaction is recorded.
There are two methods for handling bookkeeping: single-entry and double-entry bookkeeping. Many businesses use double-entry accounting because it accurately records and matches activity to every affected amount.
Set reasonable payment terms
Making and recording business transactions on time is good for a company. Establishing correct deadlines for Accounts Receivable and Accounts Payable is part of this stage. It also entails notifying customers of upcoming payment deadlines.
What Financial Records Do You Need to Keep?
To prepare financial reports with accuracy, ensure to keep the following financial documents:
- Receipts
- Invoices
- Payroll records/Payroll taxes
- Credit card and bank statements
- Investment statements
- Tax return
As a small business owner, you must retain financial and tax records for six years after the tax year in which they were received. Also, it’s wise to keep these archived data in both paper and digital formats for added protection.
Preparing Financial Reports
Financial statements reveal the overall condition of a business. A business owner needs to prepare a comprehensive financial report at least once a year for tax purposes.
Here are some of the most typical statements used by a bookkeeper to track financial activities:
- Balance sheet – This document summarizes your company’s assets, liabilities, and equity throughout a specific period.
- Income statement – This report shows a company’s revenues, costs, and expenses over time.
- Cash flow statement – Cash flow statements demonstrate where your company earns and spends money.
Final Thoughts
As a small business owner, it is vital to learn the basics of bookkeeping to help you manage your finances more effectively. Bookkeeping doesn’t have to be complicated. Just follow the bookkeeping tips discussed, and you’re good. Without bookkeeping, it will be impossible to produce an accurate financial record that can aid your company’s growth, profitability, and success.
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