Bookkeeping for a small business involves establishing a framework, selecting a method, and keeping track of details. Bookkeeping is a fundamental aspect of business finances and can affect the growth and prosperity of your small business. It encompasses a variety of tasks, ranging from simple data entry in a software platform to working with certified public accountants, and serves as the foundation of your accounting and financial systems.
Accounting fundamentals for small businesses
As bookkeeping and accounting technology has advanced, more bookkeeping tasks have become automated. However, this does not diminish the significance of ensuring everything is set up correctly from the beginning.
Implementing accounting software
Setting up accounting or bookkeeping software entails connecting business bank accounts, entering any required data, and reconciling transactions. It also entails checking for errors, learning your accounting software, and searching for ways to streamline various accounting processes.
Selecting an entrance system
Accounting for small businesses requires you to choose between single- and double-entry systems. Single-entry accounting records each transaction as an expense or an income only once. This method is simple and appropriate for small businesses without significant inventory or equipment. To “balance the books” between accounts, double-entry accounting records each transaction twice, as a debit and a credit. Although more complex, it can prevent errors in transaction recording. The entry system you select affects your financial management and bookkeeping procedures.
Choosing a method of bookkeeping
You must also choose between cash accounting and accrual accounting. Cash accounting records transactions based on the exchange of cash. This method does not record invoices or your business’s unpaid bills until they have been paid in full. These invoices and bills are recorded by accrual-based accounting even if the funds have not been exchanged. Generally, accrual-based accounting is the preferred method, but the choice is ultimately yours.
Everyday bookkeeping duties include managing transactions. This involves importing and correctly categorizing transactions, reconciling them, and ensuring that they are recorded according to your entry system and accounting method.
Accounting for receivables and payables
Small businesses also manage accounts receivable, ensuring that your company is paid for its products or services. This may involve estimating the final cost of a project, preparing and sending invoices, and providing statements. Accounting for small businesses also entails ensuring that bills and invoices are paid on time, known as accounts payable.
Setting up payroll
Some businesses perform payroll processing within their accounting software, while others use a separate payroll program. Which software you select will determine how you set up and administer payroll.
Coordination with a tax professional
A small business must identify potential tax deductions and streamline its tax procedures to the greatest extent possible. Some accounting software options provide access to tax professionals. If you do not connect with one through a service or software, it is likely that you will need to work with one when filing business taxes.
Managing financial documents and financial statements
Bookkeeping for small businesses also entails the management of essential accounting documents and the maintenance of the data — transactions, assets, income, expenses, etc. — that is used to generate financial statements. There are numerous software options for document storage and streamlining the documentation process.
Why bookkeeping is essential for small businesses
Even though accounting software can simplify bookkeeping processes, it is essential that the bookkeeping for your small business is performed correctly. Listed below are several reasons why bookkeeping is so crucial:
- Separating business and personal finances protects you from being held personally liable for any business-related debts or issues.
- Identifying errors early by managing transactions and reconciliation prevents future financial problems.
- Businesses can save money by streamlining tax processes and collaborating with tax professionals to simplify their finances.
- Monitoring the financial health of a business identifies opportunities to improve or alter processes.
- Organizing documents and records simplifies tasks such as obtaining a business loan or purchasing new equipment.
How to administer accounting for small businesses
There are three bookkeeping methods for small businesses:
- Handle your own small business’s accounting
If you manage your own bookkeeping, you are responsible for keeping your finances in order, storing records, and creating required statements. Using accounting software simplifies many bookkeeping tasks, but you will still need tech-based skills to operate and optimize the software.
- Use an online bookkeeping service
This guide on how to find the best virtual bookkeeping service will help you initiate the process of outsourcing your bookkeeping. With this type of service, you can communicate exclusively via phone or email without having to worry about physically meeting.
The duties performed by a service will depend on the provider.
- Hire an in-house bookkeeper
You can also directly employ a bookkeeper for your business. Employing a professional on a part-time or full-time basis allows you access to their knowledge and familiarizes them with your company’s finances, processes, and accounting tools and software. It is important to note, however, that your bookkeeper will not be the only individual working on your business’s finances. Therefore, you must understand which tasks your bookkeeper is and is not responsible for.