Bookkeeping is the essential business task that helps entrepreneurs, businesses and decision makers monitor the overall financial health and the activity of the company. Lack of basic bookkeeping practices may result in spending activities and financial transactions to get out of control, which can easily result in loss of profit.
With accurate bookkeeping, you stay organised for the tax time, whereas the lack of bookkeeping practices may lead to disorganisation.
However, all of this doesn’t make the bookkeeping any less overwhelming. Despite knowing the significance of accurate financial records, many people do not feel confident undertaking this task.
So, in this article, we have gathered all the essential information about bookkeeping for small businesses that will make the bookkeeping process a little less overwhelming for you.
What is Bookkeeping?
Bookkeeping is the essential process of systematically documenting and summarising a business’s financial activities. It involves tasks like logging sales, purchases, payments, and receipts on a regular basis.
These records form the basis for creating vital financial statements, including the balance sheet, income statement, and cash flow statement. Through these documents, a company gains valuable insights into its profitability, assets, and cash flow dynamics.
Bookkeeping and Accounting- what’s the difference?
Bookkeeping and accounting are often used interchangeably, but the function they both serve in the financial management of a business are different from each other.
Bookkeeping involves the systematic recording of financial transactions such as sales, purchases, payments, and receipts. It focuses on accurately documenting these activities without going into analysis. A bookkeeper typically prepares the financial records that serve as the foundation for further analysis by an accountant.
Accounting, on the other hand, goes beyond bookkeeping. It involves summarising, analysing, and interpreting financial data to provide insights into the financial health and performance of the company. Accountants not only prepare financial statements but also conduct audits, offer financial advice, and ensure compliance with regulatory requirements.
While bookkeeping involves recording financial transactions, accounting involves analysing this data to provide a more detailed understanding of a company’s financial position. It requires specialised skills and expertise due to its complexity and the need for interpretation and analysis.
Why does a small business need bookkeeping?
Bookkeeping is crucial for the stability as well as the success of a small business. The following are some of the benefits of bookkeeping for small businesses.
- It helps in creating organised and detailed financial reports.
- A small business owner can be more prepared at tax time by following correct bookkeeping practices.
- It helps understand business transactions at a granular level.
- Bookkeeping helps small business owners make plans for profitability that lead to not only improved cash flow but also long-term success.
Bookkeeping for Small Businesses: Steps to Follow
Bookkeeping has to be done effectively, otherwise it won’t serve its purpose. So here are steps that you can follow to do bookkeeping more effectively.
1. Keep your personal and business expenses separate
Maintaining a clear distinction between your personal and business finances is crucial for small business owners. The lack of such distinction can lead to inaccuracies in your financial records, potentially deterring lenders and investors.
It’s strongly recommended to keep separate bank accounts for personal and professional transactions. This can prevent any negative impact on your personal finances due to business dealings and vice versa.
Additionally, consider establishing separate credit ratings or scores for your business to further safeguard your financial stability.
2. Select a bookkeeping method: single-entry or double-entry bookkeeping
When setting up your business’s financial tracking system, you’ll need to decide between two primary bookkeeping methods: double-entry or single-entry.
Double-Entry bookkeeping
With this approach, every transaction is recorded twice. Once it is recorded as a debit and then as a credit. This method offers a detailed overview of your financial activity, facilitating error detection and enabling complex financial analysis.
It’s particularly well-suited for larger businesses with complex financial structures where accuracy and detailed reporting are essential.
Single-Entry Bookkeeping
Conversely, single-entry bookkeeping involves recording each transaction just once. While simpler than double-entry, it doesn’t provide the same level of depth and accuracy. Single-entry bookkeeping is more appropriate for small businesses with straightforward financial operations.
The choice between these methods depends on factors such as the size of your business, its complexity, and your reporting requirements.
3. Decide on your accounting method: Accrual or cash basis
Cash Basis
This method, commonly favoured by small enterprises, provides a clear picture of the company’s cash balance. Transactions are recorded when cash is paid out or received. It’s straightforward and easy to implement, making it popular for small businesses.
Accrual Basis
As a company expands, knowing the exact cash balance might become less critical compared to understanding its overall financial health. In such cases, the accrual method is often preferred. This approach records expenses when they are incurred and revenues when they are earned, regardless of when cash actually changes hands.
By doing so, it eliminates the impact of payment delays on assessing the company’s financial status, providing a more accurate representation of its current health.
The choice of the right method will depend on factors such as the size and growth stage of your business, as well as your reporting needs and preferences.
4. Assign transactions to specific accounts
When managing a company’s finances, it’s essential to categorise transactions accurately for precise financial tracking. Assigning transactions to specific accounts involves categorising each type of financial activity into appropriate buckets, such as sales, expenses, or investments.
This categorisation simplifies reporting and analysis processes, enabling a clearer understanding of cash flow and the overall financial health of the company.
5. Carry out journal entries to the debit and credit accounts
Journal entries serve as the foundation of double-entry accounting, which ensures the accurate recording of financial transactions through debits and credits. In accounting, debits represent incoming funds or an increase in assets, while credits denote outgoing funds or an increase in liabilities.
This dual approach maintains the balance of the accounting equation (Assets = Liabilities + Equity) and enables precise monitoring of financial activities.
6. Post entries to the ledger account
Posting entries to the ledger involves transferring transaction details from journal entries to the corresponding accounts in the ledger. This process organises financial information systematically, making it easier to reference and analyse.
Ledger accounts provide a detailed view of a company’s financial status and aid in generating accurate financial statements.
7. Make adjustment entries at the end of the accounting period
At the end of each accounting period, it’s crucial to make adjustment entries to ensure accurate financial records. These adjustments reconcile any discrepancies between recorded and actual financial positions.
They account for accrued revenues, expenses, prepaid items, and depreciation, ensuring that financial statements reflect the company’s true financial status. Updated financial statements support informed decision-making and regulatory compliance.
Conclusion
Proper bookkeeping is the backbone of any successful small business operation. It provides a clear picture of the financial health of you company and enables informed decision-making. Without accurate and up-to-date financial records, businesses may struggle to manage cash flow, budget effectively, and plan for growth.
Struggling with your small business bookkeeping? Let us take the stress out of managing your finances! Contact Clear Tax Accountants to learn how our bookkeeping and accounting services can help you keep your business on track.
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