Small Business Bookkeeping Basics: How To Streamline Your Business
What is bookkeeping?
The simple answer is that bookkeeping is the process by which every financial transaction incurred by your business is written down or recorded, either manually or via bookkeeping software. These processes are usually performed by a bookkeeper. Typically, a bookkeeper records every transaction, sends out invoices, makes payments to vendors, manages bank accounts, deposits any checks or cash your business has received, and prepares monthly financial statements ready for the year-end statements and tax returns.
If you are self-employed and it is a one-person business, you will need to perform the duties of a bookkeeper along with everything else required to keep your business running smoothly.
Why Is Bookkeeping For Small Business So Important?
Accurate bookkeeping for small business plays an important part in the success or failure of any business. At any one time, you need to have an accurate snapshot of all the financial ins and outs of your business. From the cash in your bank account to money you owe to vendors, with a good understanding of the state of the business's finances, you can make better choices and plans for future growth.
Accurate small business bookkeeping also protects your business if you ever have a dispute with a vendor or if you are being audited by the IRS. Without having the benefit of accurate financial records you could end up paying for goods never received, paying twice for the same product or incur tax penalties for avoidable errors.
Now you have an understanding of what bookkeeping for small business is and its importance, how about we go into more detail?
Bookkeeping With Or Without a Computer.
One decision you will need to make is whether or not you will be using a computer to perform your bookkeeping for small business functions. If your business is small and you are the only person involved, then possibly keeping manual records is the way to go.
Later, we will discuss computerized systems, which will make life a bit easier for you, especially if you have employees and need to have a payroll system.
Should You Use Cash or Accrual Accounting?
One of the first decisions to be made when setting up your bookkeeping system, whether it be manual or on a computer, is should you use a cash or accrual accounting method. If you are operating a small, one-person business, you may want to opt for cash accounting.
Using cash accounting means that you record the transaction when cash actually changes hands. Cash can be physical money, checks or electronic funds transfer. You may want to start off using cash accounting then switch to accrual accounting when your business grows.
If you are going to offer credit to your customers or request credit from your suppliers, then you must use the accrual accounting method. Using this method of bookkeeping, means you record any purchase or sale immediately, even if the cash doesn't change hands for 30 days or so, as is the case with Accounts Payable or Accounts Receivable.
Single or Double Entry Bookkeeping - Which Should I Use?
When it comes to bookkeeping for small business, single-entry bookkeeping means only one entry is made for each transaction, similar to your checkbook register. You record entries for sales and purchases either as a positive or negative amount. Although you can keep a two-column ledger, one for income and one for expenses, it is still considered to be single-entry because there is only one line for each transaction.
If your business tracks inventory, has accounts payable and accounts receivable, then you will have to use double-entry bookkeeping. The main difference between single and double-entry bookkeeping is that each account has two columns and every transaction is located in two accounts. Two entries are made for one transaction - a debit to one account and a credit to another.
An example of a double-entry transaction would be if your business has bought some paper for your photocopier. The cash or bank account would be reduced by the cost of the paper. That is the credit entry. The double entry would be to the expense account for office supplies - the debit entry.
A good way to remember whether you should record a debit or a credit entry is by way of a simple phrase - "Credit The Giver, Debit The Receiver." So in the above example, the bank has "given cash" to buy the paper and the office supplies account has received it.
The Basics - Understanding Assets, Liabilities, and Equity.
Within every small business bookkeeping system, there should be an accounting chart of accounts. This chart of accounts is a list of accounts used to categorize each and every financial transaction your business makes.
There are five account types that make up any chart of accounts: assets, liabilities, equity, income, and expenses. Income and expenses appear in the Profit and Loss Statement, while assets, liabilities, and equity appear in the Balance Sheet report.
The Balance Sheet derives its name from an accounting equation: Assets = Liabilities + Equity. This formula is key to ensuring your books are always in balance. It basically means that everything owned by the business (assets) is balanced against claims against the business (liabilities) plus owners' equity.
So, what are they - Assets, Liabilities, and Equity?
• Assets. - Asset accounts usually start with - CASH - your Bank Account(s), then Accounts Receivable, then Inventories, which are classed as Current Assets.
Your business may have Plant & Equipment, Furniture, Office Equipment, Vehicles, etc., which are classed as Fixed Assets.
If you have any loans due to you, then they would come under Non-Current Receivables.
Anything else, such as Organization Costs, or Intangible Assets, like Capitalized Software Costs, would be classed as Other Non-Current Assets.
These are examples only, but demonstrate some of Assets that your business owns.
• Liabilities. - Liabilities are what the business owes and they include both current and long-term Liabilities. Current Liabilities are Accounts Payable (what you owe to vendors, credit cards, etc.)
Long-term liabilities would be items such as mortgages or bank loans.
Whatever your business owes to suppliers, vendors, or banks, are all classed as Liabilities.
• Equity - The Equity accounts comprise of all claims the business owners have against the company.
You, as the business owner, have made an investment in the business, (your equity) and it may be the only one, but if any other investments have been taken on, then they are included in the Equity accounts.
The Basics of an Income Statement.
The Income Statement is probably the most looked-at report when it comes to bookkeeping for small business. It is also another name for the profit and loss statement. It encompasses revenue, expenses, and costs incurred in running your business.
• Revenue is all the income received by your business in selling your products or services.
• Costs, also known as "cost of goods sold", is the amount of cash you have to spend to buy or manufacture the products or services you sell to your customers.
• Expenses are the purchases you make to keep your business running, such as utilities, rent, advertising, or bank charges. Whatever the expense, if it is business-related, then record it in the appropriate expense account, using your double-entry accounting system.
An example would be as follows:
If you are recording a check for rent, your entries would be: credit the bank account with the amount of the check and debit the rent expense account with the same amount. Remember the catchphrase? "Credit The Giver, Debit The Receiver".
By looking at the Income Statement, it will show you how your business is performing. How much income you have received, how much you have spent on the cost of goods and expenses and ultimately, how much profit - or loss - you have made in any given period.
All these facets are an integral part of your bookkeeping for small business accounting system.
Think About Your Small Business Bookkeeping Payroll Requirements.
Now you have a grasp on the fundamentals of small business bookkeeping using manual methods, you may want to consider using a computer and accounting software to handle all your accounting functions, especially if payroll is involved.
There are many software programs which handle the day to day accounting functions with ease, performing all the double-entry transactions automatically. You don't have to think about whether the transaction is a debit or a credit, the software does it all for you.
With a good program, your books are always in balance and reports like your Income Statement and Balance Sheet are readily available with a click of your mouse.
Payroll is also something you may require to be handled by software. How many employees do you have? Are they salaried or hourly paid? Do you offer bonuses, paid leave, paid overtime? Do your employees complete time sheets? How accurate are they? How do you check if their time sheets agree with the hours worked?
Although most accounting software suites can handle all the daily transactions and your payroll processing needs, when it comes to calculating the employee's hours, then that may have to be done manually and entered into the payroll program.
All of which can seem daunting and cumbersome at first, but can be overcome with a mobile and web application from ClockInEasy.
"Gone are the days of unreliable methods of timekeeping like paper time sheets, sign-in sheets, punch cards, and other older methods. Employees can clock in/out with a mobile app from any job site/office/retail location which creates instant time sheet reports."
Staying in compliance with Federal Labor Laws is also important, especially when it comes to calculating overtime. Understanding how to calculate overtime correctly is one of the key requirements of any company. The web-based mobile app from ClockInEasy will handle even the most complex scenario, keeping you and your business in compliance.
In conclusion, running a small business takes time and effort, but with the correct knowledge and tools, small business bookkeeping need not be difficult. Using the tools available from ClockInEasy, your business payroll can be streamlined, so that accurate time and employee information is stored and transferred to your accounting system.