Strong small business accounting practices can make the difference between a thriving business and one that struggles to stay afloat. Good bookkeeping can help you keep track of your expenses, income, and current financial position so you can make sound decisions about the future of your company.
In addition, accurate and up-to-date financial information is essential for filing your taxes and obtaining loans or other financing. There are a variety of methods you can use to keep track of your small business finances, so it’s important to find the system that works best for you.
In this article, we’ll discuss the most common methods of small business accounting, including bookkeeping, accounting software, and using a professional accountant. We’ll also look at the pros and cons of each option so you can decide which is best for your business.
Let’s get started!
Small Business Accounting Methods
Good accounting can be done in many ways, but there are a few common methods that are most often used by successful small businesses.
The three most popular accounting methods for small businesses are cash basis, modified cash basis, and accrual basis.
Cash Basis is the simplest way of accounting and is based on the premise that income is only recognized when it is received and expenses are only recognized when they are paid. This is the easiest method to use and understand, but it does have some limitations. For example, it does not accurately reflect the true financial position of a business because it does not account for outstanding invoices or bills that have yet to be paid.
Modified Cash Basis is an improved version of Cash Basis accounting. It is still based on the premise that income is only recognized when it is received and expenses are only recognized when they are paid, but it does account for outstanding invoices and bills. This provides a more accurate picture of a business’ financial position, but it is still not as detailed as Accrual Basis accounting.
Accrual Basis is the most common accounting method for businesses that are subject to income taxes. Under this method, gross earnings and expenses are recognized when they are earned or incurred, regardless of when cash is received or paid.
The accrual basis provides a more accurate picture of a company’s financial condition because it includes all of the company’s income and expenses, whether or not cash has actually been exchanged.
Hiring a Bookkeeper
A preferable option for many small businesses is to hire a bookkeeper. Though bookkeeping and accounting are technically different, a bookkeeper will keep track of all the income and expenses for the company, which is critical for tax purposes. The cost of hiring a bookkeeper will vary depending on the size and complexity of the business, but it’s typically a few hundred dollars per month.
There are a few things to keep in mind when hiring a bookkeeper:
– Make sure they are qualified and certified. Ask for references and check them thoroughly.
– Discuss the company’s accounting procedures with the bookkeeper to ensure they understand your business’s specific needs.
– Establish a timeline for regular bookkeeping tasks such as reconciling bank statements and tracking expenses.
– Periodically review the bookkeeper’s work to ensure accuracy.
Hiring a virtual bookkeeper can lead to a significant improvement in the accuracy and efficiency of your small business accounting, but you must be diligent in selecting a qualified individual.
Lastly, accounting software is an automated and often less expensive way to manage your books. The most popular accounting software is QuickBooks, which is used by millions of small businesses. Accounting software can track your income and expenses, create w-2s, invoices and receipts, and even help you file your taxes.
There are many different types of accounting software available, so be sure to do your research to find the one that’s best for you. Some software is designed for specific industries, while others are more versatile.
No matter which method you choose, make sure you keep accurate and up-to-date records of your business finances. By doing so, you’ll be able to make sound financial decisions that will help your business grow.
In summary, strong small business accounting practices can help entrepreneurs manage their businesses more effectively and efficiently. By understanding the different methods of accounting, business owners can choose the approach that best suits their needs and helps them meet their financial goals.
Bookkeeping and accounting are essential for all businesses, regardless of size. With effective bookkeeping and accounting practices, business owners can ensure their businesses are running smoothly and that they have a clear understanding of their financial standing.
If you’re looking for more information on small business accounting, or want automated bookkeeping and accounting services that will take the hassle out of managing your finances, we’re here to help. Check out the rest of our website today!