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. It’s important to find the system that works best for you.
Small business accounting necessitates paying close attention to financial details. Keeping balanced financial statements is an important part of managing the finances of your company. Balanced financial statements give you a reliable view of the state of your company’s finances and can aid in your decision-making. This post will go over some crucial accounting advice to keep the financial statements of your small business balanced.
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 accounting 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.
Consistently reconcile your bank accounts
For you to find any errors and make sure your financial statements are correct, you must reconcile your bank accounts. To ensure that all transactions are accurately recorded, compare your bank statements with your accounting records. This procedure makes it possible for you to quickly make any necessary corrections by allowing you to find any errors or missing transactions.
Close out each month and at the end of the year.
Maintaining balanced financial statements requires performing monthly and year-end closing processes. Review and reconcile your accounts at the end of each month, make sure all transactions are documented, and create financial statements. Additionally, conduct a thorough year-end close to get your company ready for tax filing and evaluate its overall success.
Regular Cash Flow Monitoring
The financial soundness of any small firm depends on effective cash flow management. Keep tabs on your inflows and outflows to regularly check your cash flow. Create cash flow statements to assess your company’s capacity for raising funds and paying its debts. Your financial records will remain balanced and your organization will remain afloat if you have a solid cash flow.
Seek Professional Help
Managing a small business’ accounting can be challenging, so getting help from a professional is frequently advantageous. Seek advice from a seasoned accountant or bookkeeper who can help you keep balanced financial statements. They can assist you negotiate intricate accounting requirements and provide expert guidance on financial analysis and tax planning.
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. 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.
Maintain Current Accounting Standards
Regulations and accounting principles are subject to change throughout time. To maintain compliance and accuracy in your financial statements, keep up with any revisions. To stay current on accounting trends, subscribe to relevant publications, join professional networks, or think about going to workshops or webinars.
Review financial statements frequently
Last but not least, keep an eye on your financial accounts to learn more about the situation of your company’s finances. Search for any patterns or irregularities that demand your attention. Examine important financial ratios including profitability and liquidity.
Separate your personal and small business accountings
Keeping your personal and corporate finances separate is one of the most important stages for keeping balanced financial accounts. Create a separate credit card and bank account just for your business’s transactions. This division will make record-keeping easier and clear up any ambiguity when evaluating financial statements.
Keep accurate and current records
For balanced financial accounts, it’s crucial to keep accurate and current financial records. Observe all business dealings, such as sales, purchases, expenses, and payments. To speed up the procedure and guarantee data correctness, use accounting software or cloud-based solutions. Reconcile your accounting records and bank statements on a regular basis to look for any discrepancies and act quickly to fix them.
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 paystubs, 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.
Clearly classify transactions
Correct transaction categorization is essential for reliable financial statements. Establish a chart of accounts that is appropriate for your company’s requirements and classify each transaction. Revenue, cost of products sold, operational costs, and assets are typical categories. Transactions should be consistently categorized in order to produce accurate financial statements and gain knowledge of your company’s performance.
Put in place a double-entry accounting system
A frequently used accounting technique that guarantees balanced financial accounts is double-entry bookkeeping. A debit account and a credit account are both used to record every transaction. Your financial statements must be balanced by having a total debit balance equal to a total credit balance. To establish and maintain a double-entry bookkeeping system, think about working with a professional bookkeeper or accountant.
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!