What You Need to Know about Small Business Bookkeeping
Those who do not have an accounting degree can easily learn small business accounting. It is beneficial to have attained basic skills, such as organizational, communication, and computer skills, as well as the ability to pay close attention to detail when learning the accounting process.
A bookkeeper has the responsibility of organizing and recording a business’ financial transactions for both accounts receivable and accounts payable and other financial statements. Bookkeeping simply lays the groundwork for the accounting process and is essential to the success of any small business or independent contractor. If owners do not know where their business stands financially, it is nearly impossible to make plans for the future.
Accurate bookkeeping is also needed so owners have a financial record of all transactions in the event the government audits the business or if vendors, employees, or customers dispute a transaction. A bookkeeper relieves the owner of having to keep track of every dollar and by keeping all financial records organized and easily accessible.
For most small businesses and independent contractors, a bookkeeper will set up and manage any accounts that involve financial transactions. Most accounts will fall under five types of accounts:
- Assets: Any resources or cash owned by the company
- Liabilities: Debts and obligations owed by the company
- Revenues or income: Money earned through sales or services
- Expenses or expenditures: Cash used to pay for operating costs
- Equity: The owner’s interest in the company after liabilities are deducted from the assets
There are several computer software programs that many businesses use to keep records of accounts; this is normally referred to as a ledger. Regardless of the method used for creating a ledger, bookkeepers will use a double-entry accounting system. This means that for every action recorded, there is an equal opposite action recorded too; debit and credits are recorded as entries. While single-entry bookkeeping can be used, it only provides the owner with a limited picture of the business’ financial state.
At the end of each quarter or year, bookkeepers tally up the account debits and credits. This is referred to as balancing the books, and ultimately, if done correctly, the accounts are combined and the adjusted balances show that the total assets of the business are equal to the total liabilities and equity. There are several financial reports that bookkeepers prepare to provide a portrait of the company’s financial health. Bookkeeping software provides real-time reports and is beneficial for business owners that need to make quick financial decisions.
A balance sheet is created to give a summary of the assets, liabilities, and equity at any given period of time and lets owners know if they have the ability to expand or if they need to preserve cash. An income statement, or profit and loss statement, break down revenues, costs, and expenses over a given period of time; this lets owners look and compare sales and expenses. A cash flow statement is created to show where a business is spending and earning money and its ability to pay its current bills.
Bookkeepers need to have a routine, record financial transactions at least once a week, and balance the books at least every quarter. Every minor purchase should be recorded to prevent discrepancies in account balances. It is also important to categorize the inflow and outflow of money correctly and store all records securely to ensure your business stays legally compliant.