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Accounting Basics: What Do Small Business Owners Need to Know?

Accounting Basics: What Do Small Business Owners Need to Know? image chart of accounts 600x236

Small business owners are passionate, hardworking people. They are positive, they are resilient, and they are dedicated to creating a sustainable and profitable business. But what they are not is accountants. and if you run a small business, it’s not uncommon to find yourself not knowing where to begin with basic accounting for your small business.

You’re in charge of making sure your books are in order, and yet if you’re like most small business owners, your “bookkeeping practices” are almost non-existent – and the only place you keep track of your company’s spending and revenue is your bank account.

The Importance of Quality Bookkeeping

One of the most unfortunate reasons that small businesses struggle is from miscalculating expenses and taxes .

  • Some companies spend money they do not really have.
  • Some companies miss tax payments.
  • Some companies lose out on tax refunds.

No matter how strong your products and services, accurate accounting can make or break your business. The following are some of the most important tips for small business owners to keep in mind as they deal with the ins and outs of bookkeeping.

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The best place to start your bookkeeping is with what’s known as “cash basis accounting .” This is a very basic, very simple recording practice – cash in, cash out. Record when you get paid for a sale. Record when you spend. Record it on the day it happens, when it happens. Most businesses use this type of accounting method.

What to Record

“Everything” may be too complicated an answer, but ideally, the more in-depth your records, the better. It is very important to keep track of all incoming and outgoing payments.

Incoming:

  • What you sold
  • Who you sold it to
  • How much money/revenue you collected
  • When you received the money
  • How much sales tax you collected (if applicable)

In most cases, what you will record is the transaction you made with the customer. These are the incoming payments.

Outgoing:

  • The taxes you paid
  • The employees you paid
  • The business expenses (office supplies, inventory, etc.) you paid
  • The rent/utilities you paid

As a small business owner, it’s important to keep track of every dollar that goes in and out of your company, including not only what you see on a day-to-day basis but also your monthly expenses. Remember that many of those payments you made may be deductible based on your income or the type of business you own – even coffee with a potential partner or the health insurance you purchased for yourself.

In addition, some of your “revenue” may

not be revenue at all, like in the case of sales tax. By clumping all of your incoming cash together into one account without proper records, you may have trouble separating what is tax that belongs to the government, and what is cash that belongs to you.

There may be other numbers you will want to track. For example, do you send invoices to customers? In that case, you may like to know how much is owed to you. On the other hand, you may also want to keep track of any monthly expenses (like rent) or other outstanding bills that you owe. However, in cash-basis accounting, you would not record these transactions until the money changes hands.

How to Record It

Similarly, your organizational methods are going to affect the quality of your bookkeeping. Every day you should be recording every transaction.

Most small businesses have nothing more than an Excel sheet with some numbers on them or a bank statement that logs their transactions. Rarely does this encompass every expense, nor does it allow you (and the IRS) to visualize your net income. Don’t worry – with the right software, this will not take as much time as it sounds.

Every dollar you collect should be placed on its own separate line, so that you know exactly how much you collected and when. Every dollar you spend, same thing. You’ll want to record where it went (or where it came from) as well, so that you know which payments qualify for tax breaks, how much of each payment you received goes to taxes, and more.

You may also want to break out the numbers a bit further. One strategy that we recommend is a “Chart of Accounts .” This is where you break down each transaction into its core component(s), and connect it to the location (“account”) that is related to the payment. For example:

It’s important to make sure that the data is logged as specifically as possible, with expenses marked as expenses, revenue marked as revenue, and so on. Accurate bookkeeping isn’t simply about filing taxes. It’s also about understanding your own business and the amount of liquidity you have to work with.

We even recommend that you consider scanning any paper receipts you have and putting them on the computer to protect them in case of fire. Every single receipt should be accounted for, whether it’s a receipt for money you collected or a receipt for money you spent.

Correctly Accounting for Your Accounting

Proper bookkeeping is one of the easiest tasks to procrastinate on, but it’s one of the most important tasks to creating a sustainable business. Luckily you do not need to be an experienced accountant in order to be successful at bookkeeping. With the right accounting software. you can easily maintain your business in minutes a day with accurate reporting that will help you manage your finances better.

This article was originally published in Patriot Software’s Small Business Expert blog.

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