A Simple Guide to Accounting Principles for Small Businesses

As a small business owner, the thought of doing accounting may be daunting to you. It involves the process of tracking, recording, and analyzing the financial transactions of your business. It also translates numbers into a comprehensible statement about the profitability of your business. 

However, accounting doesn't have to be intimidating. By knowing what you need to do and getting some guidance on how to do it, you can do accounting tasks for your business in no time.

Accounting 101 for Small Businesses

The following guides will introduce you to the accounting process (if you're not familiar with it) and prepare you to scale your business on an ongoing basis.

1. Bank account registration

No matter how small your business is, you should have a business bank account that is completely separate from your personal finances. It sets different records and will be a lifesaver during tax season. 

Having a separate bank account also protects your personal assets in the unfortunate case of bankruptcy, lawsuits, or audits. And if you want funds down the line from creditors or investors, strong business financial records can increase the likelihood of approvals. 

Start by opening a business checking account, followed by any savings account that will help you manage your funds and plan your taxes. You can create a savings account and use a percentage of each payment as your self-employment tax deduction.

Next, consider a business credit card to start building credit. Credit is essential to secure future funding. Corporations and LLCs are required to use separate credit cards to avoid mixing personal and business assets.

2. Income and expense tracking

Learning how to track and record business transactions is the foundation of robust small business accounting. Bookkeeping software helps you monitor deductible expenses (tax deductions), prepare financial reports and tax returns, and track the growth of your business.

It is important to note that only expenses directly related to the business should be recorded. Examples include invoices, canceled checks, purchase orders, and other business documents.

3. Accounting methods

Before you set up a bookkeeping system, you must choose an accounting method for your business. There are two main methods for recording accounting transactions: cash vs. accrual basis.

Cash method
The cash method recognizes income and expenses on the day they are received or paid. This method is the simplest for small businesses as it doesn't require you to keep track of any payables or receivables and reflects whether or not your money is actually in your account.

Accrual method
With accrual accounting, you use the double-entry method of recording transactions, which means you need to make two entries for each transaction. You record expenses and income as they occur, regardless of when cash is exchanged.

4. Accounting software implementation

Accounting software is highly essential if you want to balance your own books. Nowadays, manual data entry is unnecessary and can also be a bit risky as it's easier to make mistakes. And even if you have great Excel spreadsheet skills, you can still save more time by automating your accounting. Many small and medium-sized enterprises (SMEs) that outsource accounting still use software for light bookkeeping.

Advance accounting software like ScaleOcean lets you take care of the basics of accounting or manage your finances end-to-end, whichever you prefer. And, to get the most out of your accounting software, you can integrate it with as many functions as possible, such as inventory, sales, payroll, project management, and many more.

5. Trial balance adjustment 

If you use the accrual basis method, account for adjusting journal entries for periodic expenses and income. For example, when rent is paid throughout the year, a monthly adjusting entry must be made to recognize the costs incurred. This ensures that income and expenses are matched accurately over the period presented in the financial statements.

After the adjusting entries are made, an adjusted trial balance is prepared to confirm that the debits and credits match the adjusting entries. An adjusted trial balance is the most accurate record of your financial activity.

6. Financial statement generation

Once you’ve prepared the adjusted trial balance, you can now generate financial statements. Below are the three standard financial statements used in business:

Balance sheet
A snapshot of your company's assets, liabilities, and the owner or shareholder equity for a specific period of time.

Income/profit and loss statement
A summary of your company’s revenues and expenses during a specific time period.

Cash flow statement
A cash flow statement analyzes your business’s operating, financing, and investing activities to show how and where you receive and spend money. With accounting software, you can automatically generate these financial statements in no time

7. Bank reconciliation

Bank reconciliation is the process of reconciling your book balance with your bank cash balance. It compares your cash disbursements to your overall bank statement and helps keep your business records consistent.

With electronic banking making managing your bank accounts easier, you may be tempted to skip this step. But please don't. Reconciling your bank accounts on a monthly basis is essential and should be done regularly.

Completing a bank reconciliation not only helps you identify items that need to be included in your general ledger but also pinpoints any bank errors. With cloud-based accounting software, reconciling bank accounts is so much simpler and can be done in just a few seconds. 

8. Tax compliance

Taxes are unavoidable. Fortunately, they are easy to prepare with accounting software. But first, you need to educate yourself about your business's tax obligations, keep accurate records, and set aside income (or pay taxes quarterly).

Although accounting software is practical enough to help you calculate taxes, we suggest that you work with an accounting firm to ensure your business follows proper tax procedures and laws

Whether you file your own business taxes or hire an accounting firm, you must be able to produce accurate financial information that covers the entire fiscal year. You can do this more easily if you have recorded your financial activities throughout the year. At the end of the year, you should be able to summarize your business income, expenses, debts, losses, etc.

9. Payroll management

Payroll is another tedious yet required part of accounting. Thankfully, you can now automate this process using payroll management software. It helps you automatically calculate salaries and deduct them to cover payroll taxes. It also enables you to set up a payroll schedule and ensure you’re withholding the correct taxes.

10. Invoice management

Invoices are prepared based on the product or service sold and must be created and sent quickly. The sooner your invoices are sent, and the better for your cash flow and peace of mind.

By creating an invoice, you have also made a record of the money owed to your business. When your customer pays an invoice, you can mark it as paid and consider the money part of your income.

In the same way, other businesses may send invoices to your business when you purchase goods from them. You can save these invoices billing records and mark them as paid after you pay them.

You can automate your invoice management using invoicing software like ScaleOcean e-Invoicing. With e-invoicing, you can easily send invoices directly to customers without any postage costs. Not only that, but it gives clients an easy way to pay online.

You can also set up recurring payments, which is convenient if you’re working on a long-term project or running a subscription-based business.

Conclusion

Accounting may seem a daunting mountain to climb, but it's not that complicated once you understand the principles. From registering a business bank account to understanding your company's tax obligations, mastering the discipline of accounting can only help your business grow better.

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