A Guide to Small Business Accounting

There are several aspects to be considered to flourish your Small Business in terms of profits, branding, and accounting. Smart accounting plays a vital role in the smooth functioning of your Small business. To begin with, the term Accounting may overwhelm you, nevertheless, being a little knowledgeable in maintaining your books is essential.

In the current scenario, there were multiple accounting software for small businesses available, exclusively designed for easy and accurate accounting practices. They help you generate automated invoices, set business profit goals, and make taxation and reporting easy. Despite your business outsourcing bookkeepers or freelance accountants for your aid, learning the basics of small business accounting services helps the owners plan their business stature more efficiently with minimal accounting knowledge.

What is Small Business Accounting?

Small Businesses involving the transaction of money between two ends require proper accounting. Small business accounting entails a rigorous tracking of money entering and exiting the company accounts, creating invoices, curating tax rates, and summarizing these data into financial statements to further your business profits and goals.

The most viewed accounting practices witnessed in a Small Business are:

• Maintaining your books daily

• Creating Invoices

• Cash flow tracking

• Monitoring the income and expense tiles of the company (if your clients are paying you on time or if you have any payables at due)

• Preparing financial statements and records

• Tax-filing

Maintaining different spreadsheets and physical documents of your small business financial data and recording each of them manually can be a tedious task and time-consuming.

To beat the accounting blues, businesses have now switched to Automated accounting software. The software automates all the accounting practices with minimal manual aid required.

Automated Accounting Software can be easily used with a desktop app or as a cloud-based application. Both formats offer you the best accounting tools, however, the cloud-based apps carry an added advantage. You can access the cloud-based app from anywhere, anytime, and on any device.

We will figure out the Hows and wheres of accounting software for Small business in a while. But let's first tap into some of the basic terminologies and fundamental accounting principles practiced while accounting.

Accounting Terminologies and Financial Statements

To run a successful business irrespective of its size, the business owner/CEO needs to master the craft of accounting. Yes, we understand that not every business owner or a startup CEO has graduated with a degree in accounting, and usually, most businesses hire a bookkeeper to manage all the company accounts. Nevertheless, it is extremely important to understand the basics of accounting to dodge financial disparities and set higher financial goals.

Here are 12 basic and most used accounting terminologies, to get you started to effectively communicate with your online accounting services provider.

• Assets: Assets are the wealth owned by your company without any hindrance of a loan or liens. Assets include land or property or buildings, goods that are yet to be sold, items that depreciate over time, cash or investments, accounts receivable, warehouse inventory, equipment, and supplies.

• Liabilities: Liability is the sum of money your company owes to benefit the economic growth of the company in the future. The liability includes loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.

• Equity: Equity is the leftover amount after paying back the percentage to the shareholders when the company successfully clears all the debts and payables.

• Balance Sheet: You can confirm the financial well-being of your business by creating a balance sheet. A balance sheet records the total of liabilities and stockholder equity/capital at a certain point in time (on a monthly/quarterly/yearly basis).

• General ledger: The general ledger is the ledger that contains the balance sheet and the income statement accounts. The ledger is located in the side corner of the bookkeeping ledger. You can find all the business transactions, credit purchases, office expenses, and income losses here.

• Gross Margin: Gross Margin is the total number of sales successfully procured by the company after deducting the manufacturing costs, wholesale costs, and material/supplies costs.

• Loss: Loss is termed when your expenditure exceeds your income and other revenue streams, for instance, if your product sells for lesser cost compared to the manufacturing price.

• On credit/On account: If your products/items/services are successfully sold and the relative payments are in due accounting for additional interest charges, then you are On Credit/On Account.

• Receipts: Receipts are the final billing of a successful transaction made in one day. This is inclusive of the particular transaction and does not include other revenue collected.

• Revenue/Income: Revenue is the total amount of money earned by the business at one point in time. The income includes cash sales, credit purchases, subscription fees, and interest income. And unlike Receipts, Revenue includes all the capital collected irrespective of the delivery timings.

• Trade discounts: It is the tiny percentage of the purchase price discounted to increase the number of sales. The working formula for trade discounts are, higher the volume of sales, the higher the discount percentage of trade discounts. This formula encourages customers to buy more goods from you.

• Trial balance: Located in the general ledger, the Trial balance includes the debits and credits history of a particular account. Here you can check if your sheets are balanced that is if debits equal credits.

Accounting Equation:

Considered as one of the fundamental principles of accounting, the accounting Equation ordains the relationship between Assets, liabilities, and Equity.

The key formula can be tabulated as Assets = Liabilities + Equity

Accounting Equation explains that the total quantity of assets procured is equal to the sum of the company's liabilities and shareholders' equity.

The accounting equation is the foundation principle of a double-entry accounting system. 

The double-entry accounting system states that every financial transaction has equal and opposite effects in at least two different accounts.

Chart of Accounts: 

Chart of accounts holds a list of all different accounts categorized on a type-basis. Bookkeeping is not just managing a single bank account, but managing a business's financial stature throughout. To be precise, the Chart of Accounts is the categories created by the company to list all the accounts.

Accounting Reports for a Small Business

Apart from accurately recording the data into your books, accounting for a small business is crucial in its reporting stage, i.e. compiling all that data and creating a summary to analyze the financial happenings of the company. This will help your business make strategic decisions.

Here are some of the most common and important accounting reports that need to be curated to support a small business.

Balance Sheet:

As discussed earlier, the balance sheet is the financial summary sheet of your business at one point in time. Most Small businesses rely on primary financial statements. However other financial statements revolve under different time frames (monthly/quarterly/yearly).

You can find Assets (what you own), Liabilities (what you owe), and Equity (what's left).

Income Statement (Profit & Loss Statement):

An Income Statement, also widely known as a Profit & Loss Statement, gives you a verdict on if your business performed well or not, i.e. if your company made profit or loss during a period.

And in your income statement, you are required to list the Sales, Cost of sales, Expenses, and Profit or losses over time.

Cash Flow Statement:

Cash Flow reporting is the tabulation of money entering and leaving the company, ideally the rate of income gushing into the company.

Cash flow reports are of two types: direct and indirect cash flow reporting.

There are three sections in the Cash Flow statement for different sets of activities including operating, financing, and investing.

The operating activities section deals with direct and indirect cash flow reporting where, in the case of direct cash reporting, the cash is shown based on the actual cash transactions.

Statement of Retained Earnings:

What are Retained Earnings?

Retained Earnings are the total number of all the profits and losses made by the small business in its entire period of its existence. Here the sum of all the profits and losses made from the start of the company are tabulated.

Small business usually does not need a Statement of Retained Earnings. Only fortune 500 companies and large publicly traded companies require these statements to figure out dividends disbursements, company valuation, etc.

How to Do Accounting For Your Small Business

In simple words, accounting for a Small business is a 10-step process, in which each step needs to be performed accurately.

Open a bank account:

To open a business bank account, you need to get your business registered in your state or province under your business name, check the bank's requirements, and submit the necessary documents in the interview. 

Do your research in terms of fee charges of individual banks, before finalizing your bank. Get a business credit card and in the case of Corporations and LLCs, they are required to use a separate credit card to avoid mixing personal and business assets.

 Track your Expenses: 

Maintain a record of your company expenses including meals and entertainment expenses during business meetings, Out of town business travel expenses, Vehicle-related expenses, Gift receipts, and home office expenses. Keeping a tab on your business expenses helps you in profitable budgeting.

Develop a bookkeeping system:

Once you're all set to record your finance for accounting, you need to get a feasible yet efficient accounting system for your business. You can opt for a DIY route and opt for a smart Automated Accounting System like Quickbooks or Freshbooks. If you want to stick to old school accounting, you can outsource freelance accountants to do the job. If your enterprise is well built and can afford an accountant, then invest in a full-time accountant to maintain your books.

Set Up a Payroll system:

If your small business involves more people working for you including freelancers and employees, you need to fix a certain payroll amount aside for timely salary payments and ensure you're withholding the correct taxes.

Investigate Import Tax:

If your business imports goods from foreign countries to be sold in your home country, you're entitled to pay incoming import tax. Make your research regarding the tax amount involved in importing the goods for your store.

Determine how you'll get paid:

Once your business is open for sales and the customers or clients start purchasing your goods/services, you need to figure out a way to receive payments from them. It could either be a third party payment system or Shopify payment or through Merchant Center or anything that suits your customers and your business.

Establish Sales Tax procedures:

If you are running a physical store in a place X then irrespective of your customer's residential country, you are obliged to add place X sales tax charges in the purchase fee. On the contrary when it comes to Online Stores, especially if you are selling goods to international customers, you do not need to add any Sales Tax.

Determine your Tax Obligations:

Figure out your tax obligations based on the type of business you hold (sole proprietorship, LLC, partnership). If you are the sole proprietary then you need to include your business income in your personal tax filing. And in the case of a corporation or LLC, you need to file your business tax separately.

Calculate gross margins:

After calculating the revenue required to produce the goods including material and labor costs, you need to calculate Gross margins to escalate profit numbers, i.e. the total sales income kept after the business excluding all the direct costs to produce the product or service.

Timely update your accounting system:

If you are using the age-old spreadsheet system to manage your books, try the best accounting software for Small businesses like Quickbooks. Discover the new features offered and better your customer's experience. Check for ways to limit the time spent on accounting, use the saved time in ideating new business concepts, or strategizing your future business game.

Conclusion

Apart from basic accounting, adapt some accounting tips and tricks to boost your accounting system. You will save time, labor, and money if you timely update yourself with new accounting programs for small businesses. And as attested earlier, Bookkeeping is essential to ensure the stability and long-term success of any small business.

If your company mostly relies upon QuickBooks for accounting, you must have a look at SaasAnt Transactions for bulk imports, exports, and deletes of transactions. Sync your PayPal, Stripe, and Square transactions with QBO using PayTraQer. Reach us at [email protected] or try exploring the free trial version for 30 days.