The bookkeeping and accounting process is a necessity for small business owners. It allows them to stay in control of their finances and meet legal obligations.
To do this, you must familiarize yourself with basic accounting terms such as assets, liabilities, equity, revenue, and expenses. This will make it easier to understand the ins and outs of bookkeeping.
Recording Transactions
Bookkeeping is the process of recording every financial transaction that occurs in a business. This is done manually in a journal or through a designated accounting software system. The transactions are categorized and recorded as credits or debits to specific accounts in the general ledger. The types of accounts used include assets (stocks and equipment), liabilities (accounts payable, bank loans), revenues, expenses, and equity.
Small business owners often struggle with the time required to keep up with daily bookkeeping tasks. Trying to manage marketing, sales, customer service, inventory, and other business activities along with keeping up with the books can quickly become overwhelming. This is why many small businesses hire full-time or virtual bookkeepers to handle this responsibility.
The first step in the bookkeeping process is to set up a chart of accounts and choose a bookkeeping method. There are two primary methods: single-entry and double-entry. Single-entry bookkeeping is simpler and suitable for small businesses that have a minimal number of financial transactions. Double-entry bookkeeping is more complex and is appropriate for larger businesses that have a more significant number of financial transactions.
Once the accounts have been set up, it’s important to record every transaction that occurs in a day-to-day basis. This includes income and outgoing expenditures such as payroll, rent, utilities, and advertising. It’s also crucial to record any prepaid expenses such as insurance or future revenue such as a subscription fee. Even the smallest transactions can add up, so it’s important to be thorough when recording entries.
Once you have recorded all the incoming and outgoing money, the next step is to reconcile your accounts. This involves tallying up all the accounts to ensure that they match up. If there are any discrepancies, they should be corrected immediately.
Having an accurate picture of your business’s financial health is vital for making informed decisions about future growth. The information gathered through bookkeeping can also help you apply for a loan and prepare for tax season. Moreover, it can help you determine if there is any unnecessary spending and alert you to costly services that you might be paying for but no longer use such as focus music apps or expensive web hosting packages.
Reconciling Transactions
Reconciling your financial data is an essential part of bookkeeping that ensures that your internal accounting records match up with your company’s bank statements. While it may seem like a tedious task, especially for those still using manual bookkeeping methods, this step is essential to guarantee that your business’s financial statements are accurate and up to date. It also helps you spot any errors or fraudulent charges that you might have missed.
In this step, you need to review your company’s financial transactions and compare them with the information contained in your monthly bank statement. This is a crucial process that should be conducted regularly, ideally once a month. For small businesses that use accounting software, the reconciliation process should be automated, eliminating a large amount of the work that would otherwise need to be done manually.
For those who are managing their books with a manual system, you’ll need to review each expense record and ensure that it matches up with your bank statements. This can be a time-consuming process, especially for those who need to manage many expense records and reconcile them all on their own. However, many online programs and accounting software systems have a feature that automates this process, making it much easier for small business owners to keep up with their financial records.
Reconciliation is necessary to guarantee that your financial records are in sync with the money that comes in and goes out of your business on a daily basis. Failure to reconcile your accounts can lead to inaccurate financial reports, which can have drastic consequences for the health of a business. This can include out-of-balance records, undiscovered payments and even unauthorized charges that might not be discovered until it’s too late.
In general, the best way to ensure that your financial statements are correct is to conduct a monthly reconciliation of your accounting records and the information in your company’s bank account. This will ensure that the closing balance in your general ledger is the same as the balance shown on your monthly bank statement, which should be the sum of all recorded expenses.
Preparing Financial Statements
A bookkeeper is responsible for preparing financial statements that summarize transactions that occurred during a specific period of time. These include the balance sheet, income statement, and cash flow statement. These reports are used to understand a company’s finances and can help inform decisions like hiring, marketing, and expansion strategies.
The first step in preparing financial statements is collecting all documented business transactions from your bank account, credit card, receipts, and payroll records. Once you have all of this information, you can create a chart of accounts that includes all the accounting “buckets” for your transactions. This is where you will record each document’s date, amount, and description. You can use a journal or general ledger for this purpose, and it is important to assign each transaction to the correct category in order to prevent accounting errors.
From there, you will create a trial balance to make sure that debits and credits match for all the accounts. If there are any unmatched transactions, you will need to record adjusting journal entries at the end of the period. Once you have completed all of the steps listed above, you can prepare your company’s financial statements.
To prepare an income statement, start by listing all of your company’s revenue for the month. This can include invoices, interest from your business bank account, and more. Next, list your expenses for the month. This could include rent, insurance, supplies, and other business costs. Then subtract your expenses from your revenues to calculate your company’s net profit.
The balance sheet is a snapshot of your company’s assets, liabilities, and equity at a specific point in time. It is also known as a “statement of financial position.” The goal is to understand the company’s true financial health by looking at the long-term and short-term assets, liabilities, and equity.
The final statement is the cash flow statement, which shows incoming and outgoing cash. This is especially useful for a small business, as it can give owners a more accurate picture of their actual money flow. As an added bonus, these statements can also be compared to industry benchmarks to see how the company is doing.
Taxes
A tax is a mandatory payment or charge collected by local, state, and national governments from citizens to pay for public services, goods, and activities. It is a core component of government finance that has been around for thousands of years.
Bookkeeping is the process of recording your business’s financial transactions into organized accounts on a daily basis. Detailed records will allow you to generate accurate financial statements and prove your tax liability in case of an audit. In addition, banks review a company’s cash flow statement and income tax returns when considering loan applications.