The Steps Involved in Local Small Business Accounting

The Steps Involved in Local Small Business Accounting

Every business owner must track, record, and analyze all financial transactions associated with their venture. These tasks allow the owner to see how profitable the business is and may identify areas where they need to make changes. Many people find accounting to be boring, but they know they must do these things. However, they need to understand all that is involved in keeping books for a business of any size.

Small Business Accounting

Accounting tasks help the owner monitor the money that is coming into the business as income and all expenses incurred. For small businesses, three general tasks must be completed. The owner must record financial transactions, create financial reports, and file tax returns. Upon completion of the tasks, the business owner gains a better understanding of the company’s health and its overall value. This allows the owner to make informed decisions regarding business operations. Furthermore, owners need the information to create invoices and generate payroll.

Establishing a Small Business Accounting System

Small business owners must take certain steps to establish an accounting system. Complete each step to protect the business.
Separate Personal and Business Finances

Every business needs a bank account separate from the owner’s personal account. This account makes it easy to organize revenue and prepare for tax filings. Sole proprietors may combine their personal and business accounts, but experts recommend keeping the finances separate. When the owner spends their personal funds for a business expense, the business account can then reimburse the owner. This makes it easier to track the transactions for tax purposes. In addition, the documented reimbursement becomes of benefit if questions arise associated with the transaction.

Pick an Accounting System

Owners must choose either a cash or accrual basis accounting system and use it consistently. With the cash-basis system, the owner records transactions when they receive or remit a payment. When using the accrual basis accounting system, the owner records income every time they make a sale. They record each expense as it is incurred. The transaction makes it into the books regardless of whether they pay or receive cash. This system requires every transaction to be recorded twice using a double-entry accounting method.

Determine Payment Options

Before the business conducts its first transaction, the owner must determine what payment methods will be accepted. If the company will accept cash along with credit and debit cards, the customer pays when the transaction is complete. If the business provides on-going services and requires on-going payments, direct debit is a good choice. Direct debit solutions are a great way for small businesses to collect payments from customers. It is easy to set up and manage, and it allows businesses to automatically collect payments from customers on a regular basis. This can help businesses to improve their cash flow and avoid late payments from customers. Additionally, direct debit can help businesses to save time and money by simplifying the billing and payment process. Overall, direct debit is an efficient and convenient way for small businesses to collect payments from customers.

Record Transactions

The owner or someone acting on their behalf must record every transaction related to the business. Doing so allows the business owner to monitor expenses they may deduct on their taxes, prepare financial documents, complete tax forms, and know the status of the business at all times. However, only those expenses directly incurred by the business should be documented. This includes purchase orders, invoices, and additional financial documents. Many business owners work with a local small business accounting firm to help with this task.

Update Accounting Ledgers Regularly

Once the business takes off, an owner may put off updating accounting ledgers. They have other tasks that need completion and focus on those instead. For example, they prioritize closing sales and completing jobs, as these tasks generate income. However, when the owner puts off updating the accounting ledger, they may experience a delay in generating invoices and bounce checks. They don’t know how much money they have and it hurts them. Establish a routine for sending invoices, updating ledgers, and paying bills. Having these accounting workflows in place makes it easier to assign tasks to another person. They can pick up where the business owner left off to ensure a smooth transition of the accounting duties.

Review Transactions for Errors

In addition, when recording transactions, the business owner needs to review each account for errors. Humans make mistakes. By reviewing each transaction when recording it in the ledger, the owner can catch these mistakes before they cause major issues.

Transactions to Trial Balance

When a business uses the double-entry accounting system, the owner enters every transaction as a journal entry. The entries appear in chronological order and show the transaction dates. Each entry also lists the amounts debited and credited, and an explanation for each transaction. Balanced entries are moved to the general ledger. The owner reviews past transactions along with the current balance and makes any changes in the general ledger. The owner then prepares a trial balance.

Adjusted Trial Balance

In addition, owners using the accrual basis accounting system need to adjust their journal entries to account for income and expenses that recur. For instance, the owner may pay rent for a year. However, the accounting entry should be recorded each month to recognize when the expense was incurred. Upon completion of this process, the owner prepares an adjusted trial balance. This verifies the debits and credits were recorded correctly and provides an accurate record of the current financial state of the business.

Prepare Financial Statements

With the adjusted trial balance in hand, the owner can generate financial statements. This may include a statement of cash flow and a statement of retained earnings.

Reconcile the Books

The last step in any accounting cycle involves reconciling the books before closing them. Post-closing entries reset the balance of any temporary accounts so they show zero before the accounting cycle restarts.

Business owners often feel overwhelmed by these tasks. However, by taking three basic steps, the owner can ensure they complete accounting tasks as needed. Keep all receipts related to the business, ensuring they show the date, time, and amount of each transaction. Transfer this information to the general ledger, which is nothing more than a record of the company’s income, expenses, and more. Generate financial reports using the data in the ledger to gain more insight into the organization’s financial health.

Efficient bookkeeping allows the business owner to identify any patterns in normal business operations. They can then make changes where needed. Every business needs a robust accounting system. If a business owner needs help, they should work with an accountant. This is one area where no business owner can afford to make mistakes.

Bryan Cunningham

Total Post: 43

Zombie maven. Musicaholic. Friendly student. Unapologetic organizer. Hipster-friendly internet geek.

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