Accounting for a Small Business: All You Need to Know As a Business Owner
Accounting for a small business doesn’t have to be tough. Nor should it distract you from other business processes. The basics of small business accounting come down to three key reports. They are the balance sheet, income statement, and cash flow statement.
Accounting for small business owners is a necessary aspect of the profession. To guarantee the success of your business, you must carry out accounting duties based on a plan and timetable.
By doing so, you can manage your money better and make wise financial decisions for your business. Aspiring founders should begin accounting from the start of their business.
Basic Accounting Terms for Small Business Owners
To guarantee that your business operations function well, you need to learn a few accounting principles. One should not miscalculate the importance of fundamental accounting - even as an expert in sales or marketing.
It’s nearly impossible to drive your business forward without a clear financial picture. Important accounting concepts and principles are included here to help you in getting started. Take a look at the basic accounting terms below:
- Accounts payable: It is the money you owe creditors and vendors and is recorded as a liability since you have a legal obligation to pay them.
- Accounts Receivable: Customers owe money for products or services they’ve purchased. Accounts receivable is often classified as a creditable asset since the customers are legally required to pay.
- Accrual accounting: It is a technique of accounting in which companies record revenues and costs at the time of sale.
- Assets: Business bank accounts, accounts receivable, inventory, furniture, equipment, and real estate are all examples of assets that your firm owns.
- Cash basis accounting: It is a method in which a firm recognizes a sale when it receives money.
- Double-entry accounting: It is a method of recording transactions by making two entries for each transaction. Both sides must be equal, with one side stating debits and the other listing credits.
- Liabilities: Accounts payable, income taxes, salaries, and loans are all examples of liabilities.
Types of Financial Reports:
- Cash flow statement: It is a financial statement that shows how much cash and cash equivalents are coming in and going out of a business. The cash flow statement rates a company's ability to handle its financial position.
The statement also measures how successfully the company earns cash to fulfill debt commitments and finance operational costs.
- Balance sheet: A financial statement shows your company's financial position after a certain period. It includes the assets, liabilities, and shareholder equity of your company.
- Income statement: It’s commonly known as the profit and loss statement. An income statement shows earnings, costs, and net profits for a given time.
How to Do Accounting for a Small Business
Business accounting is the process of obtaining and evaluating financial data. It includes business activities, recording payments, and preparing financial statements.
This small business accounting checklist will help you cover all of your bases and prepare to move on to the next task on your to-do list.
1. Keep Business and Personal Expenses Separate
When it comes to calculating deductible business costs, having a separate business bank account for checking and savings saves you time. For clarity purposes, you must carry out this step right away. If you're donating capital to your firm with your assets, make sure you keep track of it.
If you have a limited liability company (LLC) or corporation, then keep a separate business bank account and credit card. This will reduce your legal responsibility to corporate obligations.
Personal costs are often not deductible on a corporate tax return. Suppose you use a car or a home office for business and personal purposes. The percentage of time you use the property for business is deductible.
Deducting personal costs from a corporate tax return is not allowed otherwise. The fine might be up to 75% of the excess tax paid.
2. Keep Track of All Expenses
Label and classify each cost, and keep track of your cash flow to make sure you get the most out of your tax deductions and credits.
You won't have to go through a wallet full of paper receipts if you use your company credit cards for all purchases. This also means you can get cashback and incentives for the purchases.
You may also use accounting software to save copies of checks and invoices that you've paid. File digital copies of receipts in your accounting program if cash is your only choice. Record costs and income depends on the accounting method you use.
3. Accurately Record Income
It's easy to lose track of loans, sales income, sales tax, and other financial information. But you need to record all your incoming cash flow.
If you don't, you risk underpaying your taxes and incurring unnecessary IRS fines. Your accounting system will determine when to record revenue, just as it will determine when to record costs.
Calculating the gross margin of your business will help you improve it, which would, in turn, bring in more income. Before calculating, you should know the following two terms:
- COGS: It stands for the direct costs of manufacturing and selling products, including labor and material expenditures.
- Gross Margin: This figure indicates the total sales income that remains after COGS has been paid.
You can calculate your small business’s gross margin with the following formula:
Gross Margin (%) = (Revenue - COGS) / Revenue
4. Make a Bookkeeping System
Bookkeeping for small businesses is a vital aspect in managing both legal and financial information and objectives. You must understand where your money comes from and goes as a small business owner.
By maintaining correct records of income statements, balance sheets, cash flow statements, you receive a real picture of the company’s health. Accounting principles deal with organizing and analyzing financial data. This leads to accuracy and improves expenditure. Bookkeeping is important for more than just being organized.
Additionally, keeping records of all incoming and outgoing costs will assist you in planning for the future. Proper bookkeeping methods can also help you regain control of your finances. Remember that bookkeeping and accounting for small businesses go hand-in-hand.
It's critical to understand how much your company spends and how much it earns. One of the most important advantages of bookkeeping is that it allows you to monitor your spending in real-time and, if required, change your budget.
Small businesses and startups can enhance their chances of success by creating excellent accounting systems from the start. According to studies, the more regularly a small firm examines its financial data, the better its financial health will be. It will also lead to long-term success.
Therefore, small business owners must evaluate these important financial indicators on a regular basis. This would enable them to make the most of growth opportunities and ensure their firm is not on the verge of bankruptcy.
5. Use Accounting Software
Accounting software is beneficial to almost every small business. Any excellent accounting software should be able to connect your bank account or credit card. The program will then keep track of your income and expenses, categorize them, and allow you to send and pay invoices as well as produce reports.
6. Set Aside Time to Keep Your Books Up to Date
Block out time in your calendar for organizing required documentation. This way, you can avoid a backlog of receipts and billed receivables. Make sure you keep to the schedule you've set.
As tax season approaches, this may save you a lot of time and effort. Accounting software can help you save time by automatically classifying revenue and spending, as well as reconciling your bank accounts and credit cards.
7. Manage Taxes
To avoid overpaying or underpaying, keep track of the overtime, perks, and other incentives you provide. Payroll taxes have different regulations and deadlines than income taxes.
Selling to consumers outside of your nation has never been easier - thanks to ecommerce. Although this aspect enables business growth, there are also some sales tax laws to consider.
If a customer buys a product from a business based in a specific place, it is necessary for him to pay sales tax as per the place’s laws. The customer’s original residence or traveling status does not matter. While selling online, consumers can be situated in different cities, regions, and nations.
Computer updates, equipment replacements, and tax deadlines are all aspects that should be covered. Larger capital expenditures are more likely to occur during slower months. Therefore, budget early to prevent a financial emergency.
The tax obligations will be based on the legal structure of your small business. Self-employment allows you to claim business revenue. Corporations are considered entities and are taxed separately. Similar to what an employer would do, self-employed individuals should withhold and remit taxes (from their income) to the government.
8. Keep Track of Inventory
Keep track of dates purchased, stock numbers, purchase prices, dates sold, and selling prices to avoid misplacing or stealing items. To ease your workload, you may buy stand-alone inventory management software or a robust accounting product with inventory management solutions.
Invoices and receivables should be followed up. Just because you sent an invoice doesn’t mean you’ll be paid. Connect back with suppliers that owe you money. This way, you may avoid overpaying taxes and wasting hours searching through your revenue account and receivables listing.
Send invoices as soon as a task is done to increase the possibility of quick payment. To encourage consumers to pay fast, you may even give early payment discounts.
Accepting online payments and utilizing cloud-based accounting software might also assist you in automating this procedure.
9. Make Financial Projections for the Following Years
Even if your company is profitable today, you would want to keep things going in the right direction. Financial forecasts and reports help you predict where your business will be in years from now. Financial forecasts can assist you in choosing where to spend your firm's earnings and whether you'll need to seek a business loan.
Financial forecasting is difficult because you must account for how costs may vary due to natural forces (such as inflation) and customer actions. The same is true for income, where you'll need to account for the increase in prices and the number of consumers you'll get each year via marketing. The easiest approach to generate accurate financial predictions is to use accounting software.
Finom – How to Set Up Business Accounting
Finom can help you manage your business more efficiently. Finom has assisted thousands of individuals, small businesses, and medium-sized companies from Europe. With a focus on simplifying financial handling in a business, we are setting new standards in alignment with the digital era. Finom gives you access to all of the features of a typical bank. These include payments, sending and receiving money, withdrawals, and holding cards. The mode will however, be quickest and the most efficient.
From business accounting and invoicing to accounting software integration, Finom offers a range of services. Finom's free Solo plan allows small companies and freelancers to have access to multi-banking and own bank accounts with local IBAN.
For Germany’ residents, Finom provides complete and secure accountant access and connection with Lexoffice, Sorted, DATEV Online, sevDesk, FastBill, and other accounting software.
Finance is the lifeline of every company. These small business accounting tips and techniques are critical to the success of a business. You can also use accounting software like Finom, which takes the uncertainty out of accounting for small businesses.
The greatest thing is that you don't even need to be the most tech-savvy company owner in the neighborhood with the right software. A key objective is not to be overwhelmed when tax season arrives.
Overall, you'll have more peace of mind knowing that everything is organized and ready to submit. This will give you more time to concentrate on increasing your profits.
You can keep your firm financially healthy today and in the future by following these tips about simple accounting for small businesses.