Accounting is a crucial aspect no matter what size of business you have. However, if you’re just starting out your small business, accounting is perhaps one of the most important things to spend time and energy on. It can help you keep track of all expenses, payroll, and any unexpected expenditures. With proper accounting and bookkeeping, you can always ensure your finances are always in line with your business goals.
For a small business, there are different methods to keep track of your expenses. Choose bookkeeping or an accounting method that is most suitable to your needs and your business model. As your small business expands, adapt to a method that can best sustain your finance tracking process.
Basic accounting for small business
Contrary to popular beliefs, there’s a difference between bookkeeping and accounting. Accounting is often referred to as a big umbrella term, an activity that involves finances and money. However, there are different facets when it comes to accounting and it’s important for small businesses to find a method that’s suitable for their practice.
There are two simple accounting methods for small business methods: Cash-based accounting and accrual-based accounting. Cash-based accounting is perhaps the simplest accounting method a small business can adapt in their company. Basically, this method requires you to record cash flow; that’s whenever there’s money coming in and when there’s money coming out. This is recommended for small businesses with little to no inventory or those focusing on service instead of a product.
On the other hand, the accrual-based accounting method is a bit more complex but it has its own benefits. It allows you to record revenues immediately and you do not need to wait until payment or cash is received by your business. The accrual-based accounting method is useful if you need to create a long-term projection of your finances.
When starting out, it’s much easier to implement the cash-based accounting method just to get your small business going. However, when clients start growing or you need to start outsourcing, accrual-based accounting might be more beneficial. Through this method, you can project future expenses and income even if you don’t have your revenue in real-time yet.
Bookkeeping for small business
Bookkeeping is the act of keeping track of all your sales and expenses on a daily basis. Usually, small businesses that have this process implemented record it in a journal or a ledger. A journal is where expenses and income are recorded chronologically while a ledger records transactions are divided into accounts so the final amount is always balanced.
There are two methods when it comes to bookkeeping: single-entry and double-entry. Each bookkeeping method has its own pros and cons so you should always choose one that suits you best.
Single-entry bookkeeping requires you to record all incoming and outgoing cash in your ledger. The main idea is to keep a note of any existing cash and add any income and subtract any expenses. After you keep track of all the entries in a period of time, this is where you calculate your cash balance. If your end balance totalled more than what you began with, it means you’ve generated more income than expenses.
Meanwhile, double-entry bookkeeping keeps track of all business transactions and this is where your debit and credit accounts come into play. Your debit and your credit must always be equal for accurate bookkeeping. There’s a simple equation when it comes to double-entry bookkeeping: liabilities + equity = assets. Liabilities refer to the expenses your small business owes and equity is what you have invested in your business. When both of these things are added, it will become the asset or all the money your business owns.
Choosing a bookkeeping entry method
While single-entry bookkeeping seems simple and straightforward, one downside to this method is its reliance on the cash you have at hand. Single-entry bookkeeping doesn’t give you the bigger picture including external transactions and expenses. With double-entry bookkeeping, you can see every transaction even if it doesn’t generate cash or income. It’s also a good method to spot errors in your finances as all your accounts must be equal. If your accounts are not equal, it means there might be a missing or miscalculated transaction in your ledger.
For a small business, single-entry bookkeeping comes in handy especially when you’re just starting out and when you don’t have a lot of inventory for your products. However, as it grows, you should consider switching to double-entry bookkeeping. If in the future you plan on looking for investors, double-entry bookkeeping is the preferred method for many banks and investment firms.
There are bookkeeping tools like the GoKudos AI debt collector that can set up payment reminders and send them out on your behalf. These reminders can be sent out via email, Whatsapp, SMS, as well as phone calls. Once the clients have made their payments, this tool can also track all payment records in the clouds.
Using software and external tools for small business accounting
Being a small business owner can be challenging as it is, from making sure you’re targeting the right market to maintaining the quality of your product or service. If accounting is not your cup of tea and you feel like it’s getting complicated, you can rely on the small business accounting software to make your job much easier. It can save you the cost of hiring an accountant to keep track of your finances for you.
There is plenty of available accounting software to help your small business. It can help you track expenses, send out invoices, generate financial statements, and remind you of due payments so you can always be one step ahead in your finances. Accounting software can be quite beneficial for sole business owners who are running a small business all on their own or with a few partners.
No matter which accounting or bookkeeping method you use for your small business, you should use all the available resources to make your job a whole lot easier. Accrual-based accounting and double-entry bookkeeping are widely used by businesses today, no matter what size they are. These businesses also use cloud-based or AI accounting software to ensure error-free tracking and financial statements.