How To Do Bookkeeping For Small Business – When running a small business, you will most likely deal with day-to-day administrative tasks such as bookkeeping.
Even if you decide to hire a bookkeeper or freelance accountant in the near future, it’s helpful to at least know the importance of bookkeeping. This will help you track and run your business more efficiently.
How To Do Bookkeeping For Small Business
In this guide, we cover everything you need to know about bookkeeping for your small business.
The Beginner’s Guide To Bookkeeping
Small business accounting involves keeping track of all the money flowing in and out of your business accounts, summarizing that data into financial statements that can then be analyzed and used to improve the business.
Keeping track of all of the above through various spreadsheets or even physical folders can quickly become time-consuming and tedious.
Accounting software can be found either as a desktop application or as a cloud-based application.
While both types of software help you perform similar accounting tasks, cloud-based accounting software gives you the added benefit of being able to access your accounting data whenever you want, from any device.
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We’ll explain in more detail how you can use cloud accounting software to automate most of your company’s accounting processes. But before that, let’s go over some basic accounting principles and terminology.
The accounting equation is one of the fundamental principles of accounting. It dictates the relationship between the 3 main components of your business: assets, liabilities and equity.
Double-entry bookkeeping is the most widely used method of accounting. In double-entry bookkeeping, for every business transaction that takes place, two entries are created: a debit entry and a credit entry.
Here’s a table that summarizes everything you need to know about debits and credits and the different account types:
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A chart of accounts is a list of all the different accounts, separated by type. Remember that a ledger account does not mean a bank account.
The table below summarizes most of the accounts (and their types) that you can use when doing accounting for your small business. You can find the 8 most common accounts any small business should use for their accounting, highlighted in blue.
Then you need to compile all that data into something more useful that can actually help your business make strategic decisions. This is where accounting reports come into play.
A balance sheet provides a financial snapshot of your business as of a specific date. It is the primary financial statement used by most small business owners.
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While other financial statements present data for a specific period of time (a month, quarter, or year), the balance sheet reflects the company’s financial position at that point in time.
An income statement, also known as a profit and loss (P&L) statement, shows how your business performed over a period of time.
The statement of cash flows is made up of three sections for different groups of activities: operating, financing and investing.
The part of the statement of cash flows that deals with direct and indirect cash flows is operating activities. Basically, in a direct cash flow statement, cash is shown based on actual cash transactions.
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And like the statement of cash flows, most small businesses will never need to use a statement of retained earnings. Large publicly traded corporations rely primarily on these financial statements to decide things like paying dividends, company valuations, and more.
The number one thing you need to decide when doing accounting for your small business is what kind of accounting system you will use. Choosing an intuitive and easy-to-use system can help streamline your entire business accounting process and save you tons of time.
Funnily enough, however, many business owners believe that using a checkbook is still an effective way to manage their company’s accounting in 2021.
For starters, it can hinder your ability to grow your business. Organizing and keeping accurate records of all transactions will become more and more difficult as you start to scale.
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And if that’s not enough, think of the trouble you’ll have to go through when the IRS comes knocking on your door to collect taxes.
Now you may be asking yourself. Why would anyone go for a manual system (spreadsheets) when online accounting software can be used instead?
Well, manual accounting systems are good for very small businesses that have few employees and don’t deal with inventory. If you’re only interested in keeping track of the money coming in and out of your business, a simple spreadsheet will do the job.
For any other small business, however, online accounting software will be a better choice. This will save you time, money and also ensure that your records are always accurate.
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Because it’s cloud-based, you can access your accounting information at any time, from any device with an Internet connection. And if your business operations are primarily conducted on mobile phones, you can download the mobile app and manage all your accounting from your phone.
For starters, it will be much simpler for you to track how well your business is doing. And you’ll also save yourself a ton of time and nerves when it comes time to file your taxes.
The main difference between the two is that single-entry bookkeeping only requires you to write one entry for each business transaction you make. This means that only one account is used.
Double-entry bookkeeping, on the other hand, contains two entries for each transaction, and two accounts are used. One account is debited and the other is credited.
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In addition, single-entry accounting is based on the cash method of accounting (its main purpose is to record money when it is received and payments when they are made).
Whereas double-entry bookkeeping is based on the accrual-accounting method. The accrual method of accounting records revenue when it is earned, not when it is earned.
Note. Companies that deal with inventory that earn more than $5 million annually, or that are likely to be audited, are required to follow the accrual accounting method as required by GAAP.
The most basic part of bookkeeping, especially for small businesses, is keeping an accurate record of any expenses the business incurs.
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As a business owner, this will help you better analyze and monitor your business growth.
Every time you make a business transaction, you must record it. The process of recording all transactions is known as making journal entries.
Now, the journal entries follow the double-entry bookkeeping method we described above. This means that for each journal entry, two accounts are affected at once. One account is credited and the other is debited.
Just for example, let’s imagine that you decide to invest $5,000 of your own capital in your business.
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In this case, the two accounts affected are the owner’s equity account and the cash account. The cash account will be credited with $5,000, while owner’s equity will be credited with $5,000.
If you use cloud accounting software like , you can directly integrate your bank accounts and credit cards so that when you spend, the transaction is automatically recorded. In practice, a journal entry is created and it is automatically mapped to the correct journal. So you don’t even have to worry about creating each journal entry manually. Adjust the salary
A company is nothing without its employees. Whether from the beginning or at some point, you will have to hire employees.
And while hiring employees may seem easy at first, it’s not. There are many laws and regulations that you must learn and follow.
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When you hire your first employees, you need to understand what employee benefits your business can afford to offer.
This type of tax differs from the above in that it is paid by you, the employer.
Remember that as an employer, you will likely have to pay both federal and state unemployment taxes.
Fortunately, you can use online software like Automate Payroll Tax and manage all your payroll payments through an easy-to-use visual dashboard.
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Offers both accounting and HRIS software, allowing you to manage your accounting and payroll, all in one place.
On the other hand, online payments can be made through e-wallets, credit cards, payment gateway providers, online bank transfers, etc.
In North America, for example, credit cards are the preferred method of payment. about 34% of payments are made by credit card.
This is because with online payments you can get paid faster, with lower fees and from any country you deal with. –
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If you want to accept online or credit card payments, you can use Stripe or Paypal. Stripe lets you directly integrate with any app to track invoices, expenses, and more.
However, keep in mind that both of these payment providers have fairly high fees of around 3% of any transaction received.
Finally, if you use Shopify, you can simply use Shopify Payments to accept credit card payments. Depending on your Shopify plan, you may have to pay between them
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