Bookkeeping basics: A guide for small businesses
We believe everyone should be able to make financial decisions with confidence. An easy tip you can implement starting today is setting reminders. Set a date early enough each month to give you time to prepare the paperwork. A safe way to protect the cash flow is to track how long it takes for the clients to pay the invoices.
With accurate bookkeeping, you can tell how much your business is making in terms of income and track your spending to ensure that you have enough cash on hand to cover your business expenses. Proper financial records make it easier for you to analyze the financial state of your firm and determine areas that need improvement. Accrual accounting provides a more accurate picture of a business’s financial health than cash accounting, as it considers all of the financial transactions for a given period. This accounting method is useful for businesses with inventory or accounts payable and receivable. Small businesses also manage their own accounts receivable to make sure they get paid on time for goods and services that have already been bought or rendered.
- You should consider electronic invoicing to make the process easier and faster.
- Getting your books together and producing financial statements is the only way to gauge the financial health of your small business.
- Keeping an accurate, up-to-date set of books is the best way to keep track of tax deductions (expenses that you can deduct from your taxable income).
- Online accounting software can help you make sense of your financial reports, review your budget, and prepare for taxes.
DIY bookkeeping is simplest when you break it into manageable chunks—don’t try to do it all at once. As much fun as a last-minute, equity stock based compensation audit techniques guide panic-fueled bookkeeping cram session can be right before tax time, you can do your future self a favor by taking care of routine bookkeeping tasks every week. Accrual basis accounting records those invoices and bills even if the funds haven’t been exchanged. Generally, accrual basis is the recommended accounting method and more aligned with generally accepted accounting principles.
You can figure both your direct and indirect costs by performing a cost assignment to each type of good you produce or service you provide. If you manufacture goods, your inventory accounting entries will reflect several stages of completion. If you produce wooden furniture, some of your inventory may be unfinished wood products, furniture currently on the assembly line, and finished pieces. In your ledger, the finished goods inventory will reflect the number of each type you have at any time. Recording just the cost of those supplies with the cash method might give you an inaccurate picture of how much you are — or should be — spending on supplies. So, which of these methods should you use in your bookkeeping to get the best, most accurate picture of your spending habits?
Chart of Accounts
Unless you’re dying to break out adding machines and slide rules, feel free to take advantage of the many bookkeeping apps and software on the market. Small business bookkeeping is a necessary business task, but if it’s not your favorite activity, you’re not alone. Admiring your profits is always fun, but going over ledgers and calculators? Get free guides, articles, tools and calculators to help you navigate the financial side of your business with ease. Although bookkeeping is an investment, it’s generally much more affordable than attempting to correct costly mistakes down the road.
Balance Sheet
To uncover errors, check whether you forgot to record an entry in either column of your accounting ledger. This means you’ll have an accurate valuation of the item and your expenses related to depreciation are accurate. Historical cost may factor in when you’re accounting for lump-sum purchases. This is particularly true once the business accounts for its operational costs and recurring expenses.
Cash versus accrual
It will be even easier to keep your records organized, stay on top of time management, send out invoices and more in a cloud-based accounting software like QuickBooks Online. Cash may be king, but it needs a bit of extra attention when it comes to DIY bookkeeping. You don’t ever want to lose track of your cash, and unlike checks or online payments, cash doesn’t come with handy documentation.
It’s useful for business owners looking to save time and avoid common accounting errors. The two key accounting systems are cash accounting and accrual accounting. If your business is still small, you may opt for cash-basis accounting. If you carry inventory or have accounts payable and accounts receivable, you’ll likely use accrual accounting.
When your business income mixes with your personal accounts, it doesn’t make more money—it just makes a mess. Do you have more questions about the bookkeeping process for small businesses? Wondering how best to collect and track financial information, deal with expense management, and ensure healthy cash flow for your business?
