Accounting for small businesses

Accounting for small businesses

Accounting is crucial to the operation and success of any business entity. For any small business to thrive, it will be required to incorporate a proper accounting system and best practices to ensure they monitor the transactions relating to the expenditures and revenue, thus aiding in cash flow management. Other benefits that small businesses derive from proper accounting include aiding in tracking financial health, meeting regulatory requirements, and making informed financial decisions. Accounting in small businesses will involve the following steps;

Major steps in accounting for small businesses

1. Opening a bank account

It is essential for the business owner or owners to open a business bank account that will ensure that they don’t use their personal accounts for business transactions. This helps in separating personal and business spending. This separation gives them a clear outline of the business’ performance and enables them to follow up and make the expected adjustments. The requirements for opening a business account vary from one bank to another.

2. The next step is identifying the most appropriate accounting method.

The two main accounting methods are cash and accrual methods of accounting. The chosen accounting method defines how a business prepares its records, and reports its income and expenses for the year. The cash method requires businesses to deduct expenses in the year or period that they are paid and recognize income in the period that it is earned and received. The accrual method requires businesses to deduct expenses at the period they are incurred and expenses at the period they are incurred regardless of whether cash is received or paid out.

3. This step involves setting up the accounting system and chart of accounts

The business can choose between using manual accounting through the ledger or using accounting software such as QuickBooks, Sage, or any other. A chart of accounts entails a listing of accounts that a business entity uses to record its transactions. This involves organizing accounts of a business entity into different categories such as assets, equity, revenue, and liability and further dividing them into subcategories and assigning them numbers. Small businesses should record daily transactions involving sales, purchases, other incomes, expenses, and any other invoices in these accounts. The balances on these accounts at the end of an accounting period are used in the preparation of financial statements.

4. Determining the accounting period

The accounting period of a business entity is defined by its fiscal year which should run for 12 months. A business can choose its fiscal year to run concurrently with the calendar year from the 1st of January to the 31st of December, from the 1st of July to the 30th of June, or any other months that might favor its nature of operations.

5. Complying with legal and tax requirements

Before they start their business operations, small businesses should ensure that their businesses are legally registered and that their operations adhere to the requirements set out under the local regulations and authority. Small businesses should also adhere to the requirements of the applicable tax authority. This will include obtaining a tax identification that will be used to identify the business when filing taxes and addressing other tax-related matters. The next step is submitting the applicable deductions and filing tax returns, which should begin with understanding tax obligations such as the Value Added Tax (VAT), income tax, and any other applicable taxes.

Fundamental financial statements for small businesses

Financial statements are documents that show the financial health of a business entity for a specific time, usually one fiscal year. The three important financial statements for a small business include income statements, balance sheets, and cash flow statements.

1. Income statement

An income statement is a document that shows a business’ profitability by detailing its incomes, expenses, losses, and gains over a period of time, to determine the net profit or loss. It is also known as the profit and loss account.

2. Balance sheet

The balance sheet is a document that outlines an entity’s net worth by detailing its assets, liabilities, and equity. It basically shows how a business finances its assets, which is either through debt or equity. The balance sheet is also known as the statement of financial position.

3. Cash flow statement

The cash flow statement is a document that outlines the movement of cash in and out of the business. It indicates the ability of an entity to manage its cash, how it generates and uses cash to pay its dues and obligations, and how it caters to its operating expenses.

Conclusion

Accounting is fundamental for small businesses. It is, therefore, essential to incorporate an appropriate accounting plan before starting any business to enhance the financial health of the business by accurately recording and following up on all the transactions relating to the business. It also ensures compliance with legal and tax requirements, differentiates business and personal finances, and enables businesses to focus on their growth.

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