In business, you must keep records of your transactions in your accounting books. Your accounting books allow you to review the financial status of your company. You may take control of your money and make appropriate commercial judgments by maintaining accurate accounting records and keeping them up-to-date. But first, you must grasp the fundamentals of small business accounting in order to do any of that.
Setting up Accounting Books for a Small Business
The prospect of recording all of your business transactions may be frightening. However, keeping track of financial activities isn’t always difficult. The more time you spend preparing your accounting books, the easier recordkeeping will be for you.
Choose an accounting method
Choose an accounting approach when you create your books for the first time. The following are the accounting methods available to you:
- Cash-basis: Least difficult accounting method
- Accrual: Most difficult accounting method
- Modified cash-basis: Mixture of cash-basis and accrual
Choose the method for recording transactions
There are different ways to record your transactions:
- Recording transactions by hand
- Hiring an accountant
- Using accounting software
The slowest way to record transactions is by hand. However, for small business owners, it is the most cost-effective approach. Manually keep track of each transaction and compute totals manually when recording transactions by hand.
Hiring an accountant eliminates the need to keep track of your own finances, which is both time-consuming and prone to mistakes. It is the most time-consuming but also the most costly alternative. They’ll prepare financial statements and totals for you if you employ an accountant.
The best of both worlds when it comes to complexity and price, accounting software is the ideal choice. If you wish to automate accounting procedures while also saving time without having to pay the cost of employing an accountant, accounting software is a fantastic alternative. Not to mention that you won’t have to worry about calculating totals because the program takes care of it for you.
Prepare a chart of accounts
A COA is a financial statement that breaks your money down into specific categories, much like a tax return does. A COA shows you all of the money going into and out of your company.
Your chart of accounts should have these five sections:
- Assets
- Liabilities
- Equity
- Revenues
- Expenses
Open a separate bank account for business
It’s a big no-no to mix personal and business funds. Create a separate company bank account to avoid accounting errors, incorrect tax filings, and overspending. Opening a business bank account not only helps you keep your records organized, but also allows you to establish an audit trail for your organization.
Determine the payment methods for your business
You can’t expand your business if your consumers don’t pay you. To ensure that you get compensated for your items or services, establish a clear customer payment policy. Determine which payments you’ll take from your clients. This might include:
- Cash
- Check
- Credit card
If you sell to customers on credit, you’ll need to send invoices once the items or services have been delivered. Decide on invoice payment terms, such as permitted payment methods, when payments are due, where payments should be sent, and late fees.
Track your expenses
It’s crucial to track your costs as part of accounting. It aids in the organization of your accounting books. You’ll thank yourself later if you track your expenditures. Keep the following in mind while keeping a record of your expenses:
- Receipts
- Bank and credit card statements
- Invoices
- Bills
- Canceled checks
- Proof of payments
- Previous tax returns
- Forms W-2, 1099-MISC, and 1099-NEC
The more documentation you maintain in your records, the better off your company and accounting books will be.