Most of the small businesses are backed by passion and inspiration. And for most of the small business owners, the focus is on initially start making a profit and then growing.
However, when you are running a small business, whether you aim to expand or not, you are required to know at least the basics of bookkeeping. Whether you are selling books or providing excellent career counseling services, you deal with numbers every day. To ensure to keep a strong financial position and keep a record of all business transactions, you need to have a basic understanding of how bookkeeping works and how it impacts your business.
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What is bookkeeping?
Bookkeeping is a system that includes recording all business transactions on a regular basis and organizing them in a particular manner. Bookkeeping help companies track financial information and operational information on the books, which enables small business owners to make functional, financial, and investment-based decisions.
Bookkeepers are the professionals who make the record of all transactions into the company books and manage financial data. Recording and maintaining systematic books with accurate details and figures is crucial for owners and other business stakeholders.
The information bookkeeper’s record becomes the benchmark for business revenue and the basis for general strategic decisions. Bookkeeping provides businesses with reliable metrics for owners to analyze performance and plan for the future.
Small businesses typically have two primary options for bookkeeping and accounting solutions. You can either hire an in-house team or partner up with an outsourcing company or have experts working for you.
Adopt an accounting and bookkeeping system
If you have decided to maintain your books in-house and not hire an outsourced accounting and bookkeeping firm, one of the first choices you have to make is to select an accounting method. This decision will affect the upcoming stages of bookkeeping. Are you going to incorporate the single-entry accounting method or double-entry system?
The single-entry bookkeeping system involves recording each business transaction just once. For example, let’s assume a customer buys two units of a product against a certain amount, and you record it just one time in the asset column. However, the single-entry method is only a realistic option for a small business with very simple operations. If you have a small shop and you only deal in cash or if you work from home and your work doesn’t require you to handle inventory or equipment and a lot of transactions, single-entry might be a bookkeeping method for you.
However, most of the businesses around the world use the double-entry accounting method for recording financial transactions. According to this system, every transaction will have an impact on at least two business accounts or more. The balance of all affected accounts will eliminate each other. This is the primary rule of the system, and it demands equal and opposite entry for the transaction. In the earlier example, the bookkeeper will debit the amount of transactions in the bank account, and credit sales account with the same figure.
Set up key business accounts
Every business is different, which is why they need to set up separate accounts based on the nature of their operations. However, you only need to set up the accounts once, and you can continue to maintain them for the entire business existence or as long as you continue to do business with the specific account.
In the earlier days, businesses used to actually draw a chart of accounts to record transactions in a physical book known as the general ledger. However, with time they have been replaced by computer software. Even though you are virtually recording transactions, but you still have to set up necessary accounts in the general ledger.
Following is the list of some of the most common accounts that almost all business need for core operations:
- Sales – to record the selling of products or services, the source of income.
- Accounts receivable – to maintain the record of payments and how much the client owed.
- Accounts payable – to keep up with how much you owe vendors and suppliers.
- Purchases – to record the raw material or supplies you buy to run the business.
- Expense – to record the overheads and other expenses you pay off to operate the business.
- Salaries & wages – to record the amount you owe employees against their services.
- Retained earnings – it helps you calculate business profit after considering all business incomes and expenses.
If you have a small set up, you can use spreadsheet software like Excel. Otherwise, there are a number of desktop accounting platforms and cloud-based software. Make sure to research to select a platform that fits best within your business needs.
Record every business transaction
The primary purpose of bookkeeping is to maintain a record of all business transactions and their impact or significant accounts. You have already picked an accounting system and created charts of accounts. Now is the time to bring everything to use.
You must record both debit and credit balances in precise accounts and with an accurate figure. Otherwise, it will mess up your account balances, and it will add a whole new task in your list at the time of closing books.
As most businesses follow the double-entry method, the first step would be to find two accounts that will be impacted. Next, you record the transaction. Remember, accuracy, and timely recording of the transaction are the key ideas here.
Balance your books
You go through all this hassle of bookkeeping for this ultimate purpose of balancing your books. As you tally up all the account debits and credits at the end of the month, quarter, or the year, the sum of both sides should match. When this happens, it means that your business books are balanced.
If you are using a digital platform or computer software, you only put in the information, and the closing or balancing part is automated. However, it is still crucial that you understand how closing and balancing of books works, so you can identify errors if need be.
The first step is to understand the basic accounting equation:
Equity = Assets – Liabilities.
Typically, some of the common assets accounts include account receivable and any equipment your business may own, liabilities include accounts payables and bank loans, and equity includes your business’s retained earnings. However, generally, there is a whole list of assets and liabilities that a company handles.
In case the two sides don’t match, the bookkeeper has to go back through the ledger entries to find the errors. Next, they make new entries to rectify these errors and balance the accounts.
Only when your books balance, you can close the period and start the process of preparing financial reports to enable management to be aware of the health of the business’s financial condition.
Prepare financial statements
Once you have balanced your books, now is the time to give a closer look at what these books mean for your business. The flow of money in each account will tell you something about the financial health of your company. Moreover, accountants help you prepare financial statements that paint a picture that helps make important decisions about the company’s future.
Let’s look at a few of the most commonly prepared financial reports by businesses globally.
- Income or Profit & Loss Statement
This report gives you anall-inclusive view of business revenues, expenses, and costs over a specified period. It helps you analyze the relationship between sales and expenses and make predictions based on it.
- Balance Sheet
This report shows breaks down the basic accounting equation in your company. It states a summarized version of business assets, liabilities, and equity in a single document. The balance sheet gives you a good look into the current health of the business and makes decisions like can you expand or need to improve liquidity.
- Cash Flow Statement
This document is a bit similar to the income statement, but it only includes cash items. This report tells you how much and where your business is making money and where it’s spending cash, and helps you analyze its ability for paying upcoming expenses.
Preparing financial statements is a significant part of accounting and bookkeeping. Many software help prepare reports in real-time. This enable small businesses to make quick business decisions based on what the numbers say.
Create a schedule and stick to it
It varies from business to business and flow of transactions, but all companies need to have a plan for bookkeeping, and they need to stick to it. You can record transactions every day or once a week, including bill payments, incoming invoices, sales, and purchases. Make it a habit to regularly close your books. You can practice this every month or at least quarterly, depending on the size of operations.
When you close your books regularly, you don’t have to worry about rectifying errors at the end of the period.
Moreover, as your business expands, it becomes crucial to have a proper schedule in place for making paying and sending invoices. Make sure you keep copies of both invoices going out and coming in within the local system, or you can also make a backup on the cloud.
Remember, it is better to be thorough and has your backup ready to help you out in case of an issue. This will help you ensure your bookkeeping and accounting reflect the real picture of the company in terms of its finances and operations.
Integrate technological solutions
Maintaining an accurate record of all business transactions is the core of bookkeeping. Hence it is vital to have a system to be able to fortify the business record against any data loss.
One of the many reasons for companies to shift to computer software like QuickBooks to record and organize their books and documents is to avoid devastating repercussions of data loss. QuickBooks Enterprise Cloud is well-known for its easy integration with Office 365 suite. Learn more about Office 365 Tenant Migration.
You can create backups of financial information not to face the consequences of hardware failure, viruses, natural disasters, human errors, and other problems that can result in loss of financial records.
Recovering any data is often double the works, hence it is better to take precautionary steps. Hence, make sure you have taken necessary steps, like a cloud backup, to ensure retrievability and security of business data. Whether you are using a software or spreadsheet to manage your books, a cloud backup can helps you get through a lot of unfortunate situations.
Look for a reliable partner
Bookkeeping and accounting tasks can be a lot of work, and they require fully dedicated resources. As your business grows, it needs more professionals to establish a proper system and follow it through. Moreover, small business owners don’t have the technical knowledge. Then they also need to hire an expert, a senior resource to lead the accounting and bookkeeping team, which can be expensive.
After expanding up to a certain extent, it makes more sense for small businesses to make use of outsourced bookkeeping and accounting services. It enables them to have some of the experts in the industry work for the interest of their business without having to pay their vast salaries. An outsourced firm charges you on per hour or project basis. You only have to pay for the services you hire them for.
Outsourcing is not onlya cost-effective option, but they also take responsibility for the service you avail. It is particularly a great option for you if you lack the technical expertise, as they offer all kinds of solutions, including CFO services, to help you prepare strategic plans and make vital business decisions.
Bookkeeping can have long-lasting effects on the performance and financial health of a business. Hence, it requires a system and schedule in place. However, looking at the nature of the task, you must have a backup system to protect the business in case of financial data loss. These days, with the use of advanced technology, you can integrate software along with your local network of the spreadsheet to back up your data in the security of the cloud. This means, with just one extra step, you can avoid consequences of data loss or any other problems and be sure that you can always retrieve the previous and current financial information along with business records.
Umair Javed is a CEO of Compt and highly renowned professional in the field of outsourcing solutions for the accounting and financial sector. He has over a decade of industry experience and he is now bringing it to use by offering his insights on the latest in this field for the benefit of the industry.