While accounting is not a topic many business owners prefer, it leaves you no choice when starting a business but to know the accounting basics. It’s vital for your business’ success.
In any case, we start businesses to make profits, or at the minimum, operate sustainable ones. To achieve this, tools such as bank statements, tax documents, a forecast or budget, and a balance sheet are inevitable.
If you’re in the process of launching a business, this article will help you understand the accounting basics you need to know for the success of your enterprise.
How to Do Accounting for a Small Business
Data from the Small Business Administration shows that out of the top eleven causes of business failure, about four are things to do with a business’s financial structure. And accounting is all about recording, analyzing, summarizing, reviewing, and reporting financial information to help make financial decisions.
Therefore, accounting books for small businesses are essential if such a business is to stand the tests of time.
These tips help ensure your business stands firm financially and allow you to focus on other crucial areas that are key to setting up and running a business.
1. Open a Separate Bank Account/Credit Card Account
A business has needs separate from individual ones. Therefore, you need to open bank and credit card accounts to cater to those particular needs. This should follow immediately after registering your business name to allow you to open the accounts under that name.
It’s from your business accounts that you’ll be fetching money needed to buy suppliers. Similarly, you’ll be depositing your income in these accounts.
Some will ask why they cannot operate with their personal accounts. The reasons are many. They include:
- A separate bank account makes it easy to deal with business taxes as well as any legal issues.
- It comes in handy in protecting your assets in case of bankruptcy, debts, audits, and lawsuits.
- To get a loan from a bank or any other creditor, having a bank account that shows a strong financial record boosts the likelihood of your business qualifying.
You can begin with a checking account, then a savings account, and of course, a credit card to help secure funding in the future.
2. Track Your Income and Expenses
According to Ashley Christenson (tax manager at Tanner LLC), every small business owner should have a system in place for recording its income and expenses. It’s up to you to decide whichever way you want to be recording this.
In most cases, the recommendation is to consider the complexity of your firm’s transactions and go for QuickBooks, Excel document, Google Sheet, or whichever bookkeeping tool fits your business.
Another consideration to make is who will be doing the recording? Is it you, or do you need to hire someone else?
The best time to start recording these transactions is as early as you launch your business. You don’t want regrets later when in dire need of the records, and it’s hard to find them.
If possible, it’s better if you hire an accountant immediately, who’ll take care of all your accounting needs. Also, regularly check your income statement to ensure the figures indicate something positive.
Have a proper way of keeping all your receipts. So that if the IRS should audit your business you can easily provide them (those over $75). According to Christenson, keeping the receipts until the expiration of your statute of limitations of tax returns will be ideal.
You need to pay close attention to the following receipts:
- Travels out of town for business purposes
- Meals and entertainment
- Receipts for business gifts
- Expenses related to business vehicles
- Home office receipts
The idea is to have a clear system in place that shows how money flows in and out of your business for tax purposes. It also helps in tracking whether your business is heading in the right direction.
3. Establish a Bookkeeping System
Bookkeeping involves keeping a record of the daily transactions, categorizing these transactions, and reconciling bank statements.
As mentioned earlier, there are many ways of bookkeeping, depending on how complex your transactions are. The best bookkeeping solution is one that suits your business needs.
You can either use the accrual or cash method of accounting for your business.
- Accrual method: In this method, you recognize expenses and revenue immediately after the transaction happens, without waiting for cash to get in or out of the bank. You track payables and receivables.
- Cash method: This method recognizes expenses and revenues only after being paid or received.
Americans owning businesses must use the accrual method as long as revenues exceed $5 million. Otherwise, they can use the cash method if the revenue figures are lesser.
4. Keep Track of Your Assets, Liabilities, And Equity
Your small business needs to have a balance sheet. This is a statement showing your fixed and current assets, long-term and short-term liabilities, and capital.
The standard formula that accountants use to develop a balance sheet is:
Assets = Liabilities + Equity
- Assets refer to all the valuable items that your business owns.
- Liabilities are all things your business owes to creditors or even suppliers.
- Owner’s equity refers to the capital you injected into your company and the cumulative revenue your firm earns.
While a balance sheet may not be much-needed at the beginning, you’ll soon need one when investors and banks come knocking. It’s also an important document that gives a clear picture of where the business stands at a particular time.
5. Know Your Tax Obligations Well
Your tax obligations will depend on the type of business you establish. For sole proprietorships, partnerships, and LLCs where you’re legally self-employed, you’ll file your personal tax return and claim business income there.
For corporations, the law considers them as separate entities from the owner, thus, taxed separately. Then, whatever you earn is also taxed, like you’re an employer in the company.
Remember, you have to collect sales tax too. The rules for this vary from place to place, and in some jurisdictions, you may not be subject to this type of tax.
If you can prepare well and know the rules that apply to your business, it will be easy to pass the sales tax cost to your customers when setting the sales prices. Otherwise, you may have to pay with your own money when the state agency responsible comes knocking for the taxes.
When filing your income taxes, ensure you know all the rules as they vary from one type of business to another.
6. Budget
As you continue to run your business, budgeting will be key. It helps you plan for your income and expenses as you consider the future of your enterprise. Don’t be carried away. Instead, let your budgets and forecasts be realistic.
A well-prepared budget will take you places and accelerate the growth of your firm. You can identify areas to cut costs, gain more revenue, ultimately making more profits.
In addition, budgeting and forecasting increase your chances of receiving funding from investors and banks. They would want to invest their money in a business with plans, not only for today but one year to five years down the line too.
In any case, they want to be sure it’s an enterprise that’ll succeed, and by looking at your budget, income, and expenses, they can tell.
Takeaway
Now you understand better the benefits of learning accounting basics and how crucial it is when starting a small business. You can go ahead and either decide to handle these accounting tasks yourself, seek help from a professional bookkeeper or accountant, or outsource.
What’s important is that you manage your business well right from day one. Keep your accounting and bookkeeping up to date for better control of your business finances.
Undoubtedly, good accounting and bookkeeping is a recipe for business success.
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