It usually gets challenging to keep all figures correctly in the organized records of a small company. The following guide, which is styled to assist you in understanding from the very basics, will be a journey to understand both of these terms.
This bookkeeping guide works as a guidebook and therefore is casting off the complexities that are usually there with bookkeeping. You can from today apply the basics from how to set up all your accounts to why it is important to record transactions promptly.
Here are the essentials of bookkeeping for beginners that you should know: Here are the bookkeeping basics you should know:
- Become familiar with and set up your chart of accounts, which is an internal financial structure containing the organization’s income and expenditures.
- You better begin to trace down all of your financial procedures.
- Reconcile bank accounts.
- Closing the month and running the financial statements for the month summarizes the task to conclude the month.
Understanding the Bookkeeping Process
The bookkeeping process includes the following key steps to follow for a successful startup as a small business owner:
Identifying and Recording Transactions
The first task in the bookkeeping process is identifying and registering financial transactions. This can be done through financial records such as sale and purchase invoices that contain the exchange of money or goods and services for your business.
Reconciling Accounts
Reconciling involves ensuring the amounts you have recorded internally (cash account in your books) agree with those shown externally, i.e. bank statements and credit card statements. This step serves the objective of correcting any mistakes that can result in false or incomplete information and thus correcting the financial records as they are current at that time.
Classifying Transactions into Accounts
Transactions that are already classified and recorded will later fall under designated accounts. These accounts may contain a source of revenue, expense accounts, assets, liabilities, and equity.
Posting Transactions to Ledgers
Now that they have been already classified, next would be the posting or recording of the transactions in the particular ledger. The main ledger, which contains all accounts, as opposed to that of subsidiary ledgers, separate accounts for accounts payable and accounts receivable.
Preparing Financial Statements
The last point of the bookkeeping process is the financial statement description. Here, the income statement, balance sheet, and cash flow statement are vital elements that together show an overall picture of your business’s financial position.
Applying these five steps of the bookkeeping process will help you to manage accurate and organized financial records that would be required for getting information for making proper decisions, to ensure you are aware of what you are doing and getting success for the long-term of your small business.
Why is it Important for Small Businesses?
Keeping Your Business Organized
Bookkeeping is the basis of any successful business. It has two main features: keeping track of transactions and providing detailed financial information about your business to organize the data. It is making sure that the company is accurate and financial standing knows where it stands.
Monitoring Profitability and Cash Flow
Unlike other aspects of your business, bookkeeping helps you make sure your company is all where it concerns profitability as well as cash flow.
By closely following the financial results, you will be able to monitor the financial condition covering income, costs, and the total state of the completed project.
Building Trust and Credibility
An orderly and updated financial record will show a serious and credible businessman and also a perfect business among your investors or lenders.
Be open and clear about your financial positions as you demonstrate the ability to spend and save expenditures well, and remain truthful. With such attributes and qualities, you are well-positioned for additional funding and loans.
Compliance with Laws and Regulations
For small business owners, bookkeeping is necessary since it helps you not only comply with tax laws but also, with the regulations in the field.
Through proper bookkeeping, you will have all of the important financial data and records required for tax filing and reporting purposes.
Informed Decision-Making
Having a proper idea of your financial status helps you to make calculated decisions on investment, expense, and growth strategies as part of your bookkeeping.
This knowledge allows you to rely on data to make choices and leads you in the right direction resulting in the success and growth of your business.
What is Bookkeeping in Accounting?
The accounting practice of keeping and maintaining records of financial transactions and all business transactions systematically is called bookkeeping. It has to do with the accounting of all the records and also where the money went and how was spent.
By understanding the core of bookkeeping, you will be able to record income and expenses, analyze cash flow, and therefore prepare correct financial statements.
Generating Financial Statements: The Heartbeat of Your Business
Working with financial statements lets you understand better your business’s financial positioning.
Income Statement: It tells about the labels being nominated for some time through income, price, and profit items.
Balance Sheet: It will help you to know the real condition of the company since we will see all assets and its debt in one fairly-done moment.
Cash Flow Statement: The statement of cash receipts and payments depicts the operation and cash flow components (operating, investing, and financial).
Furthermore, a summary of data obtained weekly or monthly with a running the results analysis would demonstrate in detail the essential fixes to be made, thus, there would be sure and confident choices based on the results observed.
Accounts Payable and Accounts Receivable: Keys to Cash Flow Management
Paying concentrated attention to accounts receivable and accounts payable, the two biggest characteristics of bookkeeping, which in one way or another determine your business’ cash management is also a must.
Accounts payable describes an activity in which you pay money to your suppliers, vendors, or creditors for the goods received or services provided. Just like the accounts receivable function – the accounts payable is its other part.
Regarding the creditors, the accounts receivable process should be comfortable by meeting the financial obligations on time eliminating the little penalty for delayed payments, and remaining friendly with your suppliers.
Opposite to this is the fact that accounts receivable, for instance, stand for the monetary returns that come your way from customers upon the terms you give them for supply before the deliveries of both goods and services.
Proper debtor’s work means that the company should its customer’s fragment, should follow a rational credit policy, and has to be loyal to punctual payments.
Exploring the Chart of Accounts
The Chart of Accounts lists all the key points and important terminologies that you will use to record business transactions. This is the road map for getting organized your financial data and is the most critical component of accurate financial statements.
Common accounts in a chart of accounts include:
- Assets: Anything your business has of value like cash, what your customers owe you, inventory, and office equipment.
- Liabilities: For example, the loans your business has to repay, e.g., the money your business owes to suppliers or any credit.
- Revenue: Profits made from selling products or services to people.
- Expenses: Expenses of your company which it has to bear to operate seem like bills for electricity, employee salaries, and business outings for food.
- Equity: The worth of your business is what remains after you have paid off debt, that is, the amount left financially in the business.
Choosing the Right Accounting Method: Cash vs. Accrual
Small businesses are free to opt for either cash accounting or accrual accounting methods. The cash basis identifies transactions when money exchanges hands, while the accrual basis records them when revenue is earned or expenses are outlawed, irrespective of when the cash is received or paid out.
The cash method is easier and often preferred by small businesses but does not give the true representation of the financial health of your business. The Accrual method, though more intricate, gives you a more comprehensive view of your organization’s financial condition.
Before hiring a Bookkeeping virtual assistant, it is essential to understand the scope of bookkeeping services.
When to Hire a Professional Bookkeeper?
Consider hiring a bookkeeper if:
Business is booming, but now the books are hard to handle and things are not making sense.
- You are simply not the one with the time and experience to run financial records updates.
- Qualified help is necessary if you are going to comply with tax rules, or report your financial activity.
- You reach the point when you have intricate financial situations or transactions. Working with a professional bookkeeper will allow your team to access a wealth of hands-on experience, a comprehensive understanding of the regulations involved, and the ability to allocate your time to the most important job at hand.
Are You Using Accounting Software for Your Bookkeeping?
You have the chance to choose between a broad range of bookkeeping solutions if you run a small business or work on your books. There are traditionally two options. One is to use a handwritten ledger while the other is to use spreadsheet software like Excel. Let’s explore the benefits of both.
Use Pen and Paper If:
You don’t own a computer nor do you have any internet connection. Perhaps the traditional ledger book approach will suit you better if you are more of a person who loves traditional ways.
Most of the business earnings are not your main source of income. When your money movement is minimal, pen and paper can do the job.
Use Accounting Software If:
- You need to have a correct and highly updated picture of your finances. Though it may seem very complex, accounting software programs mostly cater to beginners and their needs. It shows an accurate up-to-date view of your earnings, outgoings, and profitability.
- Back-office tasks, for example, bookkeeping, need to be cut down in the time you spend on them. Unlike old times when you had to manually write down all transactions and balance them, accounting software today automates most of these processes for you, thus giving you more time to attend to the core business of operating your organization.
- You are going to keep investing and growing your business.
Finding the Right Bookkeeping Method
The bottom line is this: if you’re either the owner of any business or a one-man freelancer, no matter what you do, you need a system for sending invoices to customers, tracking expenses, and understanding the financial position of your business. Utilizing accounting software is usually the most convenient and correct method.
It helps you to track cash flow, prepare financial statements, as well as remain organized throughout your entrepreneurial journey. On the other side, learning can seem very steep, but the cost of the investment in these software programs turns out to be cheaper than repeatedly hiring a financial expert.
FAQs
what is a business owner’s responsibility besides accounting for the basics of bookkeeping?
Instance; rudimentary bookkeeping knowledge is indispensable for the making of wise decisions.
What are the components of bookkeeping activities for operators of small businesses?
Recording account numbers, classifying, posting ledgers, reconciling statements, and
financials compiling.
Is it still possible that the small business could do a handbook manually or it will need to use special software to keep up with the books?
Yes, it might but I will not imagine that software will streamline the processes and minimize any possible human-related errors.
What skills do the micro-business owners need? The basic bookkeeping skills should be taught how?
Online courses, books, mentors, community college classes. Hopefully, these will be the means to have a good start.
