Represents a set of skills required for operating a small business, among which managing finances efficiently is paramount. Accounting is the primary aspect of managing the finances that most directly relates to small business owners apart from just generally knowing the figures within his trade. Proper understanding of the accounting basics can really make the difference in the fate of a small business and, in the long run, its future growth. Here are all the key concepts about accounting, financial management, and practical advice that will keep small businesses on top of their finances.
Accounting is the process of maintaining financial transactions, summarising them, and reporting them to give valuable information about a business regarding its financial health. Simply put, tracking the money that comes in and out of a business is pretty much like accounting. The right kind of account will tell you how much you are making, what you owe, how much you have in the bank, and other important information.
For a better understanding of Accounting for Small Businesses, it is best to enroll in a Short Professional Diploma in Accounting offered by the British Academy for Training and Development.
Importance of accounting for small business are:
When aware of the current financial status of almost any business one can readily make intelligent decisions concerning the spending, investing along with the pricing of its products or services.
Good accounting ensures that your business is within the boundaries of tax regulations. Since there are income budgets, expenses budgets, and any other financial activities being recorded, one prepares himself for his eventual tax assessment, saving himself from penalties.
Cash flow is lifeblood for every business. As a result, accounting helps an individual locate the sum of money that flows into and out of the organisation so that one can detect any likely cash flow problems even before it gets serious.
Lenders and investors have to have a good idea of what the finances of your business will be before releasing funds. Accurate financial statements prepared through proper accounting would give them the confidence to invest in or lend your business their money.
Good Accounting Systems make it possible for you to discover weakness and inaccuracies in your financial statements leading to a decrease in chances of fraud and also accidental mistakes.
To manage your small business accounting effectively, there are fundamental principles that you must familiarise yourself with. Some of them are:
Double-entry accounting is the fundamental principle of modern accounting. It means that every transaction you make will touch at least two accounts. One will be debited, while the other will be credited. For example, if you sell something worth $100, the cash account increases by $100 (debit), and the sales revenue account increases by $100 (credit).
Revenue should be recognized at the moment it is earned, not on payment being received. For instance, you render a service or deliver a product at that point, record revenue for the rendering of services or provision of goods, not when payment is received.
As a matching principle, an expense is matched with revenue that caused it within the same period. That is, if in the month you will pay your employees, the salaries of those employees should be recorded in that month, although paid by the end of that month.
The words accounting and bookkeeping are synonymous, but they really constitute two separate activities. Bookkeeping refers to the daily recording of financial transactions like sales receipts, purchases, etc. while accounting concerns interpreting, classifying, analyzing, and summarising financial data recorded by bookkeepers.
In small businesses, bookkeeping can be an everyday activity while accounting would entail the preparation of financial statements and ensuring compliance of all financial activities with the rules and regulations set out for it.
Small businesses usually have two types of accounting systems:
Generally, the cash basis accounting recognizes receipts and expenses at the time cash actually changes hands. So, the method is going to serve well for small businesses that only deal with simple transactions. It is mostly patronized by some sole proprietors and small businesses that do not hold an expensive inventory.
The company accrues the income and the cost of production in the system regardless of the cash receipt or cash payment. This method is more complex than cash basis accounting; however, it provides a clearer picture of the financial health of a business. Most industries that keep inventory stock do usually prefer this method, and also companies that extend credit to customers.
Thankfully, technology catapults the accounting activity concerning small-scale business owners. Besides, numerous accounting software manufactured expressly for small businesses can significantly simplify their financial management.
Some examples of popular accounting apps are:
QuickBooks is one of the favorite accounting software solutions that help one manage all income and expenses, prepare financial reports and handle the invoicing.
Xero is a cloud accounting software that is easy to use and has a lot of features including automatic bank feeds and financial reporting.
Completely free accounting software, this works very well for really small businesses. It has pretty basic bookkeeping, invoicing, and receipt scanning abilities.
FreshBooks is the easiest invoicing and accounting software to deal with finances, manage time, and bill clients.
These are the tools that can save you from all of the work in accounting, save time, and keep your data accurate and up to date.
It is the very foundation of accounting which determines whether small businesses have the chance to be productive or thrive. Keeping accurate financial records, establishing an appropriate accounting system, and utilising modern-day accounting software enable small entrepreneurs to make good business decisions, comply with standards, and avoid expensive errors. Good accounting keeps an eye on cash flow and helps furnish financial clarity for the purposes of attracting investors and lenders.
To learn more about effective accounting for small businesses, the British Academy for Training and Development offers comprehensive courses in Accounting for Small Businesses.