Bookkeeping For Small Business

Bookkeeping in essence, is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions. It is an important aspect of managing a small business (see How To Start A Business).

Bookkeeping can also help you track your business income, expenses, and profits, and ensures that your financial records are accurate and up-to-date.

Here are some steps you can follow to set up a bookkeeping system for your small business:

FINANCIAL LITERACY

Top 10 Basic Financial Terms:

In order to understand your money and how it’s organized you need to get familiar with the following basic financial terms:

1. Business Assets: Your business’s assets are simply the things that your business owns. That is, Business assets are items of value that your business owns, creates or benefits from.

Assets can range from money, raw materials and stock, to office equipment, buildings and intellectual property.

• Business Liabilities: in simple terms these are everything that your company owes. So, it can be said that liabilities are the legal debts a company owes to third-party creditors.

They can include accounts payable (for instance, inventory purchased on credit), notes payable and bank debt. All businesses must take on liabilities in order to operate and grow.

A proper balance of liabilities and equity provides a stable foundation for a business.

• Balance Sheet: A balance sheet summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time.

• Business Cash flow:  So quite simply, cashflow describes the cash coming into and going out of your business.

• Cash flow statement: is a financial report that details the cash coming in and going out of a business. It contains three main parts: cash from operations (such as sales), cash from investing, and cash from financing (such as loans or lines of credit).

The difference between the cash flow statement and the balance sheet is that the balance sheet takes into account money that’s owed to your business and money that your business owes to other entities.

But the cashflow statement is just focused on the real cash money that is coming into and going out of your business.

• Profit and Loss Statement: also known as an income statement.

So this financial report shows how much your business earned during a certain period of time and how much it spent, your revenue and your expenses.

And when you subtract your company’s expenses from your revenue, you will get your profit or your loss.

• Revenue: The basic revenue definition is the total amount of money brought in by a company’s operations, measured over a set amount of time.

A business’s revenue is its gross income before subtracting any expenses. Profits and total earnings define revenue—it is the financial gain through sales and/or services rendered.

• Accounts Receivable: Accounts receivable refer to the money a company’s customers owe for goods or services they have received but not yet paid for.

For instance, when customers purchase products on credit, the amount owed gets added to the accounts receivable.

• Accounts payable:  Is money that your company owes other people. In other words, accounts payable is money owed by a business to its suppliers shown as a liability on a company’s balance sheet.

1. Capital: Is the money a company needs to function and to expand.

Typical examples of capital include cash at hand and accounts receivable, near cash, equity and capital assets.

Capital assets are significant, long-term assets not intended to be sold as part of your regular business.

BEST FINANCIAL TIP!

You need to keep your business money completely separate from your personal money.

Keep every dollar that you spend on your business coming out of just a business bank account.

Now you might be wondering how you can do this when your business initially doesn’t have any money.

How can you spend your business’s money that doesn’t have any?

Well to do that you as the owner will need to make an investment into the company.

So, you’ll take a certain amount of money, whether that’s a hundred dollars, a thousand dollars or a hundred thousand dollars and you are going to put it in your business bank account and then you’ll spend the money out of there.

This means that you’ll have a record of that transaction, that investment that you made into the company and that will be your owner’s equity.

BANK ACCOUNT

Open A Business Bank Account:

To open a business bank account can be done locally or online. By opening a business bank account you will be able to easily keep your business money separate from your personal money.

Note: If you are first starting out and you haven’t registered your business name yet then it can be difficult to open a business bank account because normally they will want your business registry number.

However, as an alternative, you may be able to open simply a separate personal bank account that you can use exclusively for your business.

Long-term you’ll probably want to open a real business bank account but at least this way your money will be separate and a lot more organized.

ACCOUNTING SOFTWARE OPTIONS

In order to keep your business money organized and track all of your transactions you’re going to need some sort of software.

Here are some different accounting software options:

1. QuickBooks: It includes many useful features. It is used by most small business owners.

It is usually accepted by accountants.

So, they will be able to just log right into your QuickBooks account.

• FreshBooks: A lot of people like it a little bit better than QuickBooks and it’s significantly more affordable.

But, not all accountants and bookkeepers support it.

• Wave: Is a completely free bookkeeping software that works very well.

But, it doesn’t have quite as advanced functionality as FreshBooks or QuickBooks does and you definitely will find that most bookkeepers and accountants won’t prefer it.

And many won’t support it at all simply because it doesn’t have a lot of the more advanced functionality that they’ll want.

• Spreadsheets: Such as Google Sheets can help you track your expenses and your revenue.

But, it does not offer many features. You need to create your tabs (pages) yourself.

START RECORDING

Record your transactions:

Use your chosen bookkeeping method to record all of your financial transactions.

This includes sales, purchases, payroll, and other expenses.

FINANCIAL STATEMENTS

Prepare financial statements:

Use your recorded transactions to prepare financial statements, such as a profit and loss statement and a balance sheet.

Financial statements will give you a snapshot of your business’s financial health.

CONCLUSION

Keep your records organized:

It is important to keep your bookkeeping records organized and up-to-date.

This will make it easier for you to access the information you need and prepare financial statements.