What is business accounting?
Accounting is the process of capturing, analysing, interpreting, and summarising financial transactions for a business entity. The accounting process involves the systematic and comprehensive recording of financial transactions relating to a business, and it is important in enabling an organisation to make informed business decisions.
Aspects of business accounting
Business accounting consists of the following aspects:
Financial transactions, such as sales, purchases, expenses, and investments, are recorded by accountants in the accounting system. Initially, the business transactions are recorded in journals and then transferred to ledgers.
A transaction can be classified into many categories, including revenue, expenses, assets, liabilities, and equity. For accurate financial reporting, proper classification is essential.
An accountant creates documents such as an income statement, a balance sheet, a profit and loss statement, and a cash flow statement to analyse profitability, liquidity, and overall financial health.
Using financial data, accountants assist businesses and stakeholders in making informed decisions. As part of their analysis, they identify trends, strengths and weaknesses, as well as provide insights into the business’s financial health.
Accountants ensure that financial records comply with applicable laws and regulations. Depending on the industry and jurisdiction in which a business operates, they prepare financial reports that abide by accounting standards and regulations.
An accountant calculates a company’s tax liabilities, prepares tax returns, and ensures compliance with tax laws. As well as providing advice on tax planning strategies to minimise your tax burden, they also provide tax planning services
The accountant is responsible for preparing the necessary financial information for the external auditors. The purpose of an audit is to ensure that a company’s financial accounting is accurate and reliable by conducting an independent examination.
Small business bookkeeping vs. accounting
The purpose of bookkeeping is to accurately record and organise financial transactions on a day-to-day basis. In contrast, business accounting entails a higher level of analysis, planning, and strategic decision-making based on the organised financial data provided by bookkeepers. Small businesses, especially those with limited resources, can achieve financial stability and support growth by combining efficient bookkeeping with periodic accounting services.
Tips for business accounting
Search for more courses
There are several resources and courses available to you if you are interested in business accounting. You can find courses at universities and institutes through online platforms such as edX and Coursera. The other option would be to self-learn using platforms such as YouTube or by using books/ebooks. Last but not least, you can search for courses offered by accounting software providers on business accounting forums.
Record transactions
Organise your financial records by following these steps:
Keep all your financial records organised and up-to-date. Set up an efficient accounting system by using accounting software or by hiring a professional.
Documents such as receipts, invoices, and tax-related documents should be stored in a secure, easily accessible location. Recording business transactions is essential.
Be sure to keep track of all business expenses, regardless of their size. Maintain accurate financial records by categorising expenses appropriately.
Provide employees with a clear expense policy and require them to submit receipts for all business-related expenses.
Set up a small business payroll system
Identify whether you would like to handle payroll in-house using payroll software or outsource it to a payroll service provider. There are a variety of payroll software options designed specifically for small businesses that can automate the majority of payroll processes.
To assist you in setting up a payroll system for your small business, here is a step-by-step guide:
- You should obtain an Employer Identification Number (EIN) from the IRS if you have not already done so. For tax purposes, your business is identified by this unique number.
- Collect necessary information from your employees, such as their full names, addresses, Social Security numbers, tax withholding forms (W-4 in the United States), and bank account details for direct deposit.
- Decide whether you wish to handle payroll in-house using payroll software or outsource it to a payroll service provider. The majority of payroll tasks can be automated with payroll software tailored to the needs of small businesses.
- Determine your payroll frequency (weekly, biweekly, semi-monthly, or monthly) and communicate it to your employees. Establish a pay period, based on which employees’ work and leave time is calculated.
- Calculate gross pay for each employee by calculating their hourly rate or salary in addition to the number of hours they worked. In your calculations, you should take into account overtime, bonuses, and commissions.
- Calculate deductions based on each employee’s W-4 form by deducting federal, state, and local income taxes. The Social Security and Medicare taxes (FICA) should be deducted from the wages of employees. If applicable, consider other deductions such as health insurance premiums, retirement contributions, and garnishments.
- You must enter the calculated gross pay and deductions into your payroll system to process payroll. Provide each employee with a pay stub detailing his or her earnings, deductions, and net earnings.
- Ensure that employees’ paychecks are withheld and paid for payroll taxes, such as federal and state income taxes. Withheld taxes should be paid to the appropriate tax authorities regularly (usually on a monthly or quarterly basis).
- Report employee wages and payroll taxes withheld by filing quarterly and annual payroll tax forms, such as Form 941 (US) or its equivalent in your country.
- Make sure that payroll records are accurate, including information about employees, pay rates, hours worked, and tax withholdings. In accordance with your local regulations, keep records for a specified period of time.
- Make sure that your payroll practices remain compliant with federal, state, and local labour laws and tax regulations.
- If possible, consider setting up direct deposit for your employees. Both you and your employees will benefit from this program, as it is secure, convenient, and can save them time.
- It may be best to hire a professional accountant or to use a payroll service provider to handle your payroll processing and tax filing if payroll seems overwhelming.
- If you are unsure whether your payroll system complies with all legal and tax requirements specific to your industry and location, consult a professional accountant.
Employees and tax documents needed
Maintaining accurate records about your employees and their taxes is essential when managing business accounting. For business accounting, here are the key employee and tax documents you will need.
The first thing that is needed is the employee’s personal information, which includes his or her full name, social security number, address (both their home and mailing addresses, if different), date of birth, and contact information (phone number, email address).
In addition, an Employment Agreement is required for business accounting. This document should include the terms of employment (full-time, part-time, contract, etc. ), the job title and description, the start date, as well as the salary or hourly wage rate.
A copy of the employee’s tax withholding form should also be included in the employee’s documents. This includes the Form W-4 (for the U.S.): Employees complete this form to indicate their federal income tax withholding allowances. The amount of federal income tax withheld from the employee’s paycheck is determined by this form. Depending on your country, there may be similar forms for employees to declare their tax withholding.
It is essential to obtain payroll tax records to comply with tax regulations. You may also be subject to state and local payroll taxes depending on your location. It is essential to maintain accurate records for compliance, including receipts and transaction details. Provide a comprehensive summary of wages, taxes withheld, and other pertinent data at the end of the tax year. Compliant and accurate record-keeping ensures smooth tax reporting.
Records must be kept for all employee benefits such as health insurance, retirement contributions, etc., as well as for deductions made from employee paychecks for benefits, garnishments, and the like. Additionally, you should maintain records of employee hours worked, particularly if they are paid hourly, as well as records of any business-related expenses reimbursed to employees or allowances provided. Keeping records of paid time off, sick leave, and vacation days taken by employees is necessary.
Keeping accurate and organised records of these documents is essential for the processing of payroll, compliance with tax laws, responding to inquiries from tax authorities, and doing business accounting.
Prepare and send invoices
You should begin by collecting all necessary information, including your and your client’s contact information, invoice number, and payment terms. You can either use specialised accounting software systems or manual methods utilising tools such as Microsoft Word. Make sure the invoice is accurate, add clear payment instructions and terms, and then send it via email. Moreover, keep a record of each invoice and follow up promptly on late payments with polite reminders.
Get the business plan template delivered right to your inbox
On reputable online platforms, a small business owner can easily access a high-quality business plan template by providing their email address. These templates are often available for free or at a minimal cost on websites dedicated to entrepreneurship and business development. As a result of this convenient method, businesses not only save time, but also have a reliable tool to help them navigate their journey towards success by providing valuable insights and recommendations.
Bookkeeping and small business legislation
To comply with a variety of laws and regulations, small businesses need to keep accurate records of their financial transactions. An accurate record-keeping system ensures tax compliance, from the tracking of sales taxes to the management of payroll and employee benefits in accordance with legal requirements. It is useful in substantiating business expenses, meeting corporate and contractual obligations, and preparing for audits.
Financial records provide transparency, build trust, and support legal compliance, making businesses more reliable and secure in the eyes of their clients, investors, and regulatory authorities. By utilising professional bookkeeping services or specialised software, small businesses can significantly simplify the process of navigating this complex environment.
Determine how you’ll get paid
It is crucial to decide how you will be paid. Take into account your customers’ preferences and the efficiency of your operations when selecting payment methods (credit cards, online payments, checks, etc.). Take advantage of digital payment platforms for seamless and secure transactions, which can improve customer satisfaction.
In your contracts and invoices, clearly state your payment terms and policies to ensure that both you and your clients understand what is expected. Maintain a regular review of your payment methods and adapt them to market trends and customer demands to ensure your cash flow and overall success as a business.
How to manage your business accounting
To begin with, keep separate records of your personal and business finances and a business bank account. Think about investing in accounting software that is easy to use for tasks such as invoicing and expenses. Also, maintain an accurate cash flow budget and reconcile your accounts regularly. Keep track of payables and receivables, send invoices promptly, and follow up on payments. Additionally, keep up-to-date on tax obligations and seek professional advice if your financial situation is complex.
Best small business accounting software
Some of the most popular small business accounting software are as follows:
One of the most widely used accounting software platforms is QuickBooks Online. You can manage expenses, track income, generate invoices, as well as generate financial reports with a variety of plans tailored to different business sizes.
Xero is known for its user-friendly interface and robust functionality. The small business accounting software provides tools for invoicing, payroll, expense tracking, and bank reconciliation. Xero is a cloud-based accounting program that can be accessed from anywhere.
FreshBooks is designed specifically for small service-based businesses and freelancers. It provides features such as time tracking, invoicing, expense management, and online payments. It is easy to use and intuitive, which makes it an excellent choice for non-accountants.
Small Business accounting checklist for success
This essential checklist will assist you in managing your business finances effectively. You can keep meticulous records of your business and personal transactions by using accounting software that is efficient and keeps separate bank accounts for each. Additionally, it is important to develop a budget, reconcile accounts regularly, and manage invoices and payments promptly.
To be successful, you should be able to control expenses, understand your tax obligations, and set aside funds accordingly. Review and generate financial reports, monitor cash flow, and seek professional assistance when necessary, especially during tax season. Furthermore, it is imperative that you remain up-to-date with accounting practices through continuous learning.
Use sales forecasting
In business accounting, sales forecasting provides valuable insights for financial planning and decision-making. Setting realistic sales targets based on historical data and market trends motivates sales teams and aids in strategic decision-making. Furthermore, accurate sales forecasts enhance investor confidence and support business growth and operational excellence. Sales forecasting is an integral part of effective business accounting when comparing forecasted sales to actual figures.
Accounting software to choose from
When it comes to small business accounting software, there are several excellent options available, which are suitable for different types and sizes of businesses. Some of the popular ones are listed above, which offer a variety of features, user interfaces, and pricing options. When choosing the accounting software that is most appropriate for your business, take into account your specific needs, your budget, and its ease of use.
Tips to manage cash flow
For a small business to remain stable, it is essential to manage its cash flow. Establish a detailed cash flow forecast and monitor it regularly to identify patterns and problems. Manage expenses, streamline invoicing, and negotiate terms with suppliers. Moreover, ensure that a cash reserve is maintained, that inventory is optimised, and that pricing strategies are adjusted as necessary. Business growth and stability are made possible through these strategies, which ensure a healthy cash flow.
Know your numbers to grow your business
By understanding your business’s numbers, such as revenue, expenses, profit margins, and cash flow, you can gain invaluable insight into the health of your company. Identifying strengths, weaknesses, and areas for improvement can be accomplished by analysing these figures. By understanding your financial data, you will be able to make informed decisions, set realistic objectives, and develop effective strategies.
Track your small business expenses
A detailed accounting of all costs, from supplies to marketing, will provide a clear indication of cash flow. This data facilitates effective budgeting by enabling you to identify areas for cost optimization. The use of accounting software streamlines this process and provides categorised reports. By tracking expenses regularly, you ensure adherence to your budget, facilitate tax planning, and maintain a firm financial foundation.
Daily business accounting tasks
Accounting tasks are critical to financial stability and informed decision-making. This includes recording daily transactions, updating invoices, verifying receipts, and reconciling bank statements. Monitoring accounts payable and receivable, as well as cash flow, on a daily basis ensures financial accuracy and prevents discrepancies. Additionally, it is important to categorise expenses, prepare invoices for products and services rendered, and keep an organised record of all financial activities. The success and health of your company depends on maintaining financial transparency, identifying issues, and making timely adjustments.
Have a good credit control system
Any business’s financial health depends on the implementation of a robust credit control system. In an effective credit control system, invoices are monitored, customers are followed up for timely payments, and cash flow is managed effectively.
It involves establishing clear credit policies, conducting credit checks on clients, and establishing consistent communication channels. Late payments should be addressed promptly to minimise bad debts, maintain a healthy cash flow, and foster positive relationships with clients. You can significantly improve the financial stability and success of your business by regularly reviewing and optimising your credit control procedures.
Apply for government grants and low-cost loans
Government grants and low-cost loans can have a significant impact on a business’s financial health and expansion prospects. Many of these initiatives are designed to assist small businesses and offer crucial financial assistance without charging high-interest rates. A government grant provides funds for specific projects, research, or innovation, catalysing economic growth. Conversely, low-cost loans enable businesses to invest in technology, and inventory, or expand their workforce through access to capital.
Review unpaid bills from vendors
For healthy supplier relationships and efficient cash flow management, it is essential to review unpaid bills from vendors regularly. Businesses can avoid late payment fees and build trust with their suppliers by staying on top of outstanding invoices. Timely reviews ensure that financial records are accurate by identifying any discrepancies. To achieve this goal, it is essential to communicate effectively with vendors, understand their payment terms, and negotiate when necessary. Unpaid bills must be addressed promptly to maintain a positive reputation and a reliable supply chain, and to ensure the smooth operation of the business.
Corporation tax
A corporation tax is a tax imposed by the government directly on a company’s profits. To fund public services and infrastructure, businesses are required to pay a percentage of their earnings. For businesses to meet their financial obligations and contribute significantly to the economy, corporation tax must be managed effectively.
Managing business taxes
To successfully manage business taxes, you must maintain meticulous records, understand tax regulations, and adhere to deadlines. Maintain accurate records of income, expenses, and deductions. Be aware of tax codes and allowances, and consult a tax professional for customised advice. Tax management ensures compliance with the law and optimises your financial position, supporting the growth of your business.
Review month-end balance sheet vs. prior period
By comparing the month-end balance sheet with the prior period, we can gain an understanding of financial performance and growth. Businesses can identify trends and make informed decisions by tracking changes in assets, liabilities, and equity. The ability to understand these variances allows for strategic adjustments, efficient resource management, and financial stability. To foster long-term business success, regular assessment of these changes is essential.
Review your inventory
Keeping track of stock levels, identifying products in high demand, and recognizing slow-moving products improves supply chain management. To prevent overstocking or stockouts, minimise storage costs, and ensure customer satisfaction, accurate inventory records are essential.
Implementing technology, such as inventory management software, facilitates the tracking and forecasting of inventory in real-time. Using modern technologies and staying vigilant is imperative for creating a streamlined and responsive supply chain.
Review past-due receivables
Paying invoices on time is essential, and monitoring outstanding invoices can assist in identifying payment delays. By communicating effectively, misunderstandings can be resolved and payments can be expedited. You can automate reminders and track receivables efficiently by utilising accounting software. Moreover, invoices that are past due should be addressed promptly to ensure a steady cash flow, minimise financial stress, and promote strong client relationships.
Review and approve full-year financial reports and tax returns
The review and approval of full-year financial reports and tax returns ensures financial accuracy, compliance with tax laws, and transparency. You can identify potential errors or discrepancies by carefully reviewing these documents, providing you with an opportunity to correct them before submission. The proactive approach to financial reporting and taxation is crucial to minimising audit risks, penalties, and financial mismanagement.
Process or review payroll and approve tax payments
It is essential to process or review payroll and approve tax payments to ensure that employees are properly compensated and that taxes are paid on time. The accurate calculation of salaries, benefits, and deductions ensures staff satisfaction and legal compliance. By reviewing this process, discrepancies and potential legal issues can be avoided. At the same time, approval of tax payments requires precision to ensure that government obligations are met on time. In maintaining reputation, legal standing, and employee morale, businesses foster a smooth and compliant operation.
Decide if you need professional help
Professional guidance can provide specialised knowledge, saving time and ensuring accuracy. If your business faces complex challenges such as legal issues, tax complications, or financial concerns, you should seriously consider seeking professional assistance. Accountants, lawyers, and consultants offer tailored solutions based on their expertise. It is important to evaluate the situation, the available budget, and the complexity of the task.
How much should I pay an accountant for my small business?
Depending on factors such as location, financial complexity, and the accountant’s experience, the cost of hiring an accountant for a small business can vary. Expertise needs to be balanced with affordability, ensuring that the accountant understands the needs of small businesses. Make sure your financial management is in capable hands by requesting quotes, comparing services, and evaluating reviews.
Conclusion
Understanding fundamental accounting principles is essential for business owners to make informed business decisions. Accounting for business involves recording, categorising, and summarising transactions. Maintain meticulous records, use accounting software, and keep track of your taxes. Managing invoices, managing payroll, obtaining government grants, and selecting appropriate software is essential. Unpaid bills must be reviewed regularly, accounts reconciled, and financial reports used to make informed decisions.
FAQ
Why is business accounting important?
There are many reasons why business accounting is important. To begin with, it is used to keep track of expenditures and income, which enables budgets and plans to be prepared for future periods. The analysis of financial accounting provides valuable insights that influence decision-making. Small business owners can identify the highly profitable areas of their company.
Profitability can also be used as a security for investors and creditors. This analysis provides a measure for stakeholders to evaluate the performance of a business and identify its core competencies. As a result, resources can be efficiently allocated in a logical order to ensure optimal performance.
What are the basic accounting principles small business owners should know?
Any business owner should have a basic understanding of accounting principles. It is these principles that form the basis for accurate and reliable financial reporting. Every business owner should be familiar with the following accounting principles.
According to the Going Concern Principle, the business will continue to operate indefinitely. Therefore, financial statements are prepared with the expectation that the business will continue to operate in the foreseeable future.
Using the Consistency Principle, once a method of accounting has been chosen, it must be applied consistently for the entire year. This allows stakeholders to make meaningful comparisons between financial statements over different accounting periods.
Small business owners need to understand and apply these basic accounting principles to maintain accurate financial records, make informed decisions, and communicate effectively with stakeholders.
How often should I update my financial records?
Your business size, volume of transactions, and specific business needs determine how often you should update your financial records. In general, updating your financial records regularly is recommended regardless of the size of your business.
A small business, for example, should keep a daily or weekly record of financial transactions and review expenses every month.
What is depreciation, and how does it impact my financial statements?
Depreciation is a method of allocating the cost of a tangible asset over its useful life. Buildings, machinery, vehicles, and equipment are tangible assets with a limited lifespan. Through depreciation, businesses spread the cost of an asset over several years instead of expanding it all in one year. A decrease in value occurs as a result of wear and tear, obsolescence, or other factors over time.
Depreciation affects your financial statements by reducing taxable income, affecting profitability ratios, and adjusting the value of assets on the balance sheet. The concept is essential for accurate financial reporting and analysis since it reflects the true cost of using assets over their useful lives.
