Last updated on December 15th, 2022
One of the biggest challenges new businesses face is handling their finances correctly.
It’s very easy to become overwhelmed with these tasks, especially if you aren’t great with finances or have much experience with accounting (other than just handling your personal finances).
38% of startups fail because they run out of cash, so knowing how to handle your business’s money is super important.
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So, here’s a quick guide I have pulled together regarding bookkeeping and accounting for small businesses (see also ‘Best Dispatch Software For Small Business‘). This will help you find your feet so you can get the basics covered as you set up your small business (see also ‘Best Marketing Package For Small Business‘).
Bookkeeping Vs Accounting: What’s The Difference?
First, l will cover what exactly bookkeeping and accounting are, because I’ve seen a lot of people mix these two areas up.
Bookkeeping refers to the recording of financial information, such as transactions, taxes, and so on.
Basically, every time money moves in your business, it needs to be recorded somewhere and this is what bookkeeping is all about.
It keeps records of every bill your business has paid, every payment you have received from clients and customers, every cent you’ve paid in tax, how much you’ve paid your employees every month.
Accounting is a little different. It involves taking a look at all this financial information, analyzing it, and using that analysis to make a future financial strategy.
This is a much more difficult task and so, a lot of businesses opt to hire a professional accountant they can go to for advice and support – but if it’s still very early days for your company, you may have to do this part yourself.
Bookkeeping and accounting are the two most common services accounting firms provide to businesses, with 79% of accounting firm services falling into these two categories.
So, you don’t have to do these yourself as most businesses outsource these tasks to other firms. But, if you want to do these tasks yourself, then here is my advice.
How To Bookkeep In Small Businesses
64% of small businesses do their own bookkeeping, and this is probably because bookkeeping is a lot easier than it may originally seem.
However, 21% of small business owners still say that they don’t know enough about bookkeeping, so here are the steps I follow when bookkeeping for my small business.
First,I separate my personal finances from my business finances so it is much more clear what my business is earning in revenue, spending in expenses, and I get a better idea of how much profit it makes.
Next, I choose the type of accounting I want to use.
This can be between single entry or double entry. The difference here is how often you record your transactions. Single entry means you only record each transaction once, while double records one transaction twice in a credit and debit book.
Basically, you lose the transaction in the credit book because you have used your funds to purchase something but it adds to your debit because you have bought an asset.
Ideally, both books should be equal to one another and be ‘balanced’.
Which method you prefer is completely up to you, but I tend to use single entry accounting as it is more often used by businesses with no other employees or inventory to keep track of.
Now, I choose between cash and accrual accounting. This refers to the method you use of recognizing revenue.
The cash method only recognizes revenue when you have received it and it is in your bank account, while the accrual method recognizes revenue when you have earned it like when a project is completed and the invoice for your client has been written.
Bookkeeping is easy as long as you stay organized and the next step I take is choosing my bookkeeping system.
You can choose manual softwares like Excel or simply just write your transactions on paper, or you can use a software program designed for bookkeeping – but these usually cost monthly fees to access.
Some great examples include Quickbooks with 5.5 million subscribers, and Xero with 2.3 million subscribers.
Every time I record a transaction, I write down what the transaction was, when it took place, the amount, the category, and where the transaction took place if applicable.
Keep your documents organized, regularly document your transactions, and you will be able to bookkeep with no issues!
How To Account For A Small Business
Accounting is vital for making good business decisions, and most banks will never give you a bank loan unless you can prove you have been able to account for your business – so it’s vital that every small business keeps up with their accounting.
A lot of the rules for good business accounting overlaps with the rules for bookkeeping.
For example, it’s important to remember to separate your business and personal finances so you can get a better understanding of how much revenue your business is making and how much profit it’s making too.
Your first step is bookkeeping. Bookkeeping is key to having all the information you need in order to carry out the analysis. So, follow the above section to find out how to bookkeep for your small business.
You will need to set up three financial statements in order to help you keep track of your business and its state. These statements include:
- a balance sheet which covers your assets, liabilities and equity.
- an income statement which summarizes your business’s revenue, expenses, profits and losses.
- and cash flow statements to show how much in funds your business has at hand for transactions such as paying bills.
Now, you will have everything you need in order to make business decisions.
For example, knowing that your current assets are worth more than the liabilities you owe means that you know you can quickly sell off some of your assets to cover your debts.
Taking a look at your income statement will help you see if you need to cut back on costs or focus on increasing your revenue.
Your cash flow statements can show you which areas of your business make the most money and whether you can expand on that or think of new ways to make an income.
As for taxes, I’d seriously recommend that you pay that little extra to get someone in to sort out your business’s taxes. Doing it yourself is very complicated and if something goes wrong, you can end up in serious trouble.
So, the key to successfully completing your small business’s accounting is to successfully complete its bookkeeping.
Bookkeeping allows you to keep a record of every transaction so you can easily pull together those financial statements which are vital for making good business decisions.
I hope the information above has helped you feel more confident to try bookkeeping and accounting for your own business! Good luck!