A Small business accounting revolves around the cycle of tracking, recording and then analyzing the financial transactions related to business. It is a process of converting the numerical into a statement about a business’ profit. Accounting is a complex process but it is also important to avoid a lot of paperwork.
This article will cover:
How Small Business Accounting Works?
Small business accounting is a process that tracks all the money flowing in and out of your business accounts (all payments, liabilities, purchases and sales). Accounting tasks encompass the following tasks:
- Tax filing and Tax payment
- Creating all financial reports
Accounting helps a business owner to plan and decide regarding short and long term goals.
6 Steps To Do Small Business Accounting
Following are the basic steps of the accounting process:
1. Open a Bank Account
It is always a good option to separate your business and personal finances. A business and savings account will help a business owner to organize revenue and help you plan for the taxes at the end of the year.
2. Record All Income and Expenses
Keeping a track of all business transactions is the foundation of a small business. The expenses directly linked with your business should be recorded properly to prepare financial statements and tax returns easily.
3. Select Accounting Method
It is important to choose an accounting method before establishing the basic bookkeeping system. There are two methods of recording accounts transactions:
- Cash method
- Accrual method
With the cash method, the business owner records the income and expenses while receiving or paying expenses. Whereas, the double-entry accounting method is used in accrual accounting for recording the transactions. It means that you have to maintain a record of two entries for each transaction.
4. Transactions To Trail Balance
As per the accrual method, the transactions are recorded as journal entries. The journal prepares the lists in chronological order and records all the credit and debit amounts along with dates and explanations of transactions.
The entries in the journal are posted to the general ledger. The trial balance is then prepared after checking the past transactions and current balance.
5. Generate Financial Statements
After preparing the trial balance sheet, you can generate the financial statements of the business that include the income statement, cash flow statements and the balance sheet.
The final step of the accounting circle is to prepare post-closing entries. It is used only to reset the balance of temporary accounts to 0 and restart the accounting cycle. You can also use small business accounting software, which makes it easier for you to run the accounting cycle.
How important is accounting for small businesses?
Accounting is one of the essentials of a small business. It helps the business owners to:
- Keep proper track of assets
- Record transactions
- Keep track of liabilities
- Track the income
- Maintain the cash flow
It is really helpful for business owners, investors, managers and other stakeholders for financial standing and making financial decisions.