When running a small business, day-to-day administrative tasks like accounting will take up a better part of your day. But unless you’re running an accounting firm, it’s probably the last thing you want to worry about. Yet maintaining proper accounting is crucial to the success and growth of your business.
Even when you decide to hire a professional accountant to handle your finances, it’s still important to at least know the essentials of accounting. It will help you to track your finances and run your business more efficiently. If it’s not your speciality, accounting can seem complicated and difficult to navigate. So this guide will give you a better understanding of business accounting and how to do it for yourself.
What is Business Accounting?
Accounting is the process of recording, analyzing, and interpreting your business’s financial information in a systematic manner. It helps to track financial operations, comply with legal requirements, and make informed business decisions.
Regardless of whether you’re managing your business accounting yourself or outsourcing the services, it’s important to understand business accounting basics. You’ll understand your business’s financial health and performance, and have greater control of the direction the business takes.
Some of the business accounting basics you should know include:
- Income Statement: The income statement shows the profitability of your business and indicates how much you’ve made or lost.
- Balance Sheet: This shows your financial standing. It also shows retained earnings (profits reinvested into the business).
- Profit and Loss (P&L) Statement: A P&L statement indicates your income and expenses over a period of time. It can be done monthly, quarterly, or yearly.
- Cash Flow Statement: It shows how and where you’re receiving and spending money. A cash flow statement helps to analyze your business operations, finances, and investments.
- Bank Reconciliation: This compares your cash expenditures to your overall bank statements. It helps to ensure that your business records are consistent.
You should also learn about accounts receivable & payable, accruals, burn rate, cost of goods sold, and liabilities.
Essential Business Accounting Tips for Small Businesses
The thought of tracking and keeping a record of all your business transactions may seem daunting. But it doesn’t have to scare you off. These tips will help you to get started on accounting for small businesses:
Decide where you’ll keep your money
The first order of business should be deciding where to keep your money. If your business is registered as a partnership, corporation, or limited liability company, you’ll be required to have a separate bank account for the business. But if it’s a sole proprietorship, you can use your personal bank account. We still recommend having a dedicated business bank account.
It makes your accounting easier. You won’t have to worry about your personal finances getting entangled with your business operations.
Keep in mind that you need to register your business before you can open a business account.
Itemize your expenses by department
You can save a lot of money from tax deductions. Keeping a record of your business expenses and supporting documents can help to lower the amount of money you have to pay in taxes. Some of the expenses you can enjoy tax deductions for include:
- Advertising and marketing
- Business travel
- Home office expenses
- Vehicle-related expenses
- Meals and entertainment
But you’ll need to support these expenses with documents such as receipts, bank and card statements, bills, canceled checks, and invoices among others.
Understand your tax obligations
You don’t want trouble with Revenue, so being tax compliant should be your top priority. Educate yourself on your business’s tax obligations, maintain accurate records, and set aside revenue to pay your taxes. You can also pay ahead in quarterly taxes.
The type and amount of taxes you file depend on factors such as your legal structure, the number of employees you have, and if you collect sales tax.
Get professional help
As much as it’s important to understand how business accounting works, you don’t have to do it yourself. This is where professional accounting services come in. Hire experienced professionals such as Coffey & Co Accountants to handle your accounting.