Bookkeeping is vital for every business to keep an accurate record of financial data. small business is relatively more required than large and established businesses to keep precise track of their accounting record.
As a large and established business has the leisure to access resources and has an in-house accounting department but small businesses have taken their financial record keeping seriously in order to avoid any misstatement and to comply with tax, payroll, and other laws and regulations on time.
Why Bookkeeping is necessary for small businesses
Bookkeeping is necessary for small businesses to help organize financial documentation and records. Through accurate bookkeeping, you can keep track of expenses, cash in hand, invoices, bills, bank reconciliation, loans, financing, and other payment processing platform balances that are vital for small businesses' success.
Here is the list of benefits of Shopify store bookkeeping:
Bookkeeping for small businesses keeps records of all relevant records that are necessary for Tax filing
It helps avoid any Tax Audits, fines, and penalties.
It helps organize all accounting records
Keep all accounts, credit card, PayPal, and other accounts balances up to date.
6 Small business bookkeeping fundamentals
Proper record Management is the key:
For small business bookkeeping, it is vital that you record transactions on a regular basis or set a frequency to do it accordingly and not overburden it at the month or year-end.
There are two ways you can manage your accounting records, accounting software and spreadsheets.
Spreadsheet vs bookkeeping and accounting software
Both means can be used to store data but they're used depending on the nature of the data and your business requirement.
For a spreadsheet, you have to manage manually all the debit and credit and all transactions. You can create and automate excel sheets through formula and function and advance features such as pivot tables to create ledger and trial balances from books of accounts but still, it is manually and of limited use.
Relatively the accounting and bookkeeping software provides more solutions to accounting and bookkeeping problems. It automates various processes considered for major accounting and bookkeeping software.
For example, with Quickbook and Xero you can set up a chart of accounts of your small business and can import all your banks and credit card data you can add invoices and journal entries, and QuickBooks and Xero can automate the further process of trail balance, general ledger and financial reports/ financial statements are created.
Thus, small business bookkeeping records can be mange through both spreadsheet and Accounting and bookkeeping software but it's your decision to opt for any of these two.
Understanding the difference between accounting and Bookkeeping:
Accounting and bookkeeping are often used interchangeably but there is a difference between accounting and bookkeeping. Accounting includes the overall financial accounting and reporting, costing, and taxation but bookkeeping is limited to maintaining financial transaction records.
Key Bookkeeping tasks include:
Entering transactions as debits and credits
Recording day-to-day financial data
Maintaining and balancing the general ledger
Maintaining expenditures and income
Promoting financial statements, like the balance sheet
Recording daily transactions
Awareness of cash and accrual basis of accounting
On an accrual basis income is recorded when earned and expenses are recorded when incurred irrespective of whether cash is received or paid or not.
This method follows the famous accounting principle called the matching principle, which states that an entity should recognize revenues and expenses in the same period. It also follows the revenue recognition principle, which states that organizations should recognize income/revenue when earned.
To match the records there might be more accounts under this method, for example, receivable and payable.
On an accrual basis, you can manage Accounts receivable and payable for revenue and expenses that are not yet received or paid. You can create an Invoice or bill to track these incomes and expenses.
While on a cash basis you can only record when income in cash is received and expenses are paid.
Advantages of cash basis of accounting or cash accounting:
Few accounts: When you adopt a cash basis of accounting you have to recognize income when received and expenses when paid there will be two accounts involved cash/bank will be debited and credited and income will be credited and expenses debited there are no other accounts such as keeping a record of creditor and debtor or account payable and receivables so there are fewer accounts and less complexity.
Easy to understand: by debiting and crediting the cash account and respective income and expense account one will easily understand and do it.
Takes less time
Disadvantages of cash accounting
Doesn’t always show the full picture
The disadvantage of cash-basis accounting is that it doesn’t provide all the information about income and expenses.
The cash basis of accounting doesn’t show future payments and receipts, so it understates the assets and liabilities of the entity.
Not all businesses can opt to use cash-basis accounting. The entity having credit sales and purchases can’t use the cash accounting method:
Sell products or services on credit
Have gross receipts higher than the IRS requirements
Need inventory management
Also, when an organization grows larger it has business operations not only in cash but on credit as well and is bound by GAAP and IFRS to use the accrual basis of accounting. It is a better strategy to adopt an accrual basis of accounting\.
Managing different Accounts
Balance sheet Accounts
1. Accounts receivable: These are the amount that is receivable against credit sales. This is the amount to be received in the future against the sales made in the past.
2. Inventory: These are purchases that are made for sale in the ordinary course of business. Inventory on the face of the balance sheet is the inventory amount that is present at the end of the year i-e closing inventory.
3. Prepaid Expenses: These are the expenses that are paid in advance but have not yet been incurred.
4. Property Plant and equipment: These are assets that are held as a result of past events and they can give cash flow in the future. These are assets that are worth more than $1000.
5. Depreciation: This yearly allocation of assets with respect to their usage in a particular year.
6. Intangible Asset: These are assets of no physical form. This may be patent, copyright, trademark, etc. Examples include software.
7. Deferred Income Tax: This is the tax amount that arises as a result of differences in tax authorities and accounting rules.
8. Account Payable: is the amount owed in the ordinary course of business. These are credit purchases to be paid in the future.
9. Income Tax Payable: This is the provision of Tax based on the revenue that is payable to income tax authorities.
10. Accrued salaries and wages: These are salaries of previous months that are not paid yet.
10. Owner investments: This is the initial investment that the owner has made to start a company.
11. Retained earnings: Retained earnings are the profit/losses of previous years carried to the next years.
Profit and loss accounts
The main component of Profit & loss:
Sale: represent the amount received or receivable against product sale and services provided.
Cost of goods sold: Cost of goods sold is the total amount your business paid as a cost directly related to the sale of products. Depending on your business, that may include products purchased for resale, raw materials, packaging, and direct labor related to producing or selling the goods.
Outsourcing Bookkeeping activities
Small businesses don't have the luxury to have access to resources and all departments in-house like large businesses.
The workload small business owners have is immense. They don't have the resources to have all departments.
Accounting is a necessary part of business operations to keep track of all records of income and expenses and to comply with tax laws. You might be a small business owner trying to figure out how to pay yourself or you simply can’t quite get a handle on the difference between bookkeeping and accounting.
Maintaining the right accounting records demands a lot of resources whether it's time or finances.
If you are an in-house employee or by spending a lot of resources on accounting duties like account payable, accounts receivable payroll, and business taxes, it is the best time to outsource accounting.