Every business, irrespective of its size, needs to maintain an accurate book of account. When you have a bookkeeping system in place, it allows you to record all your daily transactions in a standardized form, understand the financial position of your business and file your tax returns in a simplified manner.
If your business is growing rapidly, then there will be multiple transactions taking place daily. Therefore, you need a dedicated person to look after your accounting process. In fact, large organizations have a separate accounts department to look after their financial accounting. However, if you have a growing enterprise and want to consult a dedicated team of small business accountants, then you’ve come to the right place. To begin with your small business accounting, here’s what you should be doing:
Once you have registered your business, it’s important to create a separate bank account for your organization. It’s mandatory for Limited Liability Companies (LLCs), partnerships, and corporations to have a separate bank account for their operations. Even if you are a sole proprietor, it’s highly recommended to have a separate account. You do not want to combine your business and personal expenses together. Moreover, having a separate account also helps you to understand the sources and the application of your business funds by just looking at the bank statements. Additionally, the tax filing process reduces as you do not have to go through your personal bank statements to identify your business transactions. Therefore, open a distinct business account to organize your finances better.
In order to get your commercial bank account, you need to register your business name with your province. You can enquire the banks about what documents are required to open a business account. While selecting your bank, consider the type of account you want to open, the location of bank’s branches, the fees that they will charge for their banking services, etc. Some common business account types are business checking accounts and savings accounts –
These accounts may have different fee structures and place limits on the number of free monthly cash deposits and withdrawals. Also, they generally have low interest rates.
These types of accounts are used to keep a percentage of your earnings to cover for self-employed taxes or any emergency expenses.
The basic need for an accounting system is to record all the transactions. Apart from creating financial statements, you can keep track of your costs, monitor the performance of your company, and plan for tax returns once you have systematically recorded the transactions.
For this purpose, you need to collect all the invoices and maintain all other important records. Do not forget to include other expenses in your record such as automobile expenses (fuel, repairs), business travel expenses, meals and entertainment expenses for your employees and clients, home office expenses (electricity, rent) if you work from home, and gift expenses as well.
In the case of work from home, you are allowed to deduct a certain percentage of your home expenses that are being used for business. For example, if you use 50% of your electricity expenses for work, then you can deduct 50% as your business expense. However, you need to justify the selected percentage you use as your business expense. Such expenses help in reducing your tax liability.
To keep a record of all your transactions, you can use an accounting software or consult your small business accountants instead of manually recording each of them. In fact, some of these software raise invoices to clients for the due date automatically.
Before you get your bookkeeping system in place, ensure that you consider the following points:
There are two types of bookkeeping system – single-entry bookkeeping system and double-entry bookkeeping system. In a single-entry bookkeeping system, you record transactions as and when you receive payments, or when you pay for various business expenses. This type of system is ideal for a small business where the volume of transaction is low.
In a double-entry bookkeeping system, there are at least two entries recorded for each transaction. One entry is recorded on the debit side and the other on the credit side of the final accounts. This type of system is followed by companies that are large and have multiple transactions to record.
There are two types of accounting systems – cash accounting system and accrual accounting system. In cash system of accounting, the transactions are recorded in the books of account when you actually receive or make payments.
In the case of accrual system of accounting, the transactions are recorded irrespective of whether you have received or paid the amount. Accrual accounting system is used especially when you have to offer credit to your debtors or if you receive credit from your suppliers or creditors. For instance, if you sell goods worth $5000 to a debtor on credit, the payment will be done after the credit period, but the transaction will be recorded immediately in the books of account. It is not necessary for you to receive the payment in order to record the transaction. Often companies start their business by using the cash accounting system. Once a business grows and they need to offer or avail credit, they move to accrual system of accounting.
You should be aware of basis accounting terminologies prior to referring small business accountants:
Assets include things that are owned by a company. This includes machinery, furniture, land, building, patents, copyright, investments, cash, etc. Assets can be classified into tangible and intangible assets. Tangible assets include the things that have a physical form such as building, stationary, machines, cash, etc. Intangible assets do not have a physical form such as copyrights, goodwill, investment in securities, etc.
Assets can be further classified on the basis of their duration. This includes fixed assets also known as long-term assets and current assets also known as short-term assets. Fixed assets are used for longer periods of time such as machinery, building, etc. Current assets get exhausted within a short period of time, generally within a year. They include stationery, cash, inventories, etc.
Liabilities include things which a company owes to its creditors, suppliers or even shareholders. It includes bank loans, interest, salaries, wages, etc. Liabilities can be classified as long-term liabilities and short-term or current liabilities. As the name suggests, long-term liabilities are paid over a long period of time which is usually over a year such as loans from financial institutions. Short-term liabilities are usually the day-to-day expenses of a business such as salaries and accrued interest.
Owner’s equity refers to the actual capital invested by the company owners. In the case of public companies, the owner’s equity includes the shareholders’ funds (the amount of capital invested in shares), the reserves and surplus.
If you look at the format of a balance sheet, you will see assets, liabilities and owner’s equity. In the case of income statement which is also called profit and loss statement, you will see the expenses and the costs incurred along with the revenues earned for the financial year.
Revenue includes all the incomes received by a business. The sources of revenue can be the core activity of the business or other activities. The revenue generated from the core activity is known as operating income or revenue. Similarly, the income generated from other sources is known as non-operating income or revenue. Examples of non-operating revenue include interest from investment, the sale of assets, etc.
Expenses include all the money spent to run a business. These expenses may not necessarily be related to a product or service that is sold by the company. Examples of such expenses include salaries paid to employees, interest to creditors, etc.
Cost refers to the money spent on buying, manufacturing, and selling of products. It is also called as the cost of goods sold. Examples of cost include the cost of raw materials, wages paid to labor, marketing cost, etc.
Once you have set your bookkeeping in place, you need to set up a payroll system for your business and start with the tax planning. The entire accounting for your organization can be a time-consuming process especially when you need to focus on other important aspects of your business. In such a scenario, maintaining your books of account on a regular basis can be a complex task. Moreover, if you do not have the right knowledge about various accounting standards, then mistakes are bound to happen. At times, these mistakes can prove to be costly, especially when you file your tax returns. Simultaneously, incorrect accounts statements can affect the credibility of a firm among various stakeholders. Therefore, if you do not have the expertise or time to do your bookkeeping, it’s best to consult a professional accounting firm. Apart from providing bookkeeping services, our small business accountants also specialize in providing essential services such as tax filing consultancy and payroll services.
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