Proper accounting bookkeeping is crucial to any small business’s success. Without the right accounting and bookkeeping processes, companies can fall into debt quickly. As a small business owner, you plan to do everything in your power to avoid getting into debt. In order to achieve financial freedom, you need to track expenses effectively and manage your capital efficiently. Learn how to set your company up for financial success with the following accounting bookkeeping basics for small business.
Choose An Accounting Method
Before you can properly set up an accounting bookkeeping system, you need to choose a method. The two main accounting methods that small businesses choose from include cash and accrual. Cash accounting transactions refer to any time cash changes hands. This method typically works the best for one-person businesses operating out of a small establishment. The accrual method, on the other hand, involves more complex recording. With this system, you must record every purchase and sale as soon as it occurs. Unlike the cash accounting method, you do not wait for the capital to officially exchange hands. This type of accounting works well for small businesses that offer customers credit. Determine which option would benefit your company the most to complete establish an effective accounting bookkeeping process.
Categorize Transactions In Books
Another accounting bookkeeping basic is to categorize your transactions. The key to proper bookkeeping is to keep your books organized. The best way to achieve neat and tidy books is to categorize your transactions. The most common bookkeeping categories for small businesses include assets, liabilities, equity, revenue and expenses. To organize your transactions further, include subcategories. These subcategories are often referred to as “accounts”. When creating your accounts, get as specific to your brand. For instance, a smoothie business can use accounts like “revenue-smoothie sales” and “expenses-smoothie cups”. Use this advice to achieve an effective accounting bookkeeping process.
Keep Important Financial Records
Additionally, keeping important financial records is a crucial component of accounting and bookkeeping. Most small businesses keep a variety of financial records depending on how they complete sales and make payments. However, there are a few financial records that all small businesses should maintain. These records include receipts, invoices and payroll records. You need to manage these records even if you hire a financial advisor or outsource payroll services. In addition, consider keeping your bank, credit and investment statements. Store your tax returns in both paper and digital forms as well. By keeping these records, you can find financial security for your small business.
Establish An Emergency Fund
Many financially stable small business owners also establish emergency funds. This is a great accounting bookkeeping basic to follow because it allows you to prepare for unexpected expenses. Several small businesses deal with unexpected machine breakdowns that require large sums to fix. If you own a construction business and several dump trucks break down, you cannot wait to save up for new ones. If you did wait, you could miss out on projects and, therefore, profits. With an emergency fund, you can purchase new equipment immediately, complete projects and boost your cash flow. Therefore, this accounting bookkeeping basic is highly beneficial for maintaining a positive financial situation.
Determine Tax Obligations
Furthermore, you need to determine your tax obligations in order to begin accounting and bookkeeping properly. Each small business structure demands different tax obligations. For instance, limited liability company owners can claim business income on their personal tax returns. This is one of the many benefits of an LLC business. In contrast, corporations are taxed independently. If you own a corporation, your income is taxed as a typical employee is taxed. Since each business entity’s taxes differ, you need to determine which obligations you need to follow. That way, you can set yourself up for an easy tax season. Use this accounting and bookkeeping basic to prepare your taxes properly.
In order to avoid falling into debt as a business owner, you need to learn the main accounting bookkeeping basics. Begin by choosing between an accrual and a cash accounting method. Then, categorize transactions in your books. Keep important financial records like invoices and bank statements as well. Emergency funds play a major role in achieving financial success as well. Finally, determine your tax obligations based on your business structure. Use these accounting business basics for small businesses to stay out of debt and find financial success instead.