The Basics of Small Business Accounting in 2023
Starting a business and trying their best to develop it is the goal of every businessman. After preparing many things for the running of the business, the next step is deciding how to manage and structure your finances. If you study small business accounting, you'll save time to get simple business finances and reduce the stress at any given moment.
New businesses need a strong financial foundation to keep the business steady and keep the money on the right path. If you have never known about how to structure business accounting, let's take a look about the basics of small business accounting in 2023.
What is small business accounting?
All processes of recording, analyzing and tracking the financial transactions of your business. The business accounting will translate numbers into a comprehensive statement about business profitability. Many business owners think accounting is a boring aspect because they can't freely follow their business plan, but it is also necessary to maintain cash flow and avoid piles of paperwork.
The business accounting will track all the in and out flows including sales, purchases, liabilities and payments. For small businesses, it will be bookkeeping, creating financial reports, and filing tax returns. Accounting will help any business owner pay attention to the values and health of the company and make better decisions about short and long term success.
How to do accounting for small business?
The most basic method to do business accounting is manual recording with a pen and paper, but it takes a lot of patience and has a high error rate. At least two people must do the same recording to avoid misses. To start properly, you can use accounting software or hire professionals like Smebrother.
If you are still confused about choosing between hiring a professional, looking for an accounting software application or doing it yourself, there are a few things you need to do first.
- Choose business structure wisely
The business structure will affect everything you do in your business. There are four basic business structures: Sole proprietorship, Limited liability company, partnership, and corporation. If you are a single owner, you can choose a sole proprietorship because it requires little setup, but there is no legal differentiation between your business and you as owner.
An LLC is almost the same as a sole proprietorship, but is not responsible for business debt. You can have multiple partners and be more flexible in filing business taxes. If you run a business with more than one person, you can share ownership through partnerships. Each partner is responsible for developing the business, with detailed duties and responsibilities in a partnership agreement.
Or the last option, corporation. It's the most complex business structure, but has many benefits, such as lower corporate taxes, and legal protection. But remember, choosing this one is complicated and requires a lot of money.
- Open a business bank account
Every business structure requires a business bank account. Even if you choose a sole proprietor, it's good to have a separate account rather than your own. Having a business bank account makes it easier for you to file business taxes, increases the confidence of anyone who wants to do transactions with you, and separates the business income from your personal funds.
- Choose an accounting method
Don't just rely on simple accounting experience just checking accounts at the end of the month. You must understand the difference between the cash accounting method and the accrual accounting method.
The cash method is the simpler method and is suitable for freelancers with limited accounting activity. You have to recognize revenue and expenses when money comes out of a bank account or changes hands.
The accrual method provides an accurate picture for business health, because it recognizes revenue when earned, and only sees expenses when they occur. It's more complicated than the cash method.
- Learn how to manage income and expenses
Handling income and expenses is the same as handling the majority of financial transactions. You need to learn how to invoice. White an invoice to provide customers an easy way to pay. You can link to online payment options, or explain an easy way for customers to pay you.
Next, pay your bills in time, because good credit is important for every business. Don't forget to record all of your expenses to pay accurate taxes at the end of the year.
Enter all financial transactions whether you record them manually, or use accounting software. Don't forget to do it regularly and properly entered.
- Reconcile bank accounts
Many business owners skip this step because they are already using electronic banking. But don't skip this step because reconciling bank accounts each month is necessary. It will help you to pinpoint any bank errors and identify items that must be in the general ledger.
- Run financial statements
Once all transactions have been entered, you are ready to run financial statements. Enter adjusting entries by starting with an unadjusted trial balance and help locating any out-of-balance accounts. After everything is done, look over the financial statements to analyze how your business is running. You must run three financial statements each month: profit and loss statement, statement of cash flow, and balance sheet.
What are accounting best practices for small businesses?
The key of accounting best practices is to separate personal finance and business finance. You cannot put these two things together, because business finances will not be healthy because they are mixed with personal matters. Maintaining accurate records by checking at the end of each month, as well as tracking income and expenses. Every small business requires neat and appropriate records in order to properly analyze their business performance.
Don't let a lot of mistakes in income and expenses. Do not let expenses be greater than income, because it can have a big effect on the course of your business. Prepare several business plans to prepare for unexpected costs, and keep the finances in check.
Do you already know the basics of small business accounting? If you still feel overwhelmed with business accounting, you can consider getting an accounting software or hiring professional accountants.