7 Simple Steps to DIY Your Accounting for Small Business Owners
Congratulations, your passion and perseverance has taken you to open a business yourself. Running business is juggling everyday to meet your goals. Most important thing to run a business is to have a system in place. Business is all about financial transactions. Small businesses therefore need to be wary of all the tasks needed to achieve various milestones while stepping up ladder in the business world, one step at a time. Here are 7 simple yet highly successful steps for small business owners to setup accounting by themselves:
- Selection of Accounting Method: There are two accounting methods: cash based and accrual. In cash-based accounting method, all financial transactions are recorded only when there is movement of cash. On the other hand, in accrual system of accounting, transactions are recorded when they accrue or happen. For eg: when expenses are incurred and paid later, both the events are recorded in accrual system of accounting while in cash system of accounting, transaction is recorded only when cash is paid.
- What type of documents need to be kept: Financial and legal documents are the one that must be kept alongside with their supporting. Business licenses, tax licenses, lease deeds, etc must be kept separately in a file. Financial documents include invoices, receipts, payrolls, cash book, cheque book, etc. Hence, the small business owners should plan at the beginning on which documents shall be kept and documented well. These documents can also be stored in cloud in a secured manner.
- Apply Business Entity Concept: Often, small business owners mix their personal transactions with those of business. As per the business entity concept, business books shall be separate from personal books and personal transactions shall not be recorded in business books. The major advantages of business entity concept is that one becomes completely aware of all the business expenses and it becomes very easy to file tax reports. Hence, small business owners shall open a business bank account under the business name and route all the business transactions through this account.
- Filing and documentation: The number of the documents grow over the time in small businesses. These documents may be of various nature and belong to different accounts. They should be filed in specific system, either by the type of books say purchases, sales, debtors books, etc or month-wise. Month-wise recording is recommended only when it is expected that transactions volume would be small and the recording of transactions can be linked to the documents chronologically. A well-organized filing and documentation increase the efficiency of the overall work.
- Choosing the bookkeeping Software: If the small business owners are nuanced with accounting terms and terminologies, they can do the bookkeeping by themselves. He can choose among QuickBooks, xero or wave accounting software. He can even opt for excel spreadsheets if the volume of business is very small. Small business owners also have option of hiring part-time bookkeeper who may be local or working remotely.
- Prepare financial statements: The least small business owners can do is to prepare profit and Loss Account and Balance Sheet. Profit and Loss Account is useful to know about the income and expenses while also calculating gross and net margins. Preparing profit and Loss helps to know about the tax obligations. Comparison of profit and loss accounts over different periods help to spot the trends in the business. Balance Sheet evaluate the firm’s financial health and shows the assets and liabilities at a particular date. Balance Sheet captures the picture of what the business owns i.e. assets, what business owes i.e. liability and what is the value of business i.e. net worth.
- Re-evaluate your methods: If small business owners have started recording financial transactions in excel spreadsheets, it is highly recommended that if the volume of transactions grow over time, he must be willing to shift to various accounting software. Another instance is accounting method. Up to a certain limit, cash accounting system can help small business owners to comply with tax and legal obligations. However, beyond certain parameters or requirements of statutory requirements, businesses must be shift to accrual system of accounting. Hence, the as the businesses must evolve itself over the time to survive and grow gradually, it is equally important to re-evaluate and tweak the accounting system to meet the current nature and style of the business.