Many businesses, especially small companies with limited resources, fail because they don’t focus on their financial assets enough. Lots of small enterprises are not aware that their bookkeeping process is inefficient or outdated, while some others neglect it completely, wrongfully believing that the practice is redundant and just entails splurging on unnecessary expenses. But, the truth is—without bookkeeping, you can’t accurately keep track of your finances, which may eventually lead to detrimental financial losses in the future. So, if you are starting your own business or already have one running, you should take time to learn and acquire knowledge of small business bookkeeping.
In this article, you’ll learn some tips for simple, yet highly efficient, bookkeeping practices and will be introduced to bookkeepers from Langley who can help make the task easier.
Knowing the Types of Business Accounts
Before delving deeper into bookkeeping steps, it is essential that you understand the different kinds of business accounts out there. In fact, in the realm of bookkeeping, there are 5 main types of business accounts: Assets, Liabilities, Equity, Revenue, and Expenses.
Understanding these 5 core types of accounts is vital to gain a full understanding of how to post transactions and read financial reports. It also enables you to identify which accounts you will need for your business and set them up accordingly.
- Assets – Items that have value and are owned by the company. These items can be both tangible and intangible. Tangible assets are physical entities owned by the company, such as buildings, vehicles, and equipment, while intangible assets represent money or value, such as patents and contracts.
- Liabilities – Obligations and debts owed by the company. There are also 2 types of liabilities, which are current and long-term. Current liabilities mainly include monthly operating debts (which are paid in 12 months or less) and are often paid with the company’s current assets. On the other hand, long-term liabilities are often mortgages and loans used to buy or maintain fixed assets and are paid off in a number of years.
- Revenue or income – Money that is earned by the company from selling its products or services.
- Expenses or expenditures – Money spent by the business to create products or services. This may cover rent, salaries, marketing costs, and utilities.
- Equity – Portion of the assets that are fully owned by the owner after liabilities are subtracted from assets. Examples of equity include common stock, dividends, and retained earnings.
Setting Up Your Business Accounts
Nowadays, with the robust development of technology, a variety of offline and online software have proven to be useful when it comes to small business bookkeeping. They help reduce the time, stress, and the cost it takes to create important financial documents. Although you have to pay for using them, they are definitely worth the investment, considering how they can make the bookkeeping process more efficient.
Along with using bookkeeping software, you can also hire an accounting or bookkeeping Langley company to properly handle account management. This way, you will have more time for your other essential tasks, such as running your business.
Selecting a Bookkeeping Method
Choosing the right bookkeeping method (single-entry or double-entry) is what you need to consider if you want to do bookkeeping in-house.
- Single-entry bookkeeping – This is an accounting system where only one entry is made for each transaction. This method can be applied for transactions involving taxable income, tax-deductible expenses, and cash. You can perform single-entry bookkeeping using software or tables.
- Double-entry bookkeeping – This is the most common bookkeeping method. As the name suggests, it has two entries per transaction: debit and credit.
One more stark difference between these two methods is that single-entry bookkeeping only concentrates on revenue and expenses, while double-entry bookkeeping uses all five accounts: assets, liabilities, equities, revenue, and expenses.
Recording All of Your Financial Transactions
Once you already set up your business accounts and select the right bookkeeping method, it would now be the right time for you to record all your financial transactions. What you need to bear in mind during this stage of bookkeeping is that each credit and debit transaction must be recorded correctly and in the right account.
Balancing the Books
The last step in small business bookkeeping is to balance and close the books. When you add up account credits and debits, and the total amounts match, then your books are “balanced”.
After you are done putting in entries to the accounts as credits and debits, make sure to adjust the account balances accordingly. Apply this method to adjust the balances for each account. When all account types are combined, the adjusted balances should follow this accounting equation: assets = liabilities + equity.
However, in case there is a mismatch between the two sides of the equation, you will unfortunately have to go through the entries on your ledger to find and correct the errors. Then, you can follow the process again until the accounts are balanced.
Finally, you can make financial reports!