Proper accounting is crucial to the success of any sized business. As a small business owner, you might not have the resources to employ a team of specialists to carry out this task. But with the correct guidance and understanding of the subject, you too can ensure your business accounting runs smoothly.
If you have a small business, or if you plan on starting a new venture, this guide is for you!
What does business accounting mean?
Business accounting is the process of keeping a detailed record of your business’ financial operations. It allows the business to keep track of the origin and destination of its resources, as well as assets and capital.
What is the purpose of business accounting?
Maintaining proper accounting is a key component to any business’ success. Below you’ll find three main reasons:
It’s a legal obligation
As a business owner, regardless of its size, you must pay local and federal taxes to the government. Keeping accurate accounting records can help you easily meet these tax and fiscal obligations, as well as file tax returns in compliance with the law. This step is crucial since not paying your taxes can have many negative repercussions, whereas paying them can be very beneficial.
Looking at a bank account is not enough to assess a business’ financial situation. The economic outlook of a company includes a huge number of factors and, to evaluate them, you need to look at its accounting information. Many factors, such as accounts receivable, debt, operating expenses, and cash flow, among many others, are to be taken into account. Only through truly reliable accounting records will you be able to correctly understand the company's situation and consequently design effective strategies for it.
Helps with organization
Operating a business involves making many financial decisions. Deciding how much you should reinvest, your employees salaries, the optimal price point for your products or services, for example. All these decisions depend on your financial situation. And as mentioned above, having a clear understanding of your situation will help you make more informed decisions.
Concepts you should know
Before going into the steps for account keeping, it's necessary to understand a few terms. Some of these terms are used colloquially, so you are probably familiar with them already. However, some of these words might have very specific definitions that you may not yet be familiar with.
A company's assets are all tangible or intangible goods, resources, and securities that the company owns. In other words, they are all the components that add value to your business. Some examples of assets are: cash, positive account balances, material goods, real estate property, patents, and accounts receivables.
A company's liabilities are the exact opposite of the assets. That is, all the debts and obligations that detract from the company. Some examples are: a credit card balance, unpaid taxes, and bank loans.
A company's equity simply refers to the sum of all its assets minus its liabilities.
Stock (Share Capital)
A company's stock is the amount of money it has received from its investors. Stocks are considered a liability since, in theory, it is owed to the company's shareholders (although there is no legal obligation to return it).
Income and expenses
Income and expenses are simply defined as the money that is taken in by the business and money that is spent by the business. In other words, if a transaction results in a decrease in assets, it is considered an expense. If it results in an increase, it is considered income.Keep in mind: Some transactions may act as more than one of the above concepts. For example, a one-year loan of $1,000 with interest of 20% per year. In this instance, you would have to pay 12 monthly payments of $100 ($1,200 total). This transaction will add $1,000 to your assets (recorded as income). However, you will be incurring a debt of $1,200, so your liability will increase by the same amount. When you calculate your equity, you will see that there is a total decrease of $200 (interest to be paid). Each of the 12 monthly payments of $100 must be recorded as an expense.
What do I need for business accounting?
The most important step to reliable accounting is accurate record-keeping of all your business operations. As such it’s necessary to archive and update various documents that serve as the basis of your accounting. We’ve put together a list of the documents you’ll need to collect and maintain:
Invoices are documents that record transactions between companies and/or individuals, so they are considered essential in income and expense calculations. When your business makes a sale, you must generate an invoice that serves as proof of that income. Similarly, when your company acquires a product or service, the supplier must issue an invoice that guarantees this transaction. The latter will be taken into account as an expense.
Other proof of expenses and income
Some transactions do not generate invoices. For example, bank loans can be verified through your account statement. Similarly, real estate deeds count as proof of an asset only if they are in your company's name. We recommend you visit the Internal Revenue Service (IRS) website. Here you will find an extensive list of the records and vouchers that you must keep for your business.
Accounting books are documents (physical or electronic) that record the company's operations. There are many types depending on the specific needs of each business. However every company must have the following two:
- Journal. This type of registry is used to enter all the transactions that your company generates. Each income and expense must be properly documented and the order of operations must be chronological.
- General ledger. This document is used to create an overview of your business accounts. It’s usually updated periodically, using the data from the journal book and noting the balances of the accounts that are kept there. This will be the basis for your annual tax returns.
Your accounting step by step
Now that you know the basic elements and concepts of accounting, you can put them into practice to keep an accurate record of your business finances.
In the past, business accounting records were kept on paper and accounts were done by hand. Fortunately, now there is accounting software that will make your job easier. Follow the steps detailed below to manage your business accounting easily and effectively:
1. Find an accounting program that meets your needs
Although it is technically possible to keep your company’s accounting on paper, this option is considered outdated and ultimately is not recommended. There are many accounting software options that offer you different plans and features. Although most of these require a subscription, there are some free options for those with a limited budget. We’ll discuss these options further in the next section.
2. Record all the operations carried out by your business
As mentioned earlier, your company's journal should record all financial movements. It’s important that you enter all transactions in your accounting software, as even small omissions can throw you off when trying to square up your accounts.
3. Keep a record of all your receipts
Any software you choose should help you simplify the process of keeping your accounting in order. However, in case of an audit, you’ll need to prove the data entered is correct. For this reason we recommend that you keep all the physical evidence you have of your transactions.
Keep in mind: The IRS requires that you keep your receipts for periods ranging from two to seven years. We recommend you keep these rules in mind and do not dispose of the receipts before the recommended time has passed.
4. Keep track of your business assets
Do not forget that the assets that your business currently owns are part of the company's accounting. It’s important to keep accurate records of property, equipment, raw materials, inventory, and all possessions owned by your business.
5. Familiarize yourself with relevant tax laws
One of the main uses of accounting is to understand and be prepared for the taxes you’ll owe the government. Taxes vary greatly depending on your location, line of business, business structure, and the tax exemptions your business qualifies for. We recommend you stay informed of local laws that impact how your business is being taxed.
6. Make use of your account balances
Accounting programs are a great tool as they can help you create more accurate projections, develop specific strategies for your business, and improve your long and short term economic prospects. Take advantage of the data found in those programs and take your business to the next level!
Tips for doing accounting the right way
SABEResPODER has identified three accounting best practices that we believe can help you grow your business:
1. Keep your personal and business finances separate
One of the most common mistakes small business owners make is mixing their personal finances with their business finances. Combining these can overcomplicate your accounting and, in some cases, lead to potentially very serious repercussions with the IRS. In order to avoid any issues, we recommend that you keep those accounts completely separate.
2. If possible, hire a professional accounting service
There are accounting services that will take on your company’s accounting and allow you to focus more of your time on other aspects of running your business. Consider the time you spend doing accounting and decide if your time is worth more than what an accounting service costs. If the answer is yes, consider hiring one.
3. Look for relevant tax deductions and exemptions
Start by researching all the types of expenses that you can deduct from your business taxes. For the most part, tax deductible expenses are simply business related expenses, but there are also special cases such as donations to charities. Taking advantage of these tax benefits will help you minimize the amount of tax you pay, and therefore retain more capital.
As mentioned earlier, paper bookkeeping is a thing of the past. Most companies, regardless of their size, use computer services to carry out this activity. There are many paid options, but for limited budgets, there are also very low-cost or even free options.
Excel is a spreadsheet tool developed by Microsoft. While this software comes at a cost, many personal computers come pre-licensed with it. Alternatives to this software are Numbers for Apple computers or Google Sheets, which can be used for free on almost any device.
Keep in mind: These applications have not been specifically designed to keep accounting records. However, there are many free templates where you only need to record your company's financial movements and enter the required values.
Free or low-cost online accounting programs
If you are looking for simplicity and savings you can find many free or inexpensive accounting platforms online. One of the main advantages of this type of platform is that your information is protected in the cloud, so you will always have an electronic backup. Also, you can access them from different devices as long as you have an Internet connection.
Alegra is a very complete accounting program. It was developed for the US market, with 100% Spanish support and interfaces. It has all the necessary tools to manage a small business including detailed reports in real time. They offer a 14 day free trial and their packages start as low as $8 a month.
Wave helps small businesses keep their books online for free. It has an income and expense tracking system, the ability to scan your paper invoices, store your data on secure servers and the ability to generate automated reports. They also have payroll management, but this comes at a cost (starting at $20/month).
Sage 50 was developed in Spain, and integrates to various countries' accounting systems, including the US. It has a complete accounting management system in the cloud that you can access from any device connected to the Internet. Its interface is easy to use and has a three month trial period.
With Zipbooks' free version you can generate unlimited invoices, manage an unlimited number of suppliers and customers and accept digital payments for your business. Their plans are quite inexpensive, starting at $15/month, with the option of adding more features.
If your business makes less than $50,000 annually, Zoho Books is a great, free option. You’ll be able to generate up to 1,000 invoices per year in multiple languages, register various bank accounts, generate reports and calculate your taxes, among many other features.
Akaunting is an open source software - which means that any developer can analyze the program, modify it and create expansions. It allows its users to manage their accounting online, for free. Basic features are free to use, with the options of paying for additional ones.
Brightbook calls itself "the world's most loved free online accounting software." It does not charge for additions and its platform allows you to access your accounts from any online device, keep precise control of your cash flow, create and record an unlimited number of invoices, and add as many users as you require, among many other things.
Get your business accounting in order!
We hope you found this guide helpful. Remember that maintaining your business accounting isn’t just a tax obligation, but it also provides many benefits.Put our tips into practice, and you’ll see that keeping your company's accounting is not as difficult as it seems! If you have any questions, do not hesitate to contact us through our chat. Our experts are available to support you.