If you are running a small enterprise, you may think that accounting is not a priority or too complicated for your needs. However, accounting is an essential part of any business, regardless of its size or industry. Accounting helps you keep track of your income and expenses, monitor your cash flow, plan your budget, comply with tax laws, and make informed decisions for your business growth.
In this article, we will explain the basics of accounting for a small enterprise, including the main terms, methods, reports, and tips you should know.
What Is Accounting?
Accounting is the process of recording, summarizing, analyzing, and reporting financial information about a business. Accounting involves two main activities: bookkeeping and financial reporting.
Bookkeeping is the daily task of recording all the transactions that affect your business finances, such as sales, purchases, payments, receipts, etc. Bookkeeping ensures that you have accurate and up-to-date records of your business operations.
Financial reporting is the periodic task of preparing and presenting financial statements that show the financial performance and position of your business. Financial statements include the income statement, the balance sheet, and the cash flow statement. Financial statements help you evaluate your business results, compare them with your goals and benchmarks, and communicate them to external parties such as investors, lenders, customers, suppliers, etc.
What Are the Main Accounting Terms You Should Know?
To understand accounting better, you should be familiar with some of the common accounting terms and concepts. Here are some of them:
- Assets: Assets are the resources that your business owns or controls that can provide future economic benefits. Examples of assets are cash, inventory, equipment, accounts receivable, etc.
- Liabilities: Liabilities are the obligations that your business owes to others that result from past transactions or events. Examples of liabilities are accounts payable, loans, taxes payable, etc.
- Equity: Equity is the owner’s claim on the assets of the business after deducting all liabilities. Equity represents the amount of money that you have invested in your business or retained from your profits. Equity can also be called capital or net worth.
- Revenue: Revenue is the amount of money that your business earns from selling goods or services to customers. Revenue can also be called sales or income.
- Expenses: Expenses are the costs that your business incurs to generate revenue or operate its activities. Examples of expenses are rent, salaries, utilities, advertising, etc.
- Profit: Profit is the difference between revenue and expenses. Profit measures how much money your business makes or loses in a given period. Profit can also be called net income or earnings.
- Cash flow: Cash flow is the movement of cash in and out of your business. Cash flow shows how much cash your business generates or consumes from its operating, investing, and financing activities.
- What Are the Main Accounting Methods You Should Choose From?
There are two main accounting methods that you can choose from to record and report your business transactions: cash basis accounting and accrual basis accounting.
Cash basis accounting is a simple method that records revenue when cash is received and expenses when cash is paid. Cash basis accounting does not recognize accounts receivable or accounts payable. Cash basis accounting is suitable for small businesses that have simple transactions and do not offer credit to customers or receive credit from suppliers.
Accrual basis accounting is a more complex method that records revenue when it is earned and expenses when they are incurred, regardless of when cash is exchanged. Accrual basis accounting recognizes accounts receivable and accounts payable. Accrual basis accounting is required for businesses that have inventory, offer credit to customers or receive credit from suppliers, or have revenues or expenses that span more than one accounting period.
What Are the Main Accounting Reports You Should Prepare?
As a small enterprise owner, you should prepare three main financial statements on a regular basis: the income statement, the balance sheet, and the cash flow statement.
The income statement shows how much revenue and expenses your business generated and incurred in a given period (usually a month, a quarter, or a year). The income statement also shows how much profit or loss your business made in that period.
The balance sheet shows what assets and liabilities your business has at a specific point in time (usually at the end of an accounting period). The balance sheet also shows how much equity your business has at that point.
The cash flow statement shows how much cash your business received and spent in a given period (usually the same as the income statement period). The cash flow statement also shows how much cash your business generated or consumed from its operating, investing, and financing activities.
How to Do Accounting for Your Small Enterprise (Step-by-Step)
Here are some basic steps you can follow to do accounting for your small enterprise:
- Open a separate bank account for your business. This will help you keep track of your business income and expenses and avoid mixing them with your personal finances.
- Choose an accounting method (cash or accrual) that suits your business needs and complies with tax laws.
- Choose accounting software or system that can help you record and organize your business transactions, generate financial statements, and automate some of your accounting tasks. You can use online accounting software such as FreshBooks1 or Xero2 that are designed for small businesses and offer features such as invoicing, expense tracking, reporting, etc.
- Record all your business income and expenses in your accounting software or system. Make sure you categorize them correctly and use consistent and clear descriptions. You can also use receipts, invoices, bank statements, etc. as supporting documents for your records.
- Reconcile your bank account with your accounting records at least once a month. This means comparing your bank balance with your book balance and identifying and resolving any discrepancies or errors.
- Prepare and review your financial statements at least once a quarter. This will help you monitor your business performance, identify trends and issues, and plan for the future.
- File and pay your taxes on time and accurately. Depending on your business structure, location, and activities, you may need to file and pay various taxes such as income tax, sales tax, payroll tax, etc. You can use your financial statements and records as the basis for your tax calculations and reporting.
What Are Some Essential Accounting Tips for Your Small Enterprise?
Here are some accounting tips that can help you run your small enterprise more efficiently and effectively:
- Keep your accounting records accurate and up-to-date. This will help you avoid errors, penalties, audits, and cash flow problems.
- Separate your personal and business finances. This will help you maintain a clear distinction between your personal and business assets and liabilities, avoid tax issues, and protect your personal liability.
- Track your cash flow regularly. This will help you manage your cash inflows and outflows, anticipate any shortfalls or surpluses, and plan accordingly.
- Review your financial statements regularly. This will help you evaluate your business performance, compare it with your goals and benchmarks, and identify areas for improvement or growth.
- Hire a professional accountant or bookkeeper if needed. If you find accounting too complex or time-consuming for your small enterprise, you can outsource some or all of your accounting tasks to a qualified professional who can handle them for you.
Accounting is an important aspect of running a small enterprise that you should not ignore or neglect. By following the basics of accounting for a small enterprise, you can keep track of your business finances, comply with tax laws, and make informed decisions for your business success.