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Small Business Accounting Bookkeeping

Paper, Paper Everywhere

If you don’t like to track receipts and get bogged down in numbers in your personal life, then you need to get used to it for your business life.  Think of all your bills in your personal life, now multiply that by 1000 times for your import from China business. Things will get out of hand very quickly if you don’t stay on top of it.  A small business owner with bills and receipts all tossed in a shoe box is asking for trouble from the IRS.  

You are not Alone

You are not alone if you feel overwhelmed by the numbers aspects of running a small business.  There are people who like numbers and see their value in running a business.  However, there is an equal number who will do anything to avoid doing anything with numbers.

Small Business Accounting Bookkeeping 101

Bookkeeping is quite simply tracking the amount of money coming in and the amount of money going out of your business. Without this fundamental knowledge, how do you know if you are even making any money importing from China or selling cookies?

Keeping good records allows you to:

  1. Comply with tax regulations.  It is a legal requirement to run a business.
  2. Analyze your business and make improvement via financial statements and other business management tools.
     

What if you never even passed Accounting 101 in college?  Well, a refresher course may be needed. You must establish good bookkeeping skills to meet your legal requirements even if don’t ever want to run any fancy cash flow analysis on your business.

The A, B, C’s of  Small Business Accounting Bookkeeping

The parts to an accounting system includes:

  1. Chart of Accounts
  2. General Ledger
  3. Accounts Receivable
  4. Accounts Payable
  5. Inventory
  6. Fixed-Asset Accounting
  7. Payroll


    Chart of Accounts

    These are accounts or categories of things that you want to track. A chart of accounts differs from business to business.   In addition to an account description, there is a corresponding 3 or 4 digit standard account number.  Here are some examples of accounts: prepaid rent (181), prepaid insurance (161), finished goods inventory (101).


    General Ledger

    All accounts within the chart of accounts are set up in the general ledger.  The general ledger is set up in groups called assets, liabilities, owner’s equity, income and expense.   It is also a summary of all transactions made in a given period.

    You will require to keep backups or source documents of all the transactions that went into the accounts.  In case something does not add up, you can always go back and examine what went wrong in a process called audit trail.  An example of a source document is an invoice to a customer.

    General ledger entries are double entries where the financial transactions go from one place to another place.   A system of debits and credits are used to capture entries in a general ledger. Debit are on the left and credits are on the right.  

    Here is the trickiest part.  Most beginners in accounting assume that all credits increase and debits decrease.  The reality is that depending on the account type, a credit can either increase or decrease.  Similarly, a debit can also increase or decrease.  The following table summarizes debits and credits impact on some key account types.

Type of Account

Debit

Credit

Income

Decrease

Increases

Expense

Increases

Decreases

Assets

Increases

Decreases

Liability

Decreases

Increases

Stockholder's Equity

Decreases

Increases

Accounts Receivable

This account type tracks the debt owed to you by your customers due to sales of product and or services.


Inventory

This keeps track of all the products manufactured or purchased for resale.  For manufactured goods, it can be broken down further by raw materials, work-in-process and finished goods inventory.  For those of you interested in importing goods for resale, this is an important account for you to be accurate.


Fixed Assets

These are items purchased for the use in your business such as vehicles, land, machines.  The fixed assets are expensed over a period of time according to tax regulations.


Accounts Payable

This is the amount of debt owed by your company for goods purchased or services rendered to you.   You need to monitor this account closely.  A messy accounts payable means that you could miss your payment deadlines.  


Payroll

Many small businesses use an outside payroll service to keep track of the payroll records.  There are IRS regulations that govern the amount of taxes to be withheld from the employees.  The regulations can change and they differ from state to state.  Using an outside payroll can be worthwhile.

Small Business Accounting Bookkeeping: Accounting Software Comes to the Rescue

When it comes to dealing with bookkeeping and accounting, you have a number of choices:

Small Business Accounting Bookkeeping - Financial Statements

Using the bookkeeping inputs, the accounting software will assist in putting together financial statements that will indicate the financial health of the business.  This will allow the small business owner to make corrective actions accordingly.  Therefore, anyone who engages in the use of financial statements is almost always ahead of the person who blindly runs his or her business.

As a small business owner, there are three kinds of financial statements which will be invaluable for gaining insights into your operations.

  1. Balance Sheet
  2. Profit and Loss Statement, also known as P&L or Income Statement
  3. Cash Flow Analysis


    Balance Sheet

    Provides a snapshot of the company’s condition on a fixed date.  It includes: assets, liabilities and net worth or working capital.

    Assets are anything that your business owns that has monetary value.  They include things such as cash, inventory, fixed assets.

    Liabilities are debts owed by your company.  Liabilities can be either short term, owed within a year (current liabilities) or longer term, not owed within a year (long-term liabilities).

    Net Worth is the amount invested by stockholders plus the accumulated profits of the business.

    This is the accounting relationship that provides the insight:

    Assets - Liabilities = Net Worth

    If a business has more assets than it owes in liabilities, then it’s net worth is positive.  But if your assets are less than your liabilities , then your net worth is negative.  Quite simply, net worth positive is good but net worth negative is not so good.  The net worth is an indication of the value of your company.

    Income Statement

    The income statement shows your company’s financial activity over a period of time such as monthly, quarterly or annually.  
    It measures all your business expenses versus all your revenue sources for a given time.

    By monitoring your income statement, you can pick out the weaknesses in your operations and make changes accordingly to improve your profitability.  You can also compare your current incomes statements with previous statements to see trends to your business.

    Given the power of an income statement, you should run an income statement monthly.  The totals from your revenue and expense journals are transferred to the appropriate P&L columns.  

    As a small business owner, you should not be investing your time manually creating the financial statements (even if know how to).  I will recommend accounting software one last time because with the click of a button or two, you can easily create the financial statements.  Even if you an accounting expert, that is still much quicker than trying to manually create statements by yourself.  Go use technology!


    Cash Flow Statement

    The Cash Flow Statement
    tracks when cash is expected to be received and when it must be spent to pay for bills and debts.  If cash flow is positive, it indicates that the business owner can fund its cash flow needs internally.  If cash flow is negative, it will require an infusion of cash from outside the company to keep it going.  

    The cash flow statement consists of 4 parts:  

    Net cash from operating activities - internal activities that produce cash or require it.

    Net cash from investing activities -  discretionary investments e.g. Purchase equipment.

    Net cash from financing activities - external sources and uses of cash e.g. sales of stocks.

    Net change in cash and marketable securities - the above three categories are used to calculate Net change in cash and marketable securities.

Numbers Photo Credit:  Ulrik De Wachter