A Beginners Guide to Small Business Accounting
As a small business, you need to be extremely wary of where your money is coming from and how you’re using it. Being financially responsible helps your business stay compliant, become more profitable, and avoid any penalties.
In this post, we will take you through small business accounting processes step-by-step.
Step one: Create a bank account
As a small business, your business bank account needs to be separate from your account. This is because both accounts are subject to different forms of taxes. As a small business, your dedicated account will help you organize your earnings and plan out the expenses accordingly.
Step two: Record your transactions
A robust bookkeeping system is backed by frequently updated and recorded business transactions. Every small business needs to record its expenses and revenue as and when they take place. Transaction recording starts from a general accounting journal, the T-accounts, general ledger, and eventually the financial statements. Make sure you’re only recording the expenses pertaining to the business. These include your purchase orders, invoices, and checks. Well-prepared financial statements help you track your business growth.
Step three: The accounting method
Every business follows a specifically designated form of the bookkeeping system. Most small businesses either opt for cash-based or an accrual-based form of accounting. If you’re opting for the former, you record your income and expenses when you exchange cash. Under the accrual method, you make double entries for every transaction. You record your income and expenses when they’re incurred, regardless of whether any cash exchange occurs.
These entries are always recorded in chronological order, and the amounts of transactions are simultaneously debited and credited. If you’re using accrual-based accounting, you also need to make adjusting entries to recognize the incurred expense. It helps if you also prepare an adjusted trial balance to match the adjusting entries.
Step four: Generate financial statements.
After you’ve adjusted the trial balance, the next step is to generate the financial statements. After this, you need to make the post-closing entries so all the temporary accounts go back to zero, and you can restart the accounting cycle.
If you’re new to the concept and find the accounting process for small businesses difficult and need help, you can always reach out to Faber LLP. We are offering regulatory compliant accounting and bookkeeping services in Edmonton. Get in touch.