The Best Accounting Practices for Small Businesses

Mar 01, 2020 · 5 mins read
The Best Accounting Practices for Small Businesses
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Having a business requires a lot of effort in some of the areas that we might not like as much, such as financing and accounting.

Once you start running your small business you’re glad because you’re watching it grow and you’re getting the money you need to live and to keep it going.

But being a business owner is much more than just selling a product or promoting your services to gain profit since there are many aspects involves that should be considered to make it

One of these is accounting, which is something that many tend to avoid until it’s completely necessary, but you don’t have to do this since following the best accounting practices could make your business stronger and it will save you some troubles in the future.

Why is accounting important?

If your small business manages money then you need to do the accounting so you can measure your revenue, make wiser decisions with the profits, know how to invest and know how much money to expect, so you can be prepared for everything.

By doing your business’ accounting correctly you’ll be able to manage your finances, and this is necessary to get success because if you don’t know how to handle the money you’ll be ruined very soon.

How to do accounting for your business?

Every business needs to do accounting, and perhaps you’re doing it now, but you’re probably not following the basic rules that can make you this process a lot easier for you.

There are several ways of doing accounting, but you need to know how to do it properly so you can save time and you can get the best result with little effort.

Have a savings account for your business

One of the mistakes that many small business owners make is that they don’t separate their business and personal expenses, so they end up taking money from the business for their pleasure.

The first thing you have to do is opening a savings account for your small business, and don’t use it for personal expenses.

By doing this you’ll be more organized regarding your expenses, and you’ll know exactly how much money is coming to your account and what you’re using it for.

This is very important since if you only have one bank account you won’t know how to differentiate your business deposits from other ones, and this is a big risk since you’ll spend it without any control.

Track every expense you make

Once you have a bank account for your small business you’ll be able to track every expense more precisely, and this is another best practice that you should follow.

You should track every expense you make; it doesn’t matter if you used it for something small since every expense it’s important for your small business.

Keep your purchase receipts

You should keep every receipt that reflects the expenses since you’ll need them as proof for tax collection or perhaps for an audit.

Since you’ll probably have a lot of receipts you need to find a way to organize them efficiently.

You can have a folder where you store the receipts by date, this way you’ll know how to look for them when you need them. Make sure to place this folder in a place where doesn’t get damaged by water or fire.

Also, you can make a digital copy of those receipts, just in case, if anything happens to the printed ones.

Work on the financial documents

There are three documents that you have to work on so you can have your accounting well-organized: the balance sheet, the income statement, and the cash flow statement.

Balance sheet: this document has three sections: the assets (liquid and non-liquid), liabilities, and equity. In this, you’ll reflect the worth of your small business and you have to update it regularly.

Income statement: with this document you’ll get an overview of your small business, whether is generating enough profit or, on the contrary, is making you lose money. Here you’ll include the expenses, revenue, losses, and net income.

Cashflow statement: as its name implies, with this document you’ll see how your small business handles the incomes and how you spend it.

These documents are highly technical, and you need to have a lot of accounting knowledge, so it’s best if you get someone who can explain them to you so you can do it by yourself in the future.

Choose an accounting method

To make accounting easy you’ll have to choose between the two methods available: the cash basis and the accrual method.

The cash basis method consists of recording on the income statement only when cash is received and record expenses only after they’ve been paid.

And if you use the accrual method, you’ll report the revenue and the expenses despite no cash has been received or paid out.

The main difference between these two methods is the day where you make the entry for the revenue or the expenses. You’ll have to choose the best one for your small business since both of them have their advantages and disadvantages.

Commit to an accounting schedule

Once you’ve decided the method for your small business and you’ve learned how to work on your financial documents, the next step is to establish a schedule so you can dedicate the right amount of time to your accounting.

You need to designate a few hours weekly to your accounting, so you can have all of your documents updated and you can have an overview of how your small business is doing regarding financing.

Be strict with your schedule, and make sure to write down all of your sales and expenses, because otherwise, you’ll end up spending a lot of time trying to figure out how to organize everything.

If you do your accounting regularly, you’ll probably start to enjoy it since you’ll see the growth of your small business and you’ll be aware of the money that you handle.