Bookkeeping for a small business is similar to any size business. There are prescribed steps to follow (known as the accounting cycle). Differences occur because of the complexity and needs of the business and the method, usually manual or computerized, used to do the bookkeeping.
It is becoming rarer and rarer that a company keeps a manual set of books where columns of numbers are kept on paper and stored in large binders. Today, bookkeeping is often accomplished on a spreadsheet or by using a computerized bookkeeping system. Most large businesses have been using computers for decades to perform these tasks and small businesses are following suit.
Regardless of the size of the company or the method used to keep the books, bookkeeping always involves the following steps:
A business conducts its operations to make a sale. To make a sale, inventory and assets must be purchased and people paid to do the work. In addition, there is overhead, such as rent, utilities, wear and tear on machinery, and expenses of getting the product or service sold, such as advertising or commissions.
All business activity involves a transaction, and every transaction must (although in many businesses it’s not) be supported by some sort of document. A sale should be supported by an invoice or sales receipt. A purchase should be supported by a receipt or vendor invoice. Payroll is supported by timecards or salary information.
The first step in the bookkeeping process is to identify the transaction using these supporting documents. Procedures for handling these documents vary, but at a minimum they should show the date of the transaction, the amount, the people, or business involved and the business purpose if it is not readily apparent.
Once recorded, as discussed below, the supporting documents must be stored or filed so they can be referred to if necessary, in the future.
Once a transaction has been identified, it needs to be recorded in a journal. A journal (sometimes referred to as a book of original entry) summarizes all the transactions that have been identified in one location by date.
It is simply a line of information that shows the details of the transaction, especially the date and amount, along with a description of the transaction in the form of a code also known as a general ledger account number. There are several types of journals:
At the end of an accounting period, again, usually monthly, the journals are totaled, and the amounts are transferred to the General Ledger. A General Ledger is a summary of all transactions by category (account).
For example, cash, sales, inventory, rent, labor, repairs, etc. each have their own page in the ledger where only those transactions are recorded. The General Ledger essentially keeps a running record of the transactions by category and their totals (balances).
Once the General Ledger has been posted, the totals for each category are summarized in a columnar format known as a Trial Balance. The Trial Balance shows the totals as debits or credits (pluses and minuses if you will) and the totals of each must be the same; that is, in balance.
Normally, accounting principles require that some adjustments be made for certain types of transactions. These are typically “non-cash” transactions. Some examples would include, salaries incurred but not yet paid for at the end of the accounting period which must be recorded to give a more accurate comparison of income and expense, or depreciation, which is a non-cash transaction that reflects the wear and tear on things like machinery or buildings which are used over a long period of time.
An Adjusted Trail Balance is a new Trial Balance after making the adjustments.
Financial statements are prepared from the amounts on the Adjusted Trial Balance. A standard set of financial statements would include a Balance Sheet, which is a snapshot of what the business owns, what it owes and what is left over for the owner at a specific point in time; and an Income Statement or Profit and Loss Statement which shows the results (profit or loss) of operations over a specific period of time (monthly, annually, year-to-date).
Financial statements are prepared for management and/or external users (banks, investors) and usually conform to Generally Accepted Accounting Principles.
However, management may require special reports on a timelier basis used to help make business decisions that external users would never see, but they still come from the same bookkeeping process being described.
Closing the books is the process of getting them ready for the next accounting period. The adjustments are typically recorded in the General Journal and in the General Ledger.
In addition, depending on the needs of management, but certainly at least annually, the income and expense accounts are reset to zero so that the results of operations can be tracked for the new period. The closed amounts are included in the owner’s accounts on the balance sheet since the income or loss affects the value of their ownership.
Bookkeeping is a straightforward but crucial task of any business. While the method of performing the tasks can vary (manual versus computer for example) the steps rarely change.
Large companies have an accounting department, managed usually by a Controller, to perform these tasks and they are often computerized. Smaller companies may have a family member doing the bookkeeping. Some companies don’t do any bookkeeping at all.
At a minimum, the business owner should have some way of summarizing the financial information of the business so that a tax return can be prepared. But there are many other reasons to “get the numbers” right and a small business financial manager, such as a Las Vegas CPA, can help with these tasks.
Owning a small business is a dream of many Americans. Being your own boss is attractive and can be financially rewarding. The truth is that it is not easy, and many businesses fail or do not meet the expectations of the owner(s) that were present at the beginning. Some may mishandle managing small business finances without even realizing it.
A financial statement can take many forms.
The first question to ask is whether the financial statement is for personal or business use. Individuals often have to prepare personal financial statements if they are looking to obtain credit, usually for a large purchase such as a vehicle or home. Often the lender will have a preprinted form that the individual will simply fill out with the necessary information, such as their checking and savings amounts, investments or real estate and their debts, such as credit card balances, car loans and mortgages. This financial statement is only required when needed.
Businesses prepare financial statements in a somewhat similar fashion but the information is much more detailed, prepared on a periodic basis rather than when needed and can contain information that is useful to both an outside party or the owner or management of the business itself. Here we will focus on the need of a business to prepare a financial statement and how it is prepared.
Your business may need internal controls. Internal controls are the policies and procedures a business takes to safeguard its assets.
A key to running a profitable business is to make sure that the assets, especially cash, are protected. Assets are the lifeblood of any business large or small. They represent the items owned by the business that lead to the production of income. If they are left unprotected, then the profitability of the business is limited or in jeopardy.
At some point in time, a business owner has to decide whether to seek help in growing their business. They are going to need employees or independent contractors or both for the business to grow. An employee is hired by a business to perform a specific task or tasks. So is a contractor. The difference depends on several factors, but the reason is specific.
Taking the home office deduction can be complex and vary between individual small businesses. For more information on whether you should take the home office deduction, please consult with your licensed CPA.
Many small businesses are based at home. There are numerous stories about large and successful businesses getting their start around the kitchen table or in a garage. The reason for this is primarily financial – the business owner doesn’t have to pay rent for often expensive office space, especially if much of the work can be done at home. Working from home is both popular and necessary these days and there can be some tax benefits available under the right circumstances.
On March 25, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. A summary of the provisions of the law can be found here.
In the business world, several terms relate to the financial affairs and functions of a company. The most common are Certified Public Accountant, Chief Financial Officer and Controller. Depending on the entity, this could be one person or three different individuals. The essential difference between these three individuals, however, is CPA is professional designation and the CFO and Controller are job titles.
Managing cash flow in a small business is crucial to its success. Cash flow management includes techniques for collecting cash, budgeting to plan for cash needs, utilizing outside sources such as banks or investors to supplement cash needs, and even legally minimizing business tax liabilities. Techniques for dealing with these functions can range from the simple to the complex, depending on the nature of the business.
However, one of the most basic ideas is to understand the difference between profit and cash flow.
