Accounting And Bookkeeping For Small Businesses

There's a common misconception that bookkeeping is simply the process of recording transactions for cash. While that is a very basic task, there's so much more to it. In this article, we will discuss the various aspects of bookkeeping for a small business.

Financial Statements

When looking at a business, the first thing that usually comes to mind is the financial statements, or more specifically, the financial reports. These are the documents that detail the financial health and performance of the company. They also provide information about the company's growth and profitability. Let's take a closer look at what makes up the financial statements.

The financial statements start with the balance sheet, which is a statement of the company's assets and liabilities at a given point in time. The balance sheet also includes a calculation of the company's shareholders' equity, which is simply the difference between the total value of its assets and its liabilities. Following the balance sheet is the income statement, which summarizes the company's revenue and expenses over a given period of time.

The income statement begins with the income received from sales followed by the bills that you've accrued throughout the year. The income and expenses from the previous year are broken down into the following groups:

• Operating expenses,

• Income taxes,

• Salaries,

• Advertising,

• Rent,

• Legal & Accounting Fees,

• Marketing,

• Management fees,

• Travel,

• Car and Truck Rental,

• Education,

• Health Care,

• Other Expenses.

The key takeaway from this part of the income statement is that it provides a full picture of the financial condition of the company. Without it, you'd have no idea how the business is performing and whether or not you should continue investing in it. Next is the statement of revenue, which details the money the business has actually made, followed by the expenses related to the operation of the business.

The revenue and expenses for each entity and department are then broken down into their respective categories, which form the last part of the income statement. The purpose of this part of the income statement is to show how each individual area of the business performed and to establish what the profitability is of each area of the business. If you find this part of the income statement a little tough to analyze, you can always find the profit and loss statement, or P&L for short. This is a more detailed version of the income statement, and it includes all the information from the income statement followed by a separate section that details the changes in equity (i.e., profits) from one period to the next. The following table summarizes the various parts of the financial statements:

• Balance Sheet,

• Income Statement,

• Statement of Revenues,

• Expenses,

• Statement of Changes in Equity

You'll notice that each part of the financial statement is important, and none of them can be overlooked. Being able to look at all three parts, along with any related notes, is critical for an effective audit of the business.

Basic Accounting Principles

Nowadays, even the smallest of businesses needs to keep track of their finances, and the process begins with recording the financial transactions that take place. This type of formal bookkeeping, which is known as accounting, is typically done by an independent accountant or bookkeeper and it involves the following tasks:

• Keeping track of income and expenses,

• Preparing financial statements, and,

• Performing periodic audits.

An audit is a type of review that is performed to verify the numbers that were put into financial statements, and it entails examining the procedures that were followed in order to arrive at those numbers as well as reviewing the sources and the underlying calculations to ensure that the numbers make sense. An audit is much more than a simple check to see if the books are balanced, it is a very scientific process that involves a complex series of steps, and it is very important because it allows the accountants that performed the audit to confirm that the financial statements are accurate and that there are no material discrepancies in the numbers. Once you have an independent auditor that has examined your books and verified the numbers, you can be sure that you are on the right track to becoming a more mature and well-run business.

Types Of Accounting

If you run a business, you'll find that there are several different types of accounting that you need to be familiar with. These include the following:

• Accrual Accounting,

• Cash Accounting,

• Fixed asset accounting, and,

• Traditional or Conventional Accounting.

Each one of these types of accounting has its merits and weaknesses, but in general, depending on the size of your business, you'll want to pick one of the following:

• Accrual Accounting,

• Cash Accounting,

• Fixed asset accounting, or,

• Traditional or Conventional Accounting.

If you're just starting out, pick traditional accounting, which is what most people understand when they think of accounting. Traditional accounting is easy to learn and it is very versatile, which makes it perfect for small businesses that are just getting started. The first step in learning traditional accounting is to determine what sort of business you have. This is typically done by using the income statement that we discussed earlier. Once you have determined what type of business you have, you can begin to look at the various aspects of traditional accounting, starting with the basics and then moving on to more advanced topics, such as:

• Research and Analysis,

• Costs,

• Inventory,

• Accounts Payable,

• Tangible Assets,

• Intangible Assets,

• Fixed Assets,

• Depreciation,

• Capitalization,

• Retirement Planning,

• Sale of Businesses,

• Business Start-Up,

• Operations,

• Financial Analysis, and,

• Management Discussion.

Once you have completed your education, you can work as an auditing accountant or bookkeeper and verify financial statements for a living. Alternatively, you can go the freelance route and set your own hours and working conditions. Some people prefer to work remotely, so they can set their own schedules and be their own bosses, so this is a great option for those that like the freedom of self-employment. Regardless of what you do, having a solid foundation in accounting will put you ahead of the game.