Small business accounting basics
If you own a small business, you know there is no shortage of tasks that need to be done. You are responsible for everything — product creation, sales, operations, customer service and regulatory compliance. Amongst all these activities, one task that often gets ignored is the small business accounting.
Bad accounting is one of the main reasons why businesses lose money.
Careless accounting can cause you to pay heavy penalties to the regulatory authorities as well. To avoid these issues, we will discuss small business accounting practices that can save you money.
Top 7 small business accounting tips
Here are 7 tactics that might help your business save money while properly maintaining the business accounts.
- Don’t mix business and personal expenses.
- Automate your accounting practices.
- Track every single expense.
- Accurately record all income.
- Follow up on invoices and receivables.
- Accounting of inventory.
- Set up a payroll system.
Good accounting is a habit, one that pays off by saving you money and time at tax time.
1. Don’t mix business and personal expenses
Keep a separate business account with the bank to run your business. This will help in separating your business expenses from your personal expenses and make for easy tallying up at tax time.
The reason is because doing so will falsely decrease the tax obligation of your business and you will risk a fine. If you use an asset such as your computer or home for both business and personal purposes, then you can proportionately deduct the expense from your business income.
If you want to contribute funds to your business, then document the contribution properly and transfer the funds from your personal account to the business account.
2. Automate your accounting practices
Every small business should use accounting software for bookkeeping purposes because it drastically reduces the time and effort needed to handle routine accounting tasks. You can use it yourself or give access to your accountant or bookkeeper.
Accounting software assists in:
- Tracking and categorizing both income and expenses
- Sending invoices
- Creating reports
- Reconciliation of data
- Periodic filing of Goods and Service Tax (GST) returns
Some of the most famous small business accounting software include Quickbooks, Tally Solutions and Zoho.
3. Track every single expense
Keep receipts or invoices of your business expenses and record them regularly in your accounting software. Don’t let them pile up — set aside a regular time each week to enter them in. You’ll be glad you’ve done this when it’s time to file GST taxes.
Tracking your expenses on a regular basis will save you from anxiety when the tax filing deadline nears.
Label and categorize each expense as you log it to ensure that you can maximize tax write-offs and credits. Accounting software will also store copies of invoices that you’ve paid so they’re all in one place at tax time.
By tracking your expenses, you can also take steps to reduce them and do accurate financial forecasting.
4. Accurately record all income
Recording each and every inflow of cash into your business is crucial to calculate your net income accurately. Income might include:
- Revenue from sales of goods or services
- Sale of assets
Any underreporting in net income can attract heavy penalties from tax authorities. To avoid this, try to connect your accounting software with your business bank account so that you can easily capture and categorize the funds as you receive them.
5. Follow up on invoices and receivables
Accounting software can also help in creating invoices that request payment from your customers. But it’s your responsibility to follow up with them and get the payment for the product or services provided.
You should try and shorten the receivable period by giving incentives or discounts to your customers for early payments.
Always keep an eye on your total receivables and long-pending ones since this might cause a cash crunch for your business. In such a case, you might have to borrow money from a lender to keep your business going.
6. Accounting of inventory
Inventory management involves tracking the stock of raw materials, work in progress and finished goods.
You must keep track of the:
- Dates purchased
- Stock numbers (if any)
- Purchase prices
- Dates sold
- Sale prices
Proper inventory management helps in reducing and detecting theft, getting insurance for the stock on your premises, applying for working capital loans and reporting the inventory as your assets in accounting books.
There are many efficient inventory management apps that can help you in managing your inventory at various stages.
Editor’s note: eCommerce stores set up with GoDaddy’s Online Store have built-in inventory tracking for easy monitoring and reporting by the business owner.
7. Set up a payroll system
Paying employees, including yourself, might represent the biggest expense of your business. Take note of each employee’s cost to the company and maintain it properly in your accounting books.
Your accountant or accounting software should be able to help you calculate and pay your payroll taxes, which have different rules and deadlines than income taxes.
Learn a few good habits now
In this article, we discussed the tips and tricks for efficient small business accounting and its advantages for business owners. Just remember:
- The owner is responsible to maintain the accounts accurately and should regularly update the books to avoid any penalties.
- There is helpful accounting software available in the market that makes the bookkeeping tasks simple.
Alternatively, you can get in touch with a good accountant in your town and hand these duties off to them.
Good financial habits are the foundation of any successful business. The better you or your accountant understand your finances, the greater your chances of long-term profit.