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Blog » Small Business Accounting and Bookkeeping Basics You Can’t Ignore

Small Business Accounting and Bookkeeping Basics You Can’t Ignore

Last updated: 06 Oct, 2023 By | 6 Minutes Read

accounting and bookkeeping for small business

Accounting and bookkeeping for small business plays a crucial role. However, businesses often lack a basic understanding of books. In the long run, have basic knowledge of accounting is crucial to secure your finances.

No doubt, small business owners are masters at their work, but what about the investment and returns that work simultaneously to gain huge profits?

According to the Small Business Administration, over 50% of small businesses fail in the first year, and 95% fail within the first five years. And the most common reason is a lack of bookkeeping knowledge among the owners.

Without a proper accounting system, it’s not possible to survive because a good financial plan is a roadmap that shows us exactly how the choices we make today. Well, I think if a small business has any miscalculation of its financial position, you can see the adverse effects of it in the business workflow.

Small businesses face higher failure rates than success, emphasizing the need for owners to heed essential do’s and don’ts when starting their ventures.

Remember one thing “Creative accounting and bookkeeping is the magic wand of restructuring”. You can take your small business to the next level with success if you know business accounting basics. It is a language of any business and using a variety of basic accounting practices you can increase the transparency of volatility in earnings.

So learning the way to create and read balance sheets, cash flow charts, and other financial records has become imperative for small businesses to survive in the competitive market.

Accounting and Bookkeeping Basics for Small Business Owners

Cash Account

Cash is the blood of any business and every business transaction passes through the cash account, this ledger shows how much cash a company holds. The owner should review the cash account thoroughly to understand the financial position of the business.

On the basis of a cash account, you can have an idea before investing in any stock, securities, or bonds.

Accounts Payable

The outstanding amount is like a termite in any business. It’s necessary to track the pending bills and have a clear idea of the payments that need to be done.

Quality bookkeeping assists you in making timely payments or early payments, which is a good sign for your business.

Accounts Receivable

Account receivable simply means the amount borrowed from you. Every business should keep a record of its debts and try to recover the amount as soon as possible.

Poor bills receivable can lead the business to increase liabilities that are bad debts, which means insolvency of the debtor.

Bank Reconciliation

The term reconciliation in accounting means verifying, so bank reconciliation is the verification of the statements that you have maintained and the bank statements.

This helps you to avoid any kind of fraudulent transaction and gives you the right picture of your income and expenses.

Inventory Account

Inventory stores stocks of products before selling. It has a different entry in a separate column in the books. Small businesses who are into selling goods should keep track of revenue generation.

Payroll Expenses

Managing payroll expenses is one of the crucial tasks, as you have to look after the government tax policy and other responsibility. And to process every employee’s salary, leaves, etc. is something you cannot neglect at any cost.

Equity shares of the owner

Equity share is the investment made by the business owner in the assets of the firm. Usually what happens is “Small business is owned by a single person or a group of people, so there’s no share of stock exists”, according to Epstein.

Instead, these investments are shown in the capital account and if any amount is withdrawn for personal use, it is mentioned in the drawing accounts of the owner.

Sales Account

To have an idea of your Sales that keeps on fluctuating, it is necessary to maintain the entries in your book of accounts regarding your sales. This will help you to improve your sales and increase business productivity.

Loans Payable

If any small business owner has borrowed the amount for business from any financial institution or bank, this account will help them to keep track of the due amount.

Retained Earnings

“Beware of little expenses, a small leak will sink a great ship”, every small business should be cautious about expenses, in order to avoid risk related to finances, and the best way is to re-invest the revenue generated by the firm since the business was started.

Managing this cumulative amount is difficult, but investors and lenders should keep track of retained earnings for future crises.

Think Big, Stay Positive, and Work Hard with Outsourced Accounting Services

Many small businesses have a myth that accounting is their biggest rival. However, with a basic understanding of accounting and bookkeeping for small businesses, you can achieve milestones. With the right knowledge, you can make informed business decisions.

Are you having problems managing the accounting even after hiring a professional accountant? You might need an entire team at an affordable cost. Get in touch with Cogneesol, a leading accounting outsourcing company. To know more about how we can help you rectify accounting issues with our small business accounting services, contact us at +1 833-313-3143 or write to [email protected].