Accounting plays a leading role in running a business because it helps track revenue and expenditures. In short, it is the “heartbeat” of every business.
A business cannot keep track of what it has, whom it owes money to, and any exceptional accounts from its patrons unless it has a definite system in place. In addition, a business’s cash flow must be traced to ensure that it is not overspending and serve as a guide for pricing. Hence, embracing financial operations with an efficient accounting setup is crucial. After all, you don’t want to get too far into the game without first establishing a basic accounting system. Still, you also don’t want to make it too complicated.
Creating an accounting system does not have to be a difficult task. An accounting system can be set up quickly if a company knows what it owns and who it owes money to. So here’s a thorough guide to establishing an effective and robust bookkeeping system:
Choose an accounting method
The first decision to be made is which accounting method to use; there are two options:
- The Cash Method- states that income is counted when received (as cash, a check, or credit card charges), and expenses are counted when paid. That is the most prevalent method for small businesses, particularly those that accept payment in advance for a product or service (credit card, cash, check, etc.)
- The Accrual Method – means that revenue is counted when a sale is made. Also, expenses are calculated when the good or service is received (instead of paying for it immediately).
Furthermore, if you’re new to the concept of accounting, these methods may cause a riot in your brain. Thankfully, there are a variety of certifications available to assist you in learning more about the subject. Also, suppose you already have a business or finance-related undergraduate degree. In that case, an Accountancy Master’s Degree may be your next best bet. The program will prepare you for roles in internal auditing, tax accounting, etc., and equip you with more advanced skills that will serve your business well.
Set up a business account
A separate bank account for your business is essential for all sizes of companies. Ensure that all business transactions are routed through this account rather than your bank accounts. Similarly, never use your business bank account for private transactions. We’ve previously discussed how mixing personal and business accounts can lead to problems. A dedicated business bank account solves a slew of issues:
- First, you’ll know that every transaction in that account is a business-related transaction.
- Second, you’ll be able to automatically import transaction data from your business bank account directly into your bookkeeping software.
Pick a bookkeeping software package
Technically, a company’s books can be managed using Excel. In theory, they could even do it with a pen and paper. However, in practice, bookkeeping software is a must-have for all businesses. Manually writing or typing transactions day after day is a massive waste of time, and it is also highly error-prone. A basic bookkeeping software solution is not prohibitively expensive. It can more than pay for itself in terms of time saved and capabilities gained. When selecting a bookkeeping software package, consider factors such as the features required, the available budget, and the software’s ability to gauge your business.
Learning and maintaining your system
After you’ve decided on an accounting system, the next step is to learn and maintain it. Understanding the system will rest on the solution you’ve chosen, but sustaining the system is primarily achieved by two things:
You Must Use the System
After you’ve spent the time and effort to set up an accounting system, you must use it properly. It entails entering each transaction, such as a check, charge, bill, or refund.
Reconcile Your Bank Statement
The best way to keep your accounting system in good working order is to reconcile your bank statement with your accounting system once a month. It entails comparing each transaction from your bank account or accounts to your accounting system and ensuring that they balance. That alone will compel you to account for the company’s funds properly.
Set your “Charts of Accounts”
Once you’ve decided on a method for recording transactions, it’s time to create your “chart of accounts.” A “chart of accounts” lists all the different accounts in your accounting system—expense accounts, income accounts, asset accounts, and so on. As previously stated, an accountant can be of great assistance in establishing your initial chart of accounts. In addition, some software programs include a “wizard” that will help you create a “chart of accounts” for your company. So choose your pick of the litter wisely.
Watch out for tax obligations
When it comes to taxes, make sure you start thinking about them before earning money. It begins with the selection of the best legal entity for your company. You should also do your homework to ensure that you understand all of your federal, city, and state tax obligations, including regional fees and registration. Because you’ll separate your business expenses and keep records, deducting business costs will be a breeze. Keep track of your payroll taxes and 1099s, and pay your taxes every quarter. The best way to stay on top of your tax situation is to hire a tax professional.
Keeping track of financial statements and documents
Bookkeeping for small businesses also includes the management of important accounting documents and the maintenance of information — assets, income, expenses, and so on — that is used for financial statements. Many software options enable you to save documents and automate the documentation process as you go.
So there you have it, a fully explained guide to setting up an accounting system for your business. Also, it is essential to keep updating your system with various innovations as they will offer more solutions and will improve your bookkeeping for the better. Moreover, laying the foundation for your business bookkeeping is only half the battle. Once your system is set up, you will need to consistently monitor your finances and ensure that every record is organized efficiently. It is also wise to hire a financial expert or expand your intellectual horizons with the knowledge of finance and accounting by enrolling in specific certifications and degree programs. Whatever efforts you put into your accounting system will all open the gates of success for your business.