How do I keep accounting books for my small business?
How do small business keep accounts?
Small business bookkeeping: Small businesses may prepare accounts in order to calculate whether or not they are working profitably for their own information just like self-employed bookkeeper, but pre-eminently they do it to comply with the demands of the relevant tax authorities. Accounts are prepared from what are known as “Books of Prime Entry”, which essentially in the small business context, means a “Cashbook”. Greater complexity results when computerized ledgers are used, but the entry point to them is often a “cashbook”.
Simply stated in small business bookkeeping guide that a cashbook records the transactions undertaken by each different manner in which purchases are made. Therefore if a business makes purchases by cash, it requires a “Petty Cashbook”. If it makes purchases through the medium of a bank account it requires a “Bank Cashbook”, indeed a separate one for every bank account it operates. If the business purchases by means of a credit card account then it requires a “Credit Card Cashbook”.
Entries for Payment Transactions in Small Business Bookkeeping
Self-employed bookkeeper can purchase pre-printed “multi-column” cashbooks from stationers and they usually include columns in which to record a transaction date, a brief description, a “Total” and various different types of expenses known as “Analysis” columns.
Payments are recorded on the right-hand page, and with some care and attention to detail it is perfectly possible for the proprietor of a small business to write such records to a standard acceptable to an accountant, thus making a considerable saving in accountancy fees in terms of small business bookkeeping. But for a cashbook to be useful to an accountant it must be:
Discrete – only those transactions occurring in the bank account it records must be entered.
Complete – that is every transaction made in a bank account must be recorded in the cashbook appropriately.
Analysed – transactions of the same type (e.g. Wages, Materials, Road Fuel etc.) must be entered in their own separate analysis column and then summed at the foot of the page.
Reconciled – the entries made in the cashbook must be checked with the bank account or credit card account statement, corrections made, and an account balance calculated.
Entries for Receipts Transactions in Small Business Bookkeeping
Self-employed bookkeeper need to understand that receipts are recorded on the left-hand page. When money is paid into a bank account, be it cash, cheque or transfer it must be recorded in the same way as for payments.
Sales Tax / VAT Entries
When a small business accounts for its periodic sales tax (VAT in the UK) on a cash basis, then the amount of tax payable (or receivable if you normally reclaim tax) can be calculated by deducting Tax Paid from Tax Received. Do not forget to make any necessary statutory adjustments e.g. Scale Charge for private use of motor vehicle.
Balancing the Entries
At the end of the accounting period self-employed bookkeeper need to check that the sum of the individual analysis columns equals the sum of the total column. Add to the previous month’s closing balance (which may have been negative) the total received and deduct the total paid. The result is the closing cashbook balance at the period end.
Basic Bookkeeping Set Up for Bookkeeping Solutions
Before computers and complex bookkeeping and accounting programs accounting systems were all on paper in a format called a ledger book. This is very similar to a spreadsheet and fairly straightforward for any business that is small enough. Setting up this bookkeeping system is rather simple and only requires a few accounts. Here’s how to do it!
Basic Bookkeeping – List All Accounts
The accounts shouldn’t be too many or it will get confusing. The more that one understands about bookkeeping and accounting, of course, the more accounts that can be tracked in a spreadsheet or manual ledger system. Begin with the easiest and most obvious accounts. These are:
Bank account – probably the most important, as it is a control account that almost everything else flows through.
Revenue – this is everything the company brings in, regardless of source
Sales Tax Collected – this is the amount over the base price that something is sold for that is remitted to the government for taxes charged on a sale the company makes.
Sales Tax Paid – this is the amount that the company pays on its supplies, materials, rent, and any other taxable goods that it pays for.
Cost of Goods Sold – this is the materials or items that are sold directly to a client. There could be sub-accounts here, depending on the business. For most retail businesses this is simply the inventory that is sold. For any manufacturing business it is the cost of materials and labour that go into creating the products sold.
Office Expenses – paper, pens, staplers, and so forth.
Rent – for home based businesses this is the portion of household expenses allocated to the business, as per tax agency guidelines.
Auto Expenses – this is NOT the cost of an automobile that is bought for the company; rather, it is the expenses of operating the company vehicle. If it is a personal vehicle being used for company purposes, it is easiest to track the mileage used for each of business and personal expenses and apportion the expenses according to the usage. If the company is incorporated, then one can use a per mile (kilometre in Canada) rate, up to the maximum determined by tax agency guidelines.
A simple small business may have only these accounts, at least if it is a proprietorship. Such a business wouldn’t require a payroll account if there were no employees other than the owner. However, a corporation would.
More Complicated Accounts in Bookkeeping
Payroll accounts can become complicated, as there are income taxes, and other deductions that the payroll is likely subject to. In this instance, make sure to get any federal or state guides that are available in order to set up all of the accounts for payroll. These should often be tracked separately, as they are very important to track correctly and fully for tax purposes.
As well, there may be fixed assets. These are long term expenses – items that must be amortized (depreciated) over more than one year. As these are more complicated, it is best to get help or read further before tackling these accounts.
Loans and credit cards are other accounts that some small businesses may have. This is like tracking account payable, which is the amount borrowed and owed to vendors.
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