Finance is one such area that requires undivided attention. An entrepreneur has numerous operations to take care of while doing business. However, the may not be aware of the accounting jargon, which may set him back. Read more to read a comprehensive guide about the basics of bookkeeping.
An entrepreneur can be proficient in multiple activities. An entrepreneur can handle all the activities efficiently, be it marketing the products, managing the team, customer interactions, or more. However, it is not a cup of tea for everybody when it comes to bookkeeping and Small Business Accountants service. Some basic skills and terms must be known for a businessman if he does not want to fail in the area.
Bookkeeping and accounting are like fuel for vehicle, blood for the human body, without which no organ can function. If you do not possess a clear financial picture of your firm, how will you formulate plans for the future? How will you decide whether to expand, increase production, set budgets, or anything else? You will get lost in the maze of accounting without the knowledge of the basic bookkeeping terms.
Properly maintaining your records give you a comprehensive view of your finances. The balances in your accounts do not constitute accounting. Its scope is broader and includes tax audits and government compliance as well. Here is a simple guide that illustrates the basics of bookkeeping and accounting for entrepreneurs:
What is bookkeeping?
Bookkeeping is an act of recording the transactions and dealings of a business into physical books or accounting software. The online bookkeeping services help you track your expenses and incomes and the tax deductions available.
What is accounting?
Accounting is the act of identifying, recording, classifying, analyzing, and reporting a business’s financial and non-financial information to its stakeholders.
Difference between accounting and bookkeeping:
In simple terms, the bookkeeping process involves identifying, classifying, and systematically recording the transactions. It requires updating the accounts regularly with the day-to-day financial activities. It lays down the foundation for accounting.
Accounting involves summarizing, analyzing, interpreting, and reporting the financial information to the stakeholders. It relies on the bookkeeping process for efficiency and accuracy. You can know about the financial position, status and forecast with these reports.
The importance of bookkeeping and accounting for entrepreneurs:
- Legal compliance:
The first and foremost reason for bookkeeping and accounting is complying with the legal regulations. Only when you know the income earned during the year (net profit) can you calculate the amount of tax to be paid. Accuracy is of utmost importance in calculating tax. If you miscalculate your tax liability due to errors or omissions, you might face heavy penalties from the government. Also, payroll compliance is a part of accounting and requires precision.
- Tracking expenses:
Entrepreneurs need to know where their money is going. It tells you whether you are receiving as much as you are spending. Also, it allows you to track down unnecessary costs. You can verify your capability to pay the upcoming dues.
- Availing of tax deductions:
Accurate and up-to-date bookkeeping and accounting can help you avail of the applicable tax deductions from the taxable income. If you maintain your documents correctly and present them to your CPA on time, they can help you claim as many deductions as possible. Also, you do not have to worry about answering the auditor because the records will speak for themselves.
- Reporting to stakeholders:
Maintaining the books is also essential because the reports need to be presented to the stakeholders. The balance sheet, income statement, cash flow represent the numbers derived by online bookkeeping services. Investors would want to know your status to decide their future course of action. The lenders assess your financial performance and verify your creditworthiness through the records. The government uses the information to impose rules accordingly.
- Identification of errors:
When you regularly update and monitor your entries, you can discover the discrepancies that may adversely impact your results. Delaying the reconciliation process can bury the mistakes underneath other transactions. Therefore, you can ensure no errors harming your finances with quality bookkeeping and accounting services.
From where does the bookkeeping process begin?
The bookkeeping and accounting process is not as easy as it sounds. However, the following points depict a breakdown of this complex process into seven easy-to-follow steps:
- Separate recording of personal and business transactions:
The most significant rule of bookkeeping and accounting for businesses is to keep their transactions separate from the company. Your bank account must only deal in transactions related to the firm. The reason behind this rule is that you cannot separately determine the business liability. You cannot track the expenses incurred and incomes received by the business and individually. You might lose money because you cannot avail of tax deductions. Or you have to pay your CPA more due to his hard work in separating the transactions.
You might not be able to differentiate between business and personal taxes. Overall, you might suffer if you do not distinctly record the numbers from the beginning.
- Selecting a bookkeeping system:
Bookkeeping and accounting entail two accounting systems, namely single entry and double entry. Single entry is a primary, quick, and beginner-friendly method for a business. The assets, liabilities, expenses, incomes are separately recorded. The double entry system is a more popular and convenient choice for firms. Despite its debit and credit complexities, it is a better fit for firms in the long run.
- Selecting a suitable accounting method:
Cash and accrual methods of accounting are available to firms. In the cash method, only cash inflows and outflows are recorded. You can quickly know the cash in hand with this method.
However, in the accrual method, the transactions are recorded as and when they occur. It means that cash flow is not necessary to record the entry. Here, you prepare accounts receivables, payables, etc. It provides a realistic view of the company’s finances.
- Categorizing the transactions:
You should be familiar with the accounting language and categorize the transactions accordingly. There are assets, liabilities, revenue, expenses, and several other categories housing similar-natured items. Prior categorization saves your time and resources.
When you choose to take the bookkeeping and accounting into your hands, you can use templates from software solutions. However, you might still require guidance from a certified public accountant.
When you outsource online bookkeeping services, you hand over the matters to a professional company to focus better on your growth plans. Such companies have all the expertise and vast experience to handle your books.