While a great product or service is an entrepreneurs' USP, botched accounting can lead to doom for all of it. In today's time, quite like the past, frankly, an idea is not enough. It's those with business acumen that succeed. And bookkeeping is a crucial task that needs to be performed effectively for your business's sound financial health. Let's not forget that any significant erroneous entry can not only become catastrophic for your business but also bring you under the tax department's radar. Despite all this, only 40% of small-business owners deem themselves knowledgeable about accounting.
While being an entrepreneur does not require an individual to be a seasoned accountant, a sound knowledge of bookkeeping basics can be extremely useful. Bookkeeping not only keeps you in charge of your finances but also helps you take better financial decisions. Therefore, you'd do well to acquaint yourself with bookkeeping basics as an entrepreneur. Let's check out a few basics of bookkeeping that can be a real game-changer for your business:
#1 Acquaint yourself with different types of bookkeeping accounts
Always acquaint yourself with common terminologies of the sector you are venturing in. Bookkeeping involves different account categories that encompass various transactional and non-transactional facets of your finances. A cash account is the most basic type that contains all your cash related activities. A few essential account types are:
- Receivables: Holds details of the money due from your customers for the provided service.
- Payables: Holds details of the money that you have to give.
- Inventory: Account for all the unsold products.
- Sales: Holds the record for all the sales made.
- Purchases: Holds record for all your purchases
Along with these a dedicated account for payrolls and money invested are other important account types.
#2 Selecting Your Accounting Method: Cash or Accrual
Now familiarised with different accounting types, the next step is the selection of your method of accounting. There are two prominent accounting methods - cash and accrual. These types are based on when an entry of a sale or purchase is registered.
- Cash accounting involves data entry only when cash is exchanged, whether received or paid.
- On the other hand, accrual accounting involves registering a transactional entry even when no cash is exchanged. The entry is then registered under receivables or payables based on the transaction.
For example, say you sell a product whose payment you will receive next week. Here no entry is made if you opt for cash accounting. On the flip side, accrual accounting registers a transaction with details of money due in the receivables category.Small business owners usually opt for cash accounting. But when the business expands and grows more complex, accrual accounting is preferred.
#3 Selecting a bookkeeping method
After finalizing the method of accounting, next is the choice of bookkeeping method. There are two main types of bookkeeping methods, single-entry, and double-entry bookkeeping.
- Single-entry is an easy and straightforward bookkeeping method where entries are registered only once, either as an income or expense. Here other account categories like inventory, loans, and others are tracked and recorded separately.
- The double-entry bookkeeping method requires a mandatory registration of all transactions into the journal, which are then individually recorded again under a credit or debit category based on their nature.
#4 Separating Personal and Business Transactions
Before you finally start recording transactions, know that it is vital to separate your personal and business expenses by opening a business account for your venture. It is paramount that you do not mix your business and personal expenses.
- You may miss out on any tax deductions on your filing if your personal money mixes with your business finances or vice versa.
- Tracking small expenditures while bookkeeping can be challenging when you have to keep your personal expenses in mind.
- Business money has to be spent for different purposes right from reinvesting to payroll expenditure. You can be in a tricky spot when you have got your personal finances tied up in your business.
#5 Categorize and Record Every Transaction
The criticality of categorizing and recording every transaction, however small, can't be stressed enough. It's how you ensure good financial health for your business. Small expenses that go unrecorded right from the usage of petty cash bundle up over the months and can leave you wondering about large amounts missing from your record.
Also, categorizing helps in quickly tracking your money and becomes very handy when filing taxes or in the situation of auditing by financial law enforcement.
#6 Comparing Transactions with Bank Statements
Along with bookkeeping, it is imperative to compare your transactions with your bank statements every month. This will help you in discovering any missed transaction along with verifying the amounts recorded in your journal. In the long run, this habit can become highly paying and will help you in keeping a better record of all your financial decisions.
#7 Outsourcing bookkeeping vs. Do 'It Yourself' approach
Now hiring a bookkeeper or investing in a bookkeeping software may seem like avoidable expenditure for new and budding entrepreneurs. However, taking pride in being a self-sufficient entrepreneur can backfire when you come from a non-accounting background. Initially, the lower scale of your business may make bookkeeping a relatively easy task. But with the expansion of your business activities, it becomes much more robust and complicated to deal with.
On the other hand, a bookkeeper holds years of experience in bookkeeping activity and can considerably lower your monthly and daily bookkeeping burden. Plus, the former can help you identify certain tax deduction benefits and offer management techniques that can significantly benefit your business. The decision of an outsourced or DIY approach becomes critical when considering bookkeeping. So do give it adequate thought.
Bonus: Pick The Tried, Tested & Validated Approach In Accounting Software
While most entrepreneurs find themselves drowning in the abyss of perfecting their products and services, acquiring new clients, and making deliveries, the task of bookkeeping, unfortunately, gets sidelined. It's why an overwhelming number of small-business owners, nearly 65% use accounting software to manage their finances, such as Deskera. With such an effective combination of automation and technology available to all of us in 2020, you save time and propel your business in the right direction.
Hopefully, these bookkeeping basics should help you crafting better records and keeping an eye on your business's financial health. Bookkeeping is, after all, a critical component for the successful financial flow of your business.