Starting a business is easy, but running it efficiently and profitably is a different story. You can’t run a healthy, successful business without keeping the books in order.
It doesn’t matter if you hire a CA for your business. As the owner, you have to be aware of your business’s finances and have a good understanding of bookkeeping.
In this guide, you will understand the basics of bookkeeping for small businesses: what it is, why is it important, and how to start today.
Bookkeeping for small businesses: What is it?
Bookkeeping is the lifeline of your business – the backbone that supports all your financial decisions.
It’s the systematic recording of all your business’s financial transactions, from sales and expenses to payments and receipts. By maintaining accurate and up-to-date records, you gain valuable insights into your business’s financial health, making it easier to make informed decisions and plan for the future.
Bookkeeping for small businesses ensures that the records of each financial transaction are up-to-date, correct, and comprehensive.
Bookkeeping in Accounting
Before explaining further on bookkeeping, it’s essential to understand its relationship with accounting.
Often mistaken as the same thing, bookkeeping and accounting are two different yet interdependent parts of business finances.
Bookkeeping is a segment of the whole accounting system. Bookkeeping is the foundation for your accounting as it contains the proper records of all financial transactions. On the other hand, accounting involves organizing, summarising, classifying, and reporting the financial transactions of your business.
While bookkeeping is the craft of recording, accounting is the art of analyzing.
Power of Numbers: Importance of Bookkeeping
For a business owner, there are a number of reasons why having a proper bookkeeping system is essential.
Here are our four favourite reasons which makes bookkeeping so important.
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You will need it for all your business Taxes!
In India, you need to maintain proper financial records not just for good practice; but also because it’s a legal requirement.
The Income Tax Act and Goods and Services Tax (GST) laws necessitate keeping organized records for filing accurate tax returns and staying compliant with tax authorities.
And bookkeeping is “the not-so-secret” weapon to help you with this.
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You need to know where your money is going
Keeping your books in order gives you a clear view of your business’s financial position.
Are your sales going up? Do you have enough money next month to pay vendors? Is your cash flow increasing or decreasing?
Only proper bookkeeping can tell you for sure.
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You need to make Smart Decisions
With accurate bookkeeping reports at your fingertips, you can make informed decisions.
Whether it’s investing in new equipment, expanding your product line, or hiring additional staff, bookkeeping ensures you have the necessary information to evaluate the potential risks and rewards.
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You need it for Budgeting and Planning
Sound bookkeeping records allow you to create realistic budgets and make achievable plans for your business’s growth and expansion.
You can allocate resources effectively and set achievable financial goals.
Basic Tasks Involved in Bookkeeping for small businesses
Bookkeeping, in its essence, encompasses the tracking, recording, and organization of all financial transactions within a business.
The individual assigned with this crucial role holds the responsibility of monitoring every business transaction.
Let’s take a look at some examples of bookkeeping tasks:
- Creating invoices for goods sold or services provided to clients.
- Logging receipts received from customers.
- Verifying and recording invoices received from suppliers.
- Documenting payments made to suppliers, vendors, and much more…
Types of Bookkeeping:
Bookkeeping for small businesses can be categorized into two main types:
Single Entry Bookkeeping and Double Entry Bookkeeping.
Single Entry Bookkeeping: This method is suitable for small businesses with straightforward financial transactions. It involves recording each transaction only once, either as income or an expense, without considering the offsetting account.
While it might be simpler, single-entry bookkeeping can lead to inaccuracies and make it challenging to identify errors or detect fraudulent activities.
Double Entry Bookkeeping: This method is the gold standard for accurate financial recording. Every transaction is recorded in at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) is always in balance.
Double-entry bookkeeping provides a more comprehensive and reliable view of a business’s financial position, making it easier to identify errors and maintain proper checks and balances.
The type of bookkeeping that’s best for your business depends on the complexity of your transactions and your desire for accuracy.
Principles of Bookkeeping
To ensure consistency and reliability, bookkeeping for small businesses follows several fundamental principles:
- Entity Principle: Business transactions are recorded separately from the owner’s transactions, maintaining a clear distinction between the business and its owner.
- Cost Principle: Assets are recorded at their historical cost, ensuring a fair representation of their value.
- Revenue Recognition Principle: Revenue is recorded when it is earned, not necessarily when the cash is received.
- Matching Principle: Expenses are recorded in the same period as the revenue they helped generate, providing a more accurate picture of profitability.
How to Start with Bookkeeping for Small Businesses
Now, let’s briefly touch upon the basics of recording in bookkeeping. The process involves a series of steps:
Step 1: Separate your business and personal expenses
First things first, it’s essential to keep your business and personal expenses completely separate. Having a dedicated business bank account will do the trick.
Why? Well, if you mix them up, you could face problems like personal liability for business debts or missing out on crucial deductions when it’s tax time.
Step 2: Choose a bookkeeping system
There are two main methods: single-entry and double-entry bookkeeping. Single-entry is straightforward and suitable for small businesses. Double-entry is more comprehensive and preferred for established businesses. Most accounting software these days use double-entry.
Step 3: Choose an accounting method
Cash or Accrual Decide whether you want to track your transactions when money exchanges hands (cash) or when bills are sent and received (accrual). Cash accounting is easier, while accrual accounting gives a more realistic view of your business’s financials over time.
Step 4: Choose the right tools
To keep track of your transactions, you need to categorize them properly. Consider using a mobile-based bookkeeping service like the MyBusiness app for an easy accounting experience.
Step 5: Make sure your transactions are categorized
Categorizing your transactions accurately is vital for claiming deductions and making your life easier during audits.
Get professional advice when setting up your system to ensure it aligns with your industry standards.
Step 6: Choose a system for storing your documents
Keep your expense receipts and records organized using mobile applications like MyBusiness.
Bonus Step: Make bookkeeping a habit
Set aside a specific day each month as your ‘bookkeeping day.’ Use that time to stay on top of your financials, reconcile bank statements, review financial statements, and make any necessary changes.
Remember, it might not always be easy, but mastering the bookkeeping process is vital for your business’s financial success!
FAQs
Q: What are the common bookkeeping mistakes to avoid?
A: Common mistakes include mixing personal and business expenses, failing to reconcile accounts regularly, and overlooking small transactions.
Q: Is bookkeeping for small businesses necessary?
A: Absolutely! Regardless of your business’s size, bookkeeping is crucial for financial management and compliance.
Q: What software can I use for bookkeeping for small businesses?
A: There are various accounting software options available, such as MyBusiness, designed to simplify bookkeeping tasks.
Q: How often should I update my books?
A: Regular updates are essential, ideally on a daily or weekly basis, to maintain accurate records.
Q: How long should I retain my financial records?
A: It’s best to retain records for at least six years, as per Indian tax laws.
Q: Can bookkeeping help me secure loans or investments?
A: Yes, organized and accurate financial records can enhance your credibility and increase your chances of securing loans or investments.
Q: What’s the difference between cash-basis and accrual-basis bookkeeping?
A: Cash-basis bookkeeping records transactions when cash is received or paid, while accrual-basis bookkeeping records transactions when they occur, regardless of cash flow.
Q: What documents should I keep for bookkeeping purposes?
A: Keep invoices, receipts, bank statements, purchase orders, and any other financial documents relevant to your business.
Q: How can bookkeeping for small businesses help me with tax planning?
A: Accurate records facilitate better tax planning by allowing you to identify deductions, exemptions, and potential tax-saving opportunities.