In business, it’s crucial to keep records of financial transactions in your books for effective financial management.
Your accounting books will help you accurately review your business income and expenses and determine your company’s financial health performance and position.
Moreover, keeping books of accounts organized and up-to-date can help you track cash inflows and outflows control your finances, and make smart business decisions.
However small business owners juggle many functions and activities. Thus they might not have enough time to maintain books of accounts.
In such a case, hiring reliable accounting services for small business can help. Professional accountants can record each financial transaction in your books of account and provide you with insights into your company’s financial position.
Furthermore, if you want to learn the basics of setting up accounting books you are at the right place. Let’s get started!
Select an Accounting Method
The first and foremost step when setting up your books of accounts is to choose a suitable accounting method. The following are the most common accounting methods you can opt for:
- Cash-basis accounting: It’s easy to implement accounting method
- Accrual accounting: It’s a relatively tricky accounting method
- Modified cash-basis: It’s a mix of cash-basis and accrual accounting method
Cash-basis accounting
You will not need extensive accounting knowledge when deploying the Cash-basis accounting method. This method requires you to record the transaction when money changes hands.
It means you should record income when you receive payments and avoid recording transactions that don’t involve cash exchange. The cash-basis method will only use cash accounts such as expenses, income, etc.
Accrual accounting
Using this method to set up books of account requires the most accounting knowledge and can be more time-consuming for small business owners.
Therefore, it’s better to collaborate with professional accounting services for small businesses as accountants can seamlessly deploy accrual accounting methods.
The accrual accounting method requires you to record income when the transaction occurs regardless of whether the transfer of money occurred.
In addition, you should record expenses when your company is billed. This accounting method requires companies to use more advanced accounting tools allowing them to record long-term liabilities.
Modified cash-basis accounting
The modified cash-basis or hybrid accounting method mixes accrual and cash-basis accounting.
Like the cash-basis accounting method you should record income after receiving it and record an expense after making a payment. When using this accounting method you can use cash and accrual accounts.
Determine How to Record Transactions
After selecting the accounting method you should decide how to record transactions in your books. You can use the following three ways to record transactions:
- Recording transactions manually via spreadsheet
- Hiring a professional accountant
- Using an accounting software
Manually recording each transaction can consume the most time. Although it’s the cheapest solution for small business owners it’s a labor-demanding option for recording transactions.
Hiring business bookkeeping services will free you from managing accounting books and making common accounting errors.
If you hire an experienced accountant they will compile financial statements, calculate totals, and provide valuable insights into the financial aspects of your business.
Accounting software will allow you to leverage the best of both worlds regarding the difficulty and cost of recording transactions.
Installing technologically advanced accounting software will help streamline accounting processes. Moreover this software will save business owners enough time that can be used on other vital tasks.
However accounting software solutions can be expensive. When you hire a professional service you can leverage several accounting tools at a fraction of the cost.
Set up a Chart of Accounts
The charts of accounts, or COA, list all accounts in the company’s financial statements and break down money into many different categories. A COA will show the money going into and out of your business.
Your chart of accounts should consist of assets, liabilities, expenses, revenue, and equity. You can break down the COA even further by using sub-accounts to organize increasing transactions.
Open a Business Bank Account
Small business owners consistently make the common mistake of having a joint account for business and personal funds leading to accounting blunders, overspending, and inaccurate tax filings. To avoid all these issue, you should always avoid mixing personal and business funds.
A separate business bank account will aid in organizing your records and create a clear audit trail for your company.
Determine How Your Business Will Get Paid
Businesses generate revenue primarily from customers. Your small business can’t grow if you fail to receive customer payments.
It will help to establish a clear customer payment policy to ensure you get paid for all your products and services. Moreover determine what kinds of payment to accept from your customers- cash check mobile wallet payment or credit card payment.
Maintain a Record of Expenses
Tracking expenses is one of the vital parts of accounting. It will help you keep your books of accounts in order. Professional accounting services for small business can help you track business expenses in real-time and prepare efficiently for tax filing.
Create a Schedule and Set Reminders
The last thing you want is to put off recording financial transactions in your accounting books and fail to determine your business’s financial position.
The more your business transactions are piled up, the more you will have to deal with disorganized records, accounting mistakes, and unnecessary stress.
The best solution to simplify your bookkeeping and accounting responsibilities is to make a schedule or accounting cycle and follow it religiously.
Your accounting schedule should start with starting account balances and end after closing the books. In addition to creating the weekly monthly or quarterly plan you should set reminders to know when to go through the accounting cycle and update your books.
To wrap up it all
Maintaining accounts for any business is not easy as it requires keeping track of bills expenses and sales in real time. Small businesses are often a single-man show making bookkeeping and tracking financial transactions tricky.
Knowing the above-discussed steps of maintaining accounting books can make the transaction recording job easier.
However, you might not have enough time to keep accounting books regularly. In such a case your best solution is to hire professional business bookkeeping services and free up your burden and time.
