To run a small business you do not need the degree but the skills, confidence, and long-sightedness to make it happen. Some are born entrepreneurs. With the right set of skills, they can do a lot. But the art of bookkeeping is different from running a business. Even a basic understanding of small business bookkeeping services can revolutionize growth.
Bookkeeping is the process of recording and organizing the business’s financial transactions. You do need a degree to become a professional bookkeeper. However, learning about the bookkeeping basics is always a possibility. With the right bookkeeping tools, you can have the confidence to understand how profitability works.
Small Business Bookkeeping - The Basics
What is meant by Bookkeeping?
The primary way to do business is to understand the process of business financial transactions. Bookkeeping is the way to keep an eye on the numbers, handle the financial challenges at an early stage and address them.
The role of a bookkeeper is to record transactions, send invoices, make payments, manage accounts and take care of the financial statements. Bookkeeping is the basic part of accounting (so do not confuse it with accounting).
Bookkeeping services for small business owners is a chance to handle the books at minimum cost. But before you do hire one, let’s take a look at the basic concepts of bookkeeping.
Business Accounts
If you are thinking of individual bank accounts, then you are sidetracked. In the world of accounting and bookkeeping accounts is the record of all financial transactions including sales, payroll, etc.
There are five basic types of accounts involved in a business;
Assets - The long-term or short-term resources like land, office supplies, etc owned by the business.
Liabilities - The debts owed by a business to other services like account payables.
Revenues - The income earned by the business through sales.
Expenses - The cash outflow, payments made by the business for an item/service.
Equity - the remaining value after liabilities are paid and represents the owner’s interest in the business.
Bookkeeping represents all of these accounts. It is necessary to manage all of the accounts properly. To do that you need to learn which account falls under the account type;
Setting Up the Business Account
Now that you have learned about the types of accounts, it’s time to set up the accounts. Online bookkeeping services handle everything on the behalf of the clients. However, for your learning purpose, you need to understand how to set accounts.
There are three common methods to create your general ledger;
Use of spreadsheet in Excel.
Desktop accounting software like QuickBooks Desktop etc.
Cloud-based bookkeeping software like My CPA Dashboard, Quickbooks, etc.
Spreadsheet or use of excel is the cheapest mode, doesn't cost a fee even. Google Docs is the recent advancement in the spreadsheet program. But it can be a disaster as it is an outdated bookkeeping practice.
Bookkeeping services for small businesses use the latest methods like cloud-based accounting software. Data is safely stored online and cloud storage allows access from anywhere. Or you can always pay online bookkeeping services to do the job. Outsourcing is easier if you find the right match.
Choose the Bookkeeping Method
Even if you outsource the bookkeeping experts, still the bookkeeping services for small businesses are going to ask one thing - do you want single-entry bookkeeping or double-entry bookkeeping?
Single-entry bookkeeping records each transaction only once. The customer pays the bill, and you enter the sum in the asset column only. Sounds easy right? Single-entry bookkeeping can work for a small business. Especially if your business is more about work from home or doesn't require any large inventory.
But mostly double-entry bookkeeping is used. You make entries in two accounts instead of one. One side is debit and the other is credit. These are known as journal entries. Debit (Dr) is recorded on the left side and credit (Cr) is recorded on the right side.
Even the cloud-based accounting software used by the bookkeeping services follows a double-entry bookkeeping system.
Financial Transaction Records
It is important to make the right entry for every transaction. So how will you know whether the accounts are going into profit or loss?
To record a transaction you need to make two entries - debits and credits. If the debit side is surplus then the credit is profit, but if the credit side has a larger balance than the debit side then it’s a loss. It is simple enough, right?
But this concept may vary from the type of account. For instance;
The accounts debit side should be more than the credit side.
Liability debit should be in decrease and credit in increase.
The revenue debit side should decrease and increase in credit.
Expenses on the debit side increase and decrease on the credit side.
Equity is decreased on the debit side and increased on the credit side.
So in order to record the transaction, you need to determine which account must be debited or credited.
Balance the Ledger
Once you have made the transactions and recorded them successfully, make sure that the total balance of debit and credit at the end of the year should match. This is known as a balanced ledger.
For example, if the cash account is debited with $3000 (increases) and the credit side has $5000 (decreases) you will then adjust the remaining $2000 as a decrease).
The simple formula includes: Assets = Liabilities + Equity
If both sides of the ledger do not match then you need to go through the books again to see if you missed something.
Online Bookkeeping Services
Not all business owners are great at managing their business accounts. Therefore there are contractors/service providers helping small businesses to maintain their finances. Online bookkeeping services are one of the most common ways these days to hire a bookkeeper or an accountant. They do the job well. The small business owner pays them according to the decided rates and vice versa.