Bookkeeping Basics for Small Businesses
Introduction to Bookkeeping
Small business owners have many lessons to learn in the initial phase of the development of their
operations. Nevertheless, that does not mar the excitement of signing the first deal or having the
first customer and the enthusiasm of the first profits. They start small; their finances are small, the operations are on a smaller scale; however, multiple tests and trials have to be dealt with on a daily basis, similar to any large business enterprise. One of the key challenges that businesses generally ignore is bookkeeping, which is essential for efficient financial management.
Small business owners make big business plans for the key processes of sales, marketing, strategy, and customer relationships. However, when it comes to bookkeeping, their focus reduces, and
hence the business suffers.
Accurate bookkeeping is a vital activity for the smooth running of healthy business operations.
However, the foremost thing that small business owners must do is to understand bookkeeping, identify the key rules of bookkeeping, and comprehend the small errors or pitfalls in the recording of transactions that can become a threat to business growth in the future.
Therefore, small business owners must make efforts to learn the basics of bookkeeping to understand where the business stands through the cash on hand, debts owed, and the other
financial ins and outs. Furthermore, this ensures to prevent any fraud situations from any customers, employees, or vendors.
We provide the small business owners with the following basics of bookkeeping so that they can
understand the finances better for ensuring the long-term success and sustainability of their
Basic types of accounts
Bookkeeping and key decisions
Once small business owners understand the importance of bookkeeping and the significant basic accounts to be maintained, there are few key decisions to be taken to ensure a proficient process of
bookkeeping in the entity.
Single-entry vs. double-entry bookkeeping
For example, if there is no requirement to deal with any equipment or inventory and if there are not many cash transactions, business enterprises can move ahead with single-entry bookkeeping. In the case of double-entry bookkeeping, two entries – one debit and one credit transaction are added to two different accounts.
This is required in highly complex organizations with a larger volume of transactions. Double-entry bookkeeping is more challenging than single-entry bookkeeping; however, accuracy and balanced books can be ensured with double entries of each transaction.
In-house or outsourcing
Making journal entries for every transaction and managing the supporting documentation is a tedious and complex task. Without special training in accounting, it is difficult for entity owners to manage it themselves.
However, the decision depends on the owner based on the factors of costing, accuracy, and trust. If the number of transactions remains very few, managing it in-house by hiring an accountant is best, while if the business involves multiple, complex transactions daily, outsourcing to a CA firm is better.
When the businesses are just following a passion or hobby with rare transactions, then the Do it Yourself (DIY) route is manageable. If the business owners and their team are too occupied in
operations to ensure growth that they are not able to focus on bookkeeping, then hiring a professional would be the best decision.
Excel or software
Frequency of recording the transaction
Furthermore, business owners must ensure to balance and close the books regularly – monthly or quarterly, depending on the volume of transactions. The balance of credits and debits calculated after every month or quarter must satisfy the equation of Assets equal to the summation of Liabilities and Equity. If not, the errors must be found, checked, corrected, and the final balance must be achieved for the closure of books.
Cash method or accrual method
On the other hand, in the case of the accrual method, the revenues and expenses are recognized when the transaction occurs, even if the cash payment or receipt has not occurred. Herein, the business owner is required to track all the receivables and payables; however, it gives a more realistic and long-term picture of the business.
Benefits of good bookkeeping
Easier fixing of problems
Dealing with taxation on time
Better planning and management of business
Increased probability of receiving financing
Accurate and timely bookkeeping enables business owners to provide the lenders with business
reports on financial statements and income tax returns. This enables the businesses to demonstrate
the actual financial scenario of the enterprise to investors for obtaining a business loan. If such
critical statements are not available, it becomes difficult to obtain the approval of the lenders or
Therefore, for successful operations of your business ad better financial management, it is advisable
for small business owners to engage in a regular, accurate bookkeeping process.