Business Accounting Basics
Bookkeeping is an essential part of running a small
business, and you need to know the basics. However, if you are just starting
your own business, you might be unsure about the basics of bookkeeping. This
will help you to keep track of your expenses and earnings, as well as being
tools for tax and VAT calculation.
The purpose of bookkeeping
There are two main reasons why bookkeeping is essential.
These are:
- to keep track of your income and expenses, which can help you to
make a profit
- to collect financial information about your business to help with tax
returns and VAT issues
Bookkeeping
can sometimes seem overwhelming, but if you remember these two simple goals, then
you can remain focussed and keep the job simple. Another thing to remember is
that there is no ‘right’ way to keep your records, in that you are not required
by law to use a specific format. You just need to keep your records in a way
that is clear and accurate. If you are unsure about how to create or keep your
records, then here are the three basics of bookkeeping that you should follow
in order to maintain clear and accurate records:
Keeping your receipts
The most important
aspect of bookkeeping is to have a comprehensive summary of all your business’s
income and expenses. These need to be backed up with records and evidence. Get
into the habit of keeping receipts when you buy anything related to your
business, and make sure you have a record of any money that you earn.
For legal purposes the system of bookkeeping that
you adopt can range from simply keeping receipts in a box, to a high tech
computer system. You should examine the size and scope of your business and
decide which is the best method for you. If you are a sole trader and have
relatively few items of expense or income, then something simple will suffice.
The most important thing is to use a system that can clearly and easily record
all of your business transactions.
Setting up and posting ledgers
The next step in bookkeeping
is to create ledgers. A ledger is simply a summary of your revenues,
expenditures, and anything else you need to keep track of. You should enter the
information from your receipts by category and date. You can use these
summaries at a later time to answer business issues such as your profit level
and your level of expenditure. You can also use these summaries to help you
file your tax returns and for any audits that might occur.
You start off with a blank ledger page, which in
paper terms is a sheet with lines. However, these days ledgers are often kept
in a computer spreadsheet file, which serves the same purpose. Whichever method
you use, the principles are the same. On a regular basis, usually weekly or
monthly, you should transfer the data from your receipts into your ledger. This
is known as ‘posting’. How often you do this obviously depends upon the size of
your business, and how many receipts you have. However, you should try and post
things at least once a month, even if you have only a few receipts. This will
help you to keep track of your business
To start with a hand-written system, you can buy a
ledger book from most stationery shops. Otherwise you can purchase accounting
software from a computer shop. These computer programs will do all the
calculations for you, and makes financial planning much easier. You can also
create your own spreadsheet that can do the calculations for you. It is
advisable for even very small businesses to invest in some accounting software,
as it really does make everything much easier to understand and saves you time
with calculations and reporting.
Creating financial reports
The
last step of basic bookkeeping is to create financial reports. Reports are
important because they help piece together different areas of financial
information. Although your income ledger will tell you how much you have
brought in through revenues, it cannot tell you how much profit you have made.
A report will bring together your expenses and sales, and tell you how well you
have done over different periods of time. This is financial reporting at its
most basic. Other things you should include in reports are the dates of
payment, to see if your customers are paying on time, and when you have to
purchase items. You need financial reports to turn your records and numbers
into a detailed picture of your business, so you can see exactly how well you
are doing and where you need to improve. If you maintain your records in a clear and accurate
way and carry out regular financial reports, then you will find that your bookkeeping
will be quick and easy.