A Guide to Accounting Basics for Small Business

Understanding the accounting basics within any business is very important. The financial reports created from the accounting will help you make plans or improve your small business.

A Guide to Accounting Basics

While you can rely on other people doing the work for you, it is worth taking time to understand the basics of the report and get the correct accounting information you require.

Why are the basics of accounting so essential?

Keeping up-to-date with the business accounting basics may sound boring, but staying on track with your small business financial position is essential.

A basic accounting equation is the basis of all accounts and makes up the Balance Sheet.

Basic Accounting Equation

The basic accounting equation above shows that assets equal liabilities plus equity. Here is some further information on each category:

Assets

These are items that the business owns and are current and long-term assets.

Current assets include items that can be converted into cash quickly, usually one year. Current assets include the bank, cash, computers, fixture and fittings and accounts receivable.

Long-term assets include items that a business owns that can’t be converted easily to cash. Some examples are patients, goodwill, buildings, machinery and land.

Liabilities

Current liabilities are items that a business owes and expects to pay within a year. They include accounts payable, short term loans, accrued payroll and dividends payable.

Long term liabilities are long term loans and might include mortgages.

Equity

Equity is the amount of money invested into a business. It includes owners investments, shareholders investments and retained earnings (income from running the company).

Double Entry Bookkeeping

One of the basic accounting procedures is double entry bookkeeping and looking at debits and credits. The easiest way to complete it is by using accounting software.

Double entry creates at least two accounting entries for each transaction. The debits and the credits are always equal. These entries are posted to the general ledger on accounting software.

Once all the transactions are posted, the financial statements are produced.

Single Entry Bookkeeping

Single entry bookkeeping is in its simplest form and easier to produce accounting records. The transaction is posted to either an income account or an expenditure account.

Only the self-employed can use it in the UK, but it is easier to understand and run.

We have a free Excel cash book download if you want to complete single-entry bookkeeping.

Double entry cash book example
Free Excel Cash Book Example

Bookkeeping Basics

Completing everyday transactions is part of the bookkeeping basics. Bookkeeping basics covers all the record-keeping of credit controlsales invoicing, reconciling bank accounts, writing cheques, posting receipts, producing profit and loss accounts, and maintaining the balance sheet.

Every small business needs to complete its bookkeeping basics to produce accurate accounting reports regularly.

Types of accounting records

There are two types of accounts that make up accounting basics – financial statements and management accounts.

Company Financial Accounts basics

Every limited liability company needs to produce a set of accounts at the end of its financial year. These consist of a profit and loss accountbalance sheettrial balance, and cash-flow statement called the financial statements.

Every company in the UK has to submit these accounts to Companies House, as specified in the Companies Act. These accounts become publicly accessible records and can be accessed by anyone for a small fee.

These Financial Accounts will need to be completed by Accountants with a report from the Directors and the Accountant. Small companies can produce abbreviated accounts. Check with your accountant about the reports you need to submit for your small business.

Your financial reports will enable investors to look at your company’s performance. The bank may also require a copy to help secure overdrafts or small business loans.

Here is a brief overview of the basic accounting reports:

Balance Sheet

The balance sheet is a snapshot of the businesses financial position on a given date.

It shows how much a business owns, what it owes and the equity.

Profit and Loss (Income Statement)

The income statement shows the revenue, cost of sales, expenses and profit for an accounting period.

The accounting period might be a week, month or financial year.

Cash Flow Statement

The cash flow statement will show how much cash a business will expect to have in the future. The report is produced for a given period.

Trial Balance

There is also a trial balance that accountants and bookkeepers use to check the business records. The trial balance lists all the general ledger codes and the debits and credits in one report. It makes it easier to reconcile financial year-end accounts.

What is a trial balance

The basics of self-employed financial accounts

If you are self-employed, you will still need to produce accounting records once per year, although these need not be as comprehensive as company accounts. You will use this information to complete your self-assessment tax return.

If you are self-employed, it is worthwhile setting your financial year-end to the 31st March, in line with the nominal tax year. It makes it much easier to complete your tax return and save money if you use an external accountant or bookkeeper to maintain your accounts.

Management Accounts basics

Do you know from your accounting reports how much money your small business will have in the bank in six months? You should have a rough idea. If not, how can you budget for staff, premises and other outgoings?

The tools that give you this information are management accounts.

Management accounts are reports which help you make decisions in running your business. Cash-flow statements and forecasts, stock reports, fixed asset registers, purchasing processes – these are all tools that help you keep your finger on the pulse of your business.

Every business is different and requires different reports, depending on the size and type of company. Some companies produce these accounts monthly; others will present some of these reports weekly – or even daily.

Accounting Software and Free Accounting Software

Best Accounting Software for small business

While it is not a requirement to use a software package to handle your accounting basics, modern software packages streamline the whole accounting system – producing management accounts at a touch of a button and significantly reducing the amount of time spent on bookkeeping.

Accounting software helps you keep track of accounts receivable, accounts payable, time tracking, expenses and inventory.

Many different packages are available to help your small business, from free software you can download from the internet to major financial systems costing millions of pounds.

Look at our accounting software review section for more information on the most popular accounting packages available, including the free software downloads.

The most popular accounting software packages include FreshBooksQuickBooksEmberZoho Books and Xero.

When setting up your accounts software, it is essential to ensure you have a chart of accounts that works for your business. It sets up all the Nominal codes and is the basis of the financial statements.

8 Steps of the Accounting Cycle

8 Steps of the Accounting Cycle

The 8 steps of the accounting cycle are the process that companies use, from processing transactions to producing a trial balance, making adjustments, preparing the financial statements and closing the year-end.

We look at each step in detail and explain the accounting cycle.

Accounting Ratios

Various people use accounting ratios to see how well a business is performing. Business owners will use profitability ratios, while lenders and investors will use ratios to see if they can pay their debts.

In the section on accounting ratios, we look at a few examples and provide several accounting calculators, including simplified expenses, gross profit, net profit cost of goods sold and Flat rate Vat.

The figures for accounting ratios are taken from the balance sheet or income statement (profit and loss).

Accounting Basics Courses

If you want to learn more about the basics of accounting, it may be worth looking into an accounting course; these can either be completed at home in your spare time or a part-time college course. You can learn anything from the basics to becoming a fully qualified accountant.

All the accounting bodies run courses, which generally start in September. The Open University also runs a Certificate in Accounting, a one-year course.

If you are looking into a course because you work in accounting and want to learn more, it may be worth asking your employer to fund the course.

Accounting Regulating Bodies

If you are looking for an accountant to complete your accounting basics regularly or year-end figures, it is worth checking the qualifications of the accountant you use. All accountants should belong to one of the main regulatory bodies. For further information, look at accounting regulatory bodies.

The are a few places worth checking to find a good accountant. If you use accounting software, there is usually a list of providers. Asking other small business owners for recommendations or checking on the internet and looking at reviews.

Accounting Basics – History

We have produced a short introduction to accounting history, explaining how it started and who first invented the double-entry system.

Basic Accounting Summary

Completing your small business accounting basics is essential to understanding how the business is performing.

The business will use the accounting data to produce financial statements, including the balance sheet, income statement and cash flow forecast, to make business decisions.

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