A Guide to Bank Accounting Basics for Small Business
Anyone who runs a small business knows that bank accounting basics are essential for keeping track of income and expenses. Bank accounting is the process of recording, classifying, and summarising financial transactions to provide information about a company’s financial position.
While this may sound daunting, there are some basic bank accounting concepts that every small business owner should know. For example, it is essential to keep accurate records of all income and expenditures. This information can be used to prepare financial statements, which provide a snapshot of a company’s financial health.
By understanding the basics of bank accounting, small business owners can make sure that their finances are in order and that their company is running smoothly. Whether you’re just starting or have been running your business for years, it’s never too late to brush up on bank accounting basics!
In this article, we will look at the following:
- What is a Bank Account?
- What are the Benefits of having a business bank account
- Do I need a separate bank account
- How to Open a Bank Account
- How to record the bank transactions in the accounts
- Double Entry Bookkeeping
- What if I’ve got more than one account
- The bank account on the Balance Sheet
- Does the Bank account affect the Profit and Loss?
- How to complete a bank reconciliation statement
- Fees associated with Business bank accounts
What is a bank account?
A bank account is an essential tool for any business owner. A bank account allows you to deposit and withdraw money from your business and set up automated payments and manage your cash flow.
There are many different types of bank accounts available, depending on the needs of your business. The two most common bank accounts include:
– Business savings account: A business savings account is a great way to grow your business’s cash reserves. You can set up automatic transfers from your business checking account to your savings account or make manual deposits.
– Business current account: A business current account is the most basic type of bank account for businesses. Current accounts typically offer online banking, direct deposit, overdrafts and cheque writing. You may also know it as a checking account.
What are the benefits of having a business bank account?
Having a business bank account can provide several advantages over using a personal account for business purposes. Perhaps most importantly, it can help to separate your business finances from your personal finances, making it easier to track business expenses and income.
A business bank account can give you access to business loans and lines of credit. This can help grow your business or cover unexpected expenses. Overall, a business bank account is valuable for any business owner.
Do I need a separate bank account?
Having a separate business bank account is a legal requirement for limited companies in the UK. This requirement helps to ensure that businesses are correctly managing their finances and protecting their assets. A Limited company is a legally separate entity.
It is good to have a separate account for the business if you are self-employed, although not a legal requirement. This will help you keep track of business expenses and income and make it easier to prepare your tax return.
How to Open a Business Bank Account
Before you can start making money, you need to find the right financial institution to help your business succeed. Most banks offer additional services to small businesses and entrepreneurs; they might include guidance on business planning or the cash flow statement.
Most bank transactions are completed online, and you will never meet your local bank manager. Therefore, you can look for banks that have an online presence or a local branch.
Once you’ve found the perfect bank, it’s time to open a business account.
The process is relatively simple: a bank expects you to fill out some paperwork, provide ID and deposit funds into the account. Some banks may require a business plan, especially if you are looking for an overdraft or loan. Many banks offer introductory offers for new account holders. These can include waived fees or interest-free periods on credit products.
How to record the bank transactions in the accounts
Different methods can be used to record bank transactions in business financial accounts. One popular approach is to use an accounting software program that integrates with your bank accounts, allowing you to easily use a bank feed or import your financial data and automatically update your financial statements and reports. Some popular accounting software programs that easily integrate with a bank feed are Xero, QuickBooks and FreshBooks.
Another option is to use Excel templates for bookkeeping, which allow you to record financial transactions. Regardless of which method you choose, it is essential to maintain accurate records of all transactions to produce accurate financial statements and make informed business decisions. The financial statements include a balance sheet, income statement and cash flow statement.
Below is an example of our cashbook template.
Whether you’re a small business owner or a financial professional, these tools can help you manage your accounts easily and ensure that your financial information is always organised and up-to-date.
Bank Accounting Basics – Double Entry Bookkeeping
Recording a bank transaction is always a double-entry process, requiring you to make two entries for each transaction in order to balance your accounts. For example, if you pay office business expenses 125.00, you would create a journal as follows:
| Debit | Business Expenses | 125.00 | |
| Credit | Bank | 125.00 |
Another example is a business that receives 500.00 from a customer invoice, the journal is as follows:
| Debit | Bank | 500.00 | |
| Credit | Accounts Receivable | 500.00 |
Our last example is 10.00 interest payments to the bank:
| Debit | Interest Paid | 10.00 | |
| Credit | Bank | 10.00 |
This double-entry approach ensures that your total balance is always accurate, even when there are transactions occurring within your bank account. Whether you’re making deposits, withdrawals, or transfers between accounts, double entry bookkeeping will help ensure that every single change to your finances is accounted for and recorded.
If you are looking to create a journal, we have a free journal template.
What if I’ve got More than one Bank Account?
If you have more than one bank account, you will need a separate account code for each account on your chart of accounts. This will help you keep track of your finances and make it easier to reconcile your accounts.
If you have multiple bank accounts, you may want to consider using a coding system that includes the bank’s name and the account number. This will help you quickly locate the account on your chart of accounts and avoid any errors when entering transactions and reconciling your accounts.
Bank statement reconciliation
Completing a bank reconciliation is an important step in ensuring that the bank statement and the accounts’ figures match. This process can uncover missing items, such as interest income, interest paid, and service fees.
By reconciling the bank statement, businesses can be sure that they are caught up on their financial obligations. In addition, this process can help to prevent fraud and errors. Consequently, bank reconciliations are an essential part of maintaining accurate financial records.
How to Complete a Bank Reconciliation
When performing a bank reconciliation in accounting software, a few key steps need to be followed to ensure the process goes smoothly. The first step is to get the relevant bank statements and account information.
Check the transactions in the accounting software against the bank statement, looking for any discrepancies such as duplicate charges or unrecognised withdrawals. If any issues arise during this process, you should then note them so that they can be corrected later on. Use our bank reconciliation statement to make it easier.
Finally, it is important to update your bank statements and your accounting software with the correct information from your reconciliation process once it has been completed. This ensures that all records are kept up-to-date and consistent moving forward, which will help to ensure the accuracy of your financial data over time.
By following these simple steps when completing bank reconciliations in accounting software, you can rest assured knowing that your financial records are accurate.
Download our free bank reconciliation template.
Interest and Fees associated with bank accounts
When it comes to interest and fees on bank accounts in business, it is critical to understand how these items are accounted for on the income statement. Interest paid or service fees are expenses on the income statement, while interest earned is income.
If you have business bank loans, it is better to get a fixed-rated loan so that you know the amount to repay each month.
Bank Account on the Balance Sheet
The balance sheet is one of the most important reports of a company’s financial records. This document shows all the assets and liabilities that a company holds at a given point in time, allowing investors and other shareholders to assess the financial health of the business.
A balance sheet is made up of several key components, including cash and cash equivalents, accounts receivable, inventory, investments, property, plant and equipment, intangible assets, and liabilities. Of these different categories, perhaps the most important is the bank account.
This represents any funds that are currently held on deposit with a financial institution. Because this balance is considered to be part of current assets. It plays an important role in indicating how well a company can meet ongoing operational costs while still keeping enough cash on hand for unexpected expenses.
Conclusion to Bank and Accounting Basics.
In today’s article, we’ve walked you through the basics of bank accounting. We’ve explained how bank statements work and what needs to be reconciled in order to ensure accuracy. We’ve also discussed the importance of bank accounts on a company’s balance sheet, as well as the different interest and fees associated with bank accounts in the business.
If you’re looking to learn more about bank accounting and how it relates to your financial records, we recommend consulting a trusted accounting professional for guidance. With their help, you can stay up-to-date on best practices for managing bank accounts and ensuring accuracy in your financial reporting.
