Small Business Accounting

Small Business Accounting does not just entail maintaining the daily books for tax purposes; it is also vital for business reporting, identifying theft, fraud, and wastage. Accounting mistakes can result in penalties or fines, especially for submitting accounts late.

Many small businesses don’t keep accurate records because they don’t have the knowledge or time. However, accounting errors made over several years can lead to substantial financial losses. Keeping on top of small business accounting can save money.

A method used by some small businesses is the ‘shoebox method.’ You store all the business transactions of invoices and receipts in a file or box and pass everything over to an accountant or bookkeeper at year-end. We do not recommend this process for running small business accounting and will therefore look at the alternative in this article.

What Accounting is Needed for a Small Business?

For a small business owner, proper accounting is essential in order to track income and expenses, understand the financial health of the business, and make informed decisions about where to allocate resources.

Without accurate and up-to-date accounting records, it would be difficult to know how much money is coming in and going out, what areas are profitable and what areas are losing money, or whether the business is overall in a good financial position.

All of this information is necessary in order to make informed decisions about the business and ensure its long-term success. Therefore, for a small business owner, having a handle on the accounting side of things is critical.

Accounting Professionals

Most small businesses don’t have an accountant on staff, so they rely on bookkeeping services. A good bookkeeper can enter the transactions and produce the reports required for the company but may not know about taxation.

Accountants take care of complex financial matters, including preparing reports for Companies House and calculating taxes. They also provide the information required by lenders, investors and banks.

Small Business Banking

One of the most important things you can do when starting a small business is to open a separate bank account. This will help you to keep track of your business finances and avoid mixing up personal and business expenses.

Business bank accounts also offer convenient features like online banking and bank feeds, which can save you time and hassle. In addition, having a separate business bank account can help you to build business credit, which can be helpful when you need to take out a loan or lease equipment.

Choosing an Accounting Method

When choosing an accounting method, businesses should consider cash basis vs. accrual basis accounting.

Cash-Basis

With cash basis accounting, businesses only record transactions when cash is exchanged. This method is simpler and can be used by businesses with fewer transactions. However, cash-basis accounting doesn’t give a full picture of a business’s financial health since it doesn’t reflect unpaid invoices or earned but not yet received revenue.

Accrual Basis

The accrual basis accounting records transactions when they occur, regardless of when cash is exchanged. This gives a more accurate picture of a business’s financial situation, but it can be more complex to track and manage. Ultimately, the best accounting method for a business depends on the size and complexity of its operations.

Small Business Accounting Procedures

As a small business owner, you may be handling your own accounting or working with a professional accountant. Either way, it is important to understand the basics of small business accounting process and put an accounting system in place. This will help you keep track of your finances and make well-informed decisions about your business.

The first step in any accounting procedure is to establish a system for tracking income and expenses. This can be done with a simple spreadsheet or accounting software. There is also expense management software, which can provide a payment card, snap documents and post them to the system.

Once you have set up your system, you will need to track all income and expenses. Be sure to include both one-time and recurring items.

Next, you will need to categorise your income and expenses. This will help you better understand where your money is going and what areas of your business are most profitable. Common categories include advertising, stock, rent, utilities, and employee wages.

Finally, you will need to reconcile your records with your bank statements. This process helps to ensure that all transactions are accounted for and that there are no discrepancies between your records and your bank statements.

Small business accounting procedures may seem daunting at first, but following these basic steps will help you maintain accurate financial records for your business.

What are the Business Financial Statements?

There are three main financial statements that small business owners need to be aware of:

Profit and Loss or Income statement

The profit and loss statement (P&L) is a financial report that summarises the revenue, costs, and expenses incurred over a specified period of time. The P&L is one of the most important financial statements for any business, as it provides insights into the company’s overall profitability.

By tracking the various elements of the P&L, businesses can identify areas of improvement and take steps to boost their bottom line. It can be used to assess trends over time and compare the performance of different business units.

Balance Sheet

The balance sheet provides a snapshot of the company’s assets, liabilities, and shareholders’ equity at a given point in time. This information is crucial for investors and creditors when making decisions about whether to invest in or lend to a business.

Cash Flow Forecast

A cash flow forecast is a tool used by businesses to estimate future income and expenditure. It is important to have an accurate forecast in order to make informed decisions about how to allocate resources and manage finances.

The forecast is based on past financial data and current trends. Businesses use various methods to generate a forecast, including Excel spreadsheets, accounting software, financial modelling, and industry analyses.

Below is the cash flow forecast template available for free download.

Small Businesses Accounting Errors

If you don’t keep on top of or have procedures in place for small business accounting, it is easy to make mistakes. Some of the most common mistakes are:

1. Making Data Entry Errors

It is easy to enter figures wrong, add an extra 0 or get figures round the wrong way. Using accounting software can reduce errors and save time trying to correct them.

2. Not Recording all Business Transactions

Even the most minor transactions can help to reduce the tax bill.  Make sure you record all expenses and sales.

3. Recording Business Transactions Twice

Small businesses must ensure that transactions are not entered twice onto the accounting system. The best way of avoiding this is to reconcile the accounts to the bank statements and also bills to the supplier statements.

4. Accruals and Prepayments

If you are using the accrual basis for your accounting, all transactions will need to go into the correct period. Some transactions may have a timing difference due to invoices received late or services paid in advance. This is especially important at the financial year-end.

5. Not categorising Transactions to the Correct Account

It is easy to post a purchase invoice to the wrong account code. Accounting software can help to reduce this by setting up rules for invoices.

6. Not Setting a Budget

A budget may sound hard to do, but we have developed an Excel Budget template. By keeping track of your budget, you will know if the business is hitting its targets.

7. Not Following Accounting Procedures

Within accounting, there are many procedures to follow. It is worth setting time aside to set up your accounting procedures. These may include invoicing, payroll, quotations, deliveries and recording transactions.

8. Missing Accounting Dates

As a small business owner, it is essential you know the dates for submitting self-assessment tax returns, VAT returns and limited company accounts. If you miss these dates you might receive a fine and have to pay interest.

9. Choosing the wrong accounting software

There are many different accounting packages available and Excel. Take time to choose the best accounting software package for your business as it may save time in the long run. Your company requirements might include self-assessment, stock, invoicing, bank feeds, fixed assets, credit control and scanning documentation.

10. Not using an Accountant or Bookkeeper

Although they might be an additional cost, they can save you money in fines and their knowledge as well as free up time for you to concentrate on the business.

Small business owners should maintain and develop a sound accounting system to avoid accounting mistakes.

In addition to these accounting mistakes, accounting may involve complex financial issues such as international transactions, taxation, trade financing, mergers and acquisitions, leasing, debt issues, insurance, and real estate properties.

Many business owners find it challenging to understand all of the accounting language and terminology they need to understand and use regularly to complicate matters. Many business owners hire an accountant to help them understand and perform the accounting processes.

Small Business Accounting Taxation

Taxation is a complex issue, with many rules. Here are some of the taxes that the business may pay:

• VAT – If the business has an annual turnover of £90,000 or more, registration for VAT is required. The easiest way to calculate and report VAT is to use accounting software. HMRC has set up Making Tax Digital, which requires companies to maintain and submit VAT returns digitally.
• PAYE – If staff are on the books, Income tax and NI will need calculating. The options are either to use HMRC payroll tools, accounting software or specialist payroll services.
• Corporation Tax – It is charged at 19% on all limited companies on any profit generated.
• Self-Assessment Income Tax – If you are self-employed or in a partnership, a self-assessment tax return is required each year. As part of the tax return, the tax and National Insurance calculation take place.

Small Business Accounting Software

There are several options for completing the business accounts. Paper records excel spreadsheets or software. We have created some easy-to-use Excel bookkeeping templates to assist in accounting duties.

The most efficient way for businesses to run their account is to use accounting software. There are many different products available; some are free, while most have a monthly fee. Here are our top recommendations:

Free Accounting Software includes Pandle for cloud and GNU Cash for a desktop option.

Paid software includes Xero, QuickBooks and Sage.

When looking at accounting software, start by listing the accounting features required, including stock, debtors, creditors, bank feeds, purchase orders, and auto entry for documents. Most accounting software packages include a free trial; this will help you see if it is suitable for the business’s needs.

Conclusion

For those small businesses that are just getting started or for those that are experiencing difficulties with accounting practices an accounting or bookkeeping service may be an excellent solution. They can track and monitor accounting transactions and manage accounting duties.

The alternative is to set up the accounting system yourself using the software products available.

For further reading, check out the accounting basics section.