Bookkeeping is a necessity for any business regardless of its size. As an SMB owner, you will realize that the accounting fundamentals incorporated by Fortune 500 corporations apply to you as well. Following accounting principles for small business is essential for success. Doing your financial analysis while being savvy at recordkeeping is not only vital for tracking your expenditure, but also assists you in unearthing new growth avenues. Additionally, you will stay on top of your tax obligation.
Fundamental Accounting Principles for Small Business
The following are principles should be implemented immediately to help set up a solid accounting foundation for your business.
1. Be familiar with the three tools that measure financial health
Your understanding of these financial documents determines successful bookkeeping:
- Balance Sheets: These are what used to determine the worth of your business.
- Profit and Loss Statements: These verify whether your organization is making profits.
- Cash Flow Statements: These documents are used to forecast your company’s future cash balances.
The above financial documents will assist you in making informed monetary decisions such as how to utilize business credit or the best way to commit funds to business operations. Additionally, an understanding of these documents will help you comprehend other types of financial reports.
Additionally, any sound business plan stems from understanding these three documents. For instance, the majority of potential lenders only have to look at your financial statements to decide whether to fund you or not. Another example would be acquisitions; whether you want to acquire or have yours purchased, these moves cannot be made without a thorough understanding and evaluation of these financial reports.
2. Hire a Professional
Here, you have three options:
You should hire….
- An accounting firm: These are outsourced services that feature a broad scope of services.
- A Certified Public Accountant: Weigh between having them on a payroll vs. hiring their services periodically.
- Or an Enrolled Agent: This is a tax professional that is similar to a CPA and will assist you with your business and personal tax returns.
If you decide to hire a bookkeeper, referrals are the best way of finding a good one. Even so, there are levels of bookkeepers. The basic ones will manage tasks such as bill payments and receipts processing while the full-service bookkeepers will summarize all your business’s bookkeeping records for you to take to an accountant for further processing.
Tip: An accountant is the most credible referrer of a good bookkeeper.
3. Have Good Accounting Software
You will have to treasure hunt and discover the different types of accounting software being used within your niche and find out the pros and cons of each. Nonetheless, QuickBooks is among the best software for small business accounting. Consequently, you need to settle on one that is within your budget and business’s needs.
4. Select the Most Appropriate Accounting Method
When choosing accounting methods, you basically have two choices:
- Cash Basis: Here, you simplify accounting to considering income as ‘received cash,’ while expenses are ‘bills paid.’
- Accrual Method: In this method, your revenues are matched with your expenses regardless of whether the money has been collected or not. For instance, when you make a purchase today that you will pay for in 90 days, you will record it as today’s expense. Similarly, if you sell a product that will be paid for in 60 days, you will record it as today’s sale.
Note that the IRS requires businesses dealing manufacturing and inventories to use the accrual accounting method.
5. Personal and Business Accounts Should be Separate
Without fail, ensure that data from these two accounts never get mixed up. The basis of separation is to ensure the compilation of income tax is done only to the relevant records.
6. Tax Liability
Here, you will get an accountant to help you sort out your income and payroll taxes.
Income Taxes: The Schedule C of IRS form 1040 requires that any sole-proprietorship report its activities there. You’ll have to pay the social security tax that is levied on your business income as well as the income tax on your business income. They are filed separately on the income tax return.
Consequently, as a small business owner, you need to be keen on your financials since the social security tax is about 15% of your net income. Add this to your income tax, and you realize you cannot afford mistakes in your financials, and this is why you need an accountant to help you.
Payroll Taxes: For businesses with employees, they have to apply for the federal and state payroll numbers which are necessary for filing payroll tax returns. Evidently, you will need an accountant for this.
7. Only use Reputable Sources for Financial and Technical Assistance
These are agencies that have been set up to provide technical and financial assistance to small businesses. You should be conversant about some of these agencies as they could prove to be invaluable.
Some of them include:
- Service Corps of Retired Executives: It is a nonprofit whose focus is to help SMBs to become successful
- The Small Business Administration
- Trade Organizations
- Local Community Banks
8. Apply Internal Controls for Business Operations
Internal controls are measures that will ensure your business does not lose its income through carelessness, fraud, dishonesty, or wastage. These need to be initiated by an accountant as they are aware of the most feasible ones for your business.
Nevertheless, some of the most suitable controls include inventory policies & controls and damage control planning. Also, you might require further controls in goods & services procurement, as well as those that monitor the release of your products into the market.
9. Ensure that You Submit Your Quarterly Returns in Time
These are the sales and payroll tax returns, and it is imperative for SMBs to:
- File their quarterly payroll tax returns.
- Make sure that the cash that is withheld from the employees’ checks is sent to the federal government.
- Send their share of social security taxes to the federal government.
- Ensure that the withheld state income taxes are accounted for.
You need to ensure or have an accountant that can ensure you have systems that are set to initiate timely payments of taxes. This helps in avoiding penalties for non-payment or late payment.
There will be instances where your SMB will have a shortage of cash – it happens – however, do not hold off on paying any of your taxes as this may attract a backlash from the government.
10. Ensure your Bank Account is Reconciled
For every month, ensure that your bank account is reconciled after you receive your bank statement. This will involve comparing your bank balance to your checkbook’s balance.
If these balances do not match, it might mean that the bank has not yet cleared some of the checks that you wrote and as such, the bank balance might be higher than the checkbook balance because the bank hasn’t made payments from the checks yet.
Thus, you may need to subtract these outstanding checks from the bank balance until you successfully reconcile your account.
Have an Experienced Accounting Firm By Your Side
Applying the appropriate accounting principles for small businesses is essential for the growth of your business. However, do not go gung-ho and do all the small business accounting by yourself; you might pay a steep price. Having a competent accounting team is vital. PayTech is among the leading accounting services firms in Phoenix, Arizona. We offer advice and software solutions with Quickbooks integration to budding startups and established businesses. Contact us with any questions or guidance to apply these 10 accounting principles to your small business.