How to Prepare Books of Accounts for Small Business

You may have heard the term bookkeeping and immediately thought, Oh no, not another set of books to keep! But bookkeeping isn’t about numbers; it’s about your business’s performance. And if you run a small business, your bookkeeping can make or break you. This guide will show you how to prepare books of accounts for small business that reflect the truth about your company's health and performance in ways you can understand and use to steer your company in the right direction.

Standardized Accounting Principles

No matter what size your business is, there are standardized accounting principles that must be adhered to. These principles give you a solid foundation for recording, organizing and analyzing data. Knowing them well is important when preparing books of accounts for small business. It helps keep you in compliance with tax laws and reduces your risk when it comes time to file taxes. Always be sure to use accurate and detailed methods, regardless of whether you’re working with a limited liability company or a corporation.

Advantages of Small Business Owners Doing Their Own Bookkeeping

There are a number of advantages that come with an owner doing their own bookkeeping, even though many small business owners these days delegate that job out to an accountant. Doing your own bookkeeping allows you to have full control over your finances, provides instant access when necessary and can be very cost effective in terms of managing cash flow.

Setting Up the Chart of Accounts

Every business needs a chart of accounts, which is a listing (usually in numerical order) of all accounts in your company’s general ledger. These accounts help you identify how much money is associated with each business function and how much money you can spend at will. Some are pre-set by your accountant or bookkeeper; others are customized based on your industry and purpose. The following guidelines will help you get started when setting up your chart of accounts

Preparing Financial Statements

The most common financial statements are income statement, balance sheet and cash flow statement. An income statement shows business sales revenues, expenses, profits and losses over a specified period. The balance sheet lists assets and liabilities at a specific date (usually month-end or quarter-end). A cash flow statement shows inflows from customers as well as outflows to suppliers over a specified period.

Managing Your Cash Flow

Like all living things, businesses need fuel (cash) to survive. Running out of cash is a dangerous proposition—for both your business and your personal finances. To run a sustainable business, you’ll need to be able to predict and plan for incoming cash flow as well as manage money wisely during slow periods in order to avoid having capital tied up indefinitely. This is especially important if you’re a small business owner, because you don’t have much margin for error when it comes to budgeting.

Sorting Out Tax Deductions for Small Businesses

Starting a business can be an exciting time, but it’s often an expensive one as well. If you’re planning on running your own business and taking it seriously, then you should keep tabs on how much money your spending and how that compares with how much money you’re bringing in.

Cost/Profit Analysis - Is your product making you money?

One way to determine if your business is viable and profitable is by performing a cost/profit analysis. You'll need to take a close look at all aspects of your business - from your products, to shipping costs, labor expenses, etc. It's important that you're making a profit on each sale - ideally around 20% or more. If not, then you may want to seriously reconsider selling that product in favor of one that makes you money!

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