Everyone likes to be independent. And one step towards independence is starting a small business.
If you just launched one, congratulations. One vital factor for business success is accounting. It helps you monitor the business’s progress and enables you to plan. But you need good accounting with sound financial strategy and efficient record-keeping.
Read on to learn more about how to do accounting for small businesses and why you may need an accountant.
What Is Small Business Accounting?
Small business accounting is all about keeping accurate and organized records of your business’s financial transactions—assets, liabilities, sales, and expenses.
Bookkeeping for small business in Canada deals primarily with three accounting reports:
- Cash flow: A summary of money flowing into and leaving your business. It includes activities such as financing, investing, and operating activities.
- Income statements/profit and loss statements: Reports of a business’s revenues, expenses, gains, and losses over some time (a year, for example).
- Balance sheet: This shows a business’s assets and liabilities typically prepared at the end of every quarter.
How to Do Accounting for Small Business
Here are steps on how to do your own accounting for a small business.
1. Open a Business Bank Account
A business account is necessary because that’s where you will channel your income.
First, you must register your business legally to get a name by which to open your account. And for tax purposes, it’s recommended that the business account be separate from the personal one.
A business bank account also protects personal assets should your business fall into bankruptcy or face audits or lawsuits. Obtaining funding from investors and creditors is also easier if you have a good business financial track record.
In most cases, all you need to open a bank account is your business name and registration with your province. However, every bank has its list of documents you need to provide when opening one.
2. Track Your Expenses
The best way to monitor the progress of your small business is through accurate and effective tracking of expenses. In fact, it forms the basis for solid bookkeeping and is essential in tracking deductible expenses, preparing tax documents, and legitimizing your filings.
Note that CRA requires you to keep receipts of all your business expenses. As you track your business expenses, five of the most important receipts to pay attention to are:
- Vehicle-related expenses
- Meals and entertainment
- Receipts for gifts
- Business travels out of town
- Receipts from your home office.
3. Develop a Bookkeeping System
A bookkeeping system helps you undertake the daily accounting activities that revolve around recording transactions, categorizing these transactions, and reconciling your bank statements.
As you can see, the difference between bookkeeping and accounting is that you require the bookkeeping to do accounting.
You might be wondering, “How do I do simple bookkeeping for my small business?” Well, how you approach bookkeeping is up to you. Some of the options available include:
- DIY using software (Wave, QuickBooks) or an Excel spreadsheet.
- Outsourcing bookkeeping services locally or using a cloud-based bookkeeper.
- Once the business has grown, you can hire a full-time accountant or bookkeeper.
You can use the cash accounting method that recognizes revenues and expenses when you receive or pay them.
Alternatively, you can use the accrual accounting method, where you recognize revenues and expenses only upon transacting. This method requires tracking all payables and receivables.
If you’re a Canadian business owner, it’s compulsory to use the accrual method.
4. Record Every Financial Transaction
Now you know how to do bookkeeping. You’ve got the three financial accounts you need for your small business and a bookkeeping system. Therefore, you can start recording all your transactions.
Just ensure you record the transactions correctly for the balances to match, allowing you to close your books.
For journal entries, you don’t indicate specific details about the biller, item, or vendor. All you should do is track credits and debits by each account.
5. Use Accounting Software and Other Tools
Today, businesses use accounting software to balance books. Automating your accounting also saves you the time you would otherwise spend on Excel spreadsheets.
Some of the most common software include:
Integrating all your financial tools—credit cards, time tracking apps, banking services, and receipt apps in your accounting software helps you get the best out of accounting software. That’s because the software can easily find an activity and categorize it. Additionally, accounting software automatically does the following:
- Flags discrepancies
- Adjusts account balances
- Reconciles bank transactions
- It helps you generate financial reports quickly.
6. Set Up a Payroll System
If you have several employers, you need a payroll system to go about the salaries.
Ensure the employee payroll system you adopt is Real Time Information (RTI)-compliant to avoid finding yourself on the wrong side of the CRA.
7. Balance the Books
At the end of your bookkeeping, you must balance your books before closing them, often quarterly for most businesses. At this time, your account credits and debits should match (the totals down there). It’s what a balanced book entails.
You have to record all the journal entries you’ve been crediting and debiting in the general ledger and then adjust your account balances appropriately, after which the following accounting equation applies:
Assets = Liabilities + Equity
If this is not the case, it means there are some errors that you need to correct.
8. Prepare Financial Reports
Financial reports are a summary of the flow of money in your business. They show how your business is doing, enabling you to plan the way forward.
Bookkeeping software has made it easier to generate these reports, and you can get them anytime, especially when you need to make quick financial decisions.
9. Store Records Securely
Accurate and organized record-keeping ensures all your financial transactions are secure. Anytime you want to access something, you can easily find it.
In addition, secure record-keeping ensures you adhere to the law, something small businesses must do to remain legally compliant.
Do You Need an Accountant for a Small Business?
It saves you a lot of money and performs various tasks, including:
- Help with writing business plans
- Advising you on the structure of your business entity
- Setting up your accounting software
- Helping with the payment of taxes and filing returns
- Maintaining records of business transactions
Now you have the answer to the question, “How do small businesses keep financial records?” And if you follow the steps mentioned above, you’re bound to succeed. Remember, finances mean everything for a business, and managing the same starts with good accounting. Start with the right bank account and follow every step. Your business will flourish and keep growing.