Small and medium sized businesses are the backbone of the Canadian economy, but the fact is that running a business is challenging. You need to stay ahead of the competition and really understand your numbers in order to make the best decisions for your business. That’s why one of the best ways to succeed is by properly managing your books.
Not only is it the law to have accurate and up to date financial records but when you’re on top of your small business bookkeeping you’ll have a precise picture of your business’ financials, and you’ll be able to make better decisions and plan accordingly for the future.
With that in mind, here are four things you need to know about small business bookkeeping:
Understand, Organize & Manage Your Accounts
Although it’s essential to keep your personal expenses separate from your business expenses, bookkeeping accounts don’t refer to individual bank accounts. Instead, bookkeeping accounts record all financial transactions of a certain kind—for instance, sales or payroll.
There are five types of accounts your small business can have:
- Assets: the resources and the cash your company has, such as accounts receivable or inventory.
- Liabilities: what your business owes, such as accounts payable or loans
- Income or Revenue: the money your business is earning, typically through the sale of your products or services
- Expenses: your business’ cash-flow, which is used to pay for goods or services such as utilities or employee salaries
- Equity: The value of your business after your liabilities are subtracted from assets. This represents your held interest in the business, which can be in the form of stock or retained earnings.
So, the first step to proper bookkeeping is to set up each account that applies to your business so you can easily record transactions in each category. Not every company will have the same accounts, but some are more common than others. We recommend using a good bookkeeping software like Xero to make setting up accounts and recording transactions a breeze.
The Importance of Recording Financial Transactions
Once your accounts have been organized, you must record everything that’s happening with your small business’ money. Typically, bookkeeping services use a double-entry accounting system, which means that for any transaction in one account, there needs to be an equal and opposite entry in another account. For example, a debit in one account and a credit in another. Usually, the debit is recorded first, followed by the credit.
Keep in mind that a debit doesn’t always mean cash from your business is flowing out, and a credit doesn’t always mean that your business has earned money. It’s the type of account that defines if a transaction either debits or credits that account.
For example, if you own a restaurant and you buy a new point-of-sale system for $2,000 in cash, this transaction will affect two accounts: cash (an asset account) and equipment (also an asset account). You’re decreasing your cash, but you’re increasing your equipment, so in this case, you record a $2,000 debit for the equipment account and a $2,000 credit for the cash account.
For your bookkeeping system to be accurate, it’s vital that each debit and credit transaction is recorded correctly and in the appropriate account. If there is a mistake, your account balances won’t match, and you won’t be able to close your books.
Always Balance your Books
Part of keeping your books is tallying up your account debits and credits and make sure that the totals match. This might be done monthly, quarterly, or at the end of the year. When everything matches, it means your small business’ books are balanced.
This is the time to adjust your account balances. For instance, if over the month your cash account had $5,000 in debits (increases) and $3,000 in credits (decreases), you would adjust the cash account balance by a total of $2,000 (as an increase).
You’ll use this method to adjust the balances for each account in your ledger, and once you’re done, you’ll have what’s known as an “adjusted trial balance.”
When you combine account types, the adjusted balances should fulfill the accounting equation: Assets = Liabilities + Equity.
Once again, we can’t stress the importance of proper accounting software like Xero to make this process much more straightforward than manually recording all your financial transactions.
Leverage Financial Reports for Business Success
Preparing financial reports is one of the most critical bookkeeping services to help your business. Financial statements summarize the flow of money in each of your business’ accounts and paint a picture of your business’ financial health, which you can then use to make decisions about the future of your company.
Common financial reports include:
- The balance sheet: This report is a good summary of your business’s assets, liabilities, and equity during a single period. Your total assets should equal the sum of all liabilities and equity accounts. The balance sheet offers a good picture of your business’ current health and lets you know if you can expand or if you need to reserve cash.
- Profit and loss statement (P&L): This financial report is also known as the income statement. It breaks down your business’ revenues, costs, and expenses over a given period of time (such as a quarter). This statement helps you compare your sales and expenses so you can make better predictions.
- Cash flow statement: This report is similar to the P&L, but it doesn’t include non-cash items like depreciation. Cash flow statements will help you see where your business is earning and spending money as well as its immediate viability and ability to pay the bills.
Bonus Tip: Don’t Do it Alone
Although we’ve outlined what you need to know for basic bookkeeping, performing these tasks can be challenging if you’re not specially trained. Fortunately, outsourcing your needs to a professional virtual bookkeeping firm is both cost-effective and accurate. When you outsource your bookkeeping needs, you only need to pay for a few hours of work per month instead of paying a full salary.
What’s more, you’re still getting professional work which will give you peace of mind that your books are legally accurate and tax time won’t be as stressful. Plus, you can outsource as little or as much as you want to be done.
So, if you’re looking for a virtual bookkeeping service that’s reliable and professional get in touch with Canadian Cloud Accounting today! Not only can we handle your business’ books, but we also provide virtual bookkeeping training! We look forward to serving you.