How to do accounting for a small business

Let’s know about how to do accounting for a small business. Accounting is not an end in itself. It should never be done simply for its own sake, as some entrepreneurs seem to believe.

These all add up to planning and control. Any accounting system should help entrepreneurs answer two key questions.

Is it his venture earning a profit? If the answer is no, entrepreneurs should find out why and do something about it.

And even if the venture is earning a profit, they should find out if it is as high as it should be. And what part of the venture is producing the profit.

What is his venture worth? Entrepreneurs and fellow investors, if any, invest their money in the hope of earning some return, so entrepreneurs should know whether their equity in the venture has gone up or down, and why.

How to do accounting for a small business

To keep track of what is happening. Thus an accounting system should accomplish the following major objectives for a small business:

1. The system should yield an accurate and thorough picture of operating results.

2. The records should permit a quick comparison of current data with prior years’ operating results with budgetary goals.

3. The records should provide suitable financial statements for use by management, bankers, and prospective creditors.

4. The system should facilitate the prompt filing of reports and tax returns to regulatory and tax collecting agencies of the government, and

5. The system should reveal employee fraud, traits, waste, and record-keeping errors.

Any accosting system, of course, must be consistent with the accepted principles of accounting apace and practice.

This means that a business must be consistent in its treatment of given data and given transactions. For this reason, the services of a public accountant ordinarily are required

Designing an accounting system is seldom well done by the amateur. Accounting, therefore, it serves the purposes as under:

  • To help solve problems
  • To help express future plans,
  • To help pursue opportunities and
  • To keep track of what is happening

Financial information must also be gathered for reporting to and dealing with the world inside and outside the business i.e., stockholders, employees, banks, government, potential investors, brokers, exchanges, regulatory agencies, and others.

Double entry system of record keeping

Accounting under a double-entry system in order to arrive at a final account passes through three sat, such as journal, ledger, and trial balance. This flow chart is seen from the following cycle:

How to do accounting for a small business
How to do accounting for a small business

Figure showing the Accounting Cycle

The books usually are maintained by a small business person and may include the following:

  1. Cash Book
  2. Purchase Book
  3. Sales Book
  4. Sales Return Book
  5. Purchase Return Book
  6. Bills Receivable
  7. Book Bill Payable Book

Accrual vs. cash system

Most modern accounting systems are based on an Accrual, rather than cash, system. In a cash see the accounts are debited and credited as cash is received and paid out.

In the accrual system, income earned and expenses incurred are recorded at the time the sale is made or the expense is incurred.

The use of the accrual method is preferable because it provides a more nearly accurate and up-to-date statement of profits.

Single entry vs double entry

The single entry method of record-keeping is crude and unscientific in that the accuracy of the financial position is not ensured.

On the other hand, in order to help ensure efficient account records, the double-entry method has been proven to be dependable for reasons of accuracy and auto-balancing.

Double-entry accounting serves three especially important functions when appropriate accounts are set up:

  • It keeps track of assets and liabilities, showing what form they are in.
  • It keeps accurate records of revenue and expenses.
  • It allows the financial condition of the small business to be determined easily by adding up all account balances for assets, liabilities, and equities.

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