Accounting is the soul of any successful business, whether a one-person company or Google. An accurate and well-managed accounting operation could be the difference between the success and downfall of a company. Accounting helps businesses keep track of payables, receivables, inventory, and so on, helping business owners make informed decisions.
If you are finding the tasks of GST invoicing and filing cumbersome, it’s time when you should think about automate the process of financial management. We will answer you in detail on how to manage accounts for small business.
Accounting is a costly business process requiring expertise, which is not affordable for small businesses. However, you can manage your business accounts without spending huge resources with the help of right accounting tools and guidance.
Small business is a relative concept; some businesses are small by area, some by people, and some by operation. To be very clear about the statement, you can consider a few parameters as a small business.
These parameters are not set by law or rulebook but only for better understanding. If your business fits into any of the following parameters, you can consider your business as a small business.
Small business accounting is a process to record, track and maintain financial records. Accounting for small business emphasizes on invoicing, bank statement tracking, vendor & debt ledger management, and expense tracking.
If you maintain a diary, cashbook, or excel sheet to track the expenses, sales, or payments. In that case, you are in the initial phase of accounting, i.e., bookkeeping. But here, we are not talking about recording transactions but keeping track of all these transactions in a smarter way for your business.
The priorities of accounting for small business owners are very different from the accounting system of large businesses. Here are the significant solutions offered by the SMB accounting software.
Here, we list down a few essential and basic financial terminology that every small business owner should know.
Financial statements are consolidated and summarized reports representing all the business transactions in different financial periods. They give an overall picture of accounting activities, performance, and financial health. Here are the most important financial statements for small business:
Reports are the summarized data related to any specific financial transaction of business. Some of the accounting reports for small businesses are:
If you haven’t studied accounting in your college, you might wonder what are cash and accrual accounting methods. Let’s explain both these bookkeeping services for small business in layman terms.
Cash Accounting refers to recording a transaction is recorded only when consideration is exchanged. For example, if you own a book shop, you sell books and immediately receive cash from customers.
You can quickly enter the transaction in your accounting software or books when the sale is completed. Whenever you order books from a supplier, you record the purchase transaction only when you pay the supplier by cash, cheque or wire transfer.
The accrual accounting system involves transactions that are recorded and due. This accounting method has nothing to do with payment and receipt. The accrual method depends on the accrual of events instead of an exchange of considerations.
Suggested Read: Difference Between Cash Basis Vs Accrual Basis of Accounting: Which is Better for SMBs?
| Factors | Cash Accounting System | Accrual Accounting System |
|---|---|---|
| Recording Event | Exchange of cash, payment, or consideration | On the due basis, as soon as the transaction is executed |
| Complexity | Extremely Simple | Requires Basic Understanding |
| Accuracy | Doesn’t give accurate statements & reports | Gives Accurate reports and financial statements |
| Acceptability | Generally, not accepted as the standard accounting system | Widely accepted accounting system across the world |
| Usability | They are used mainly by Professionals, joint ventures, limited-time collab businesses, etc. | Used by almost all industries for an accurate and legally compliant accounting |
The Accrual accounting system is the widely accepted accounting procedure in India. The cash system of accounting is neither accurate nor legally accepted. Therefore, you should always choose accrual accounting system unless you specifically need the other one.
Accounting for small businesses is extremely easy if done step by step. Here is how you can manage accounts of your business in an easy way.
One of the first things to do is setting up a separate business bank account for your business. This way, you can easily track all the transactions related to your business.
Manual recording of transactions is a thing of the past. Even excel sheets aren’t a viable option. Accounting software makes invoice creation and sharing easy even on your smartphone. It is effortless to generate invoices, record transactions, and view ledgers with the help of accounting software.
Always issue invoices for the goods and services you provide with GST details. If you generate an invoice with an accounting app, it will automatically record the transaction and update the debtor ledger.
Always record all the Purchases, Expenses, Receipt and Payments transactions. You must specify three things while recording these transactions: the amount of the transactions, the nature of the transaction (sales, expense, purchase), and the name of the party against whom the transaction is recorded.
Ledger posting is extremely important to keep track of your debtors, suppliers, creditors, and clients.
“Suppose you record all the transactions of a day in your diary in chronological order. Imagine a regular customer of yours, say ” Mr. A” pays at the end of the month. How would you know the total amount receivable at the end of every month from that particular customer?
Even if you have recorded all the transactions, it will be tedious to determine the receivable or payable amount at the end of a period. You might have hundreds of customers, suppliers, and creditors.
Imagine you keep another notebook with a separate page for Mr. A’s transactions. Whenever Mr. A buy any goods, you post them once in your first diary in chronological order and enter the transaction on Mr. A’s books in your other diary. Now at the end of the month, you can turn Mr. A’s page in your diary and calculate the due balance.”
This way, you can keep accurate records of all your receivable and payable amounts at any given time. This is what ledger posting is all about. Don’t worry if you think it is a clerical work and would consume much of your time. Most of the accounting software for small business does this automatically for you.
Small business accounting software directly debits the invoice amount to the customer’s account. Also, whenever you receive a payment, you can enter the payment amount and it automatically settles the debtor’s balance.
You can just enter the name of your customer in the accounting app and you can see all the transactions, due balance and overdue bills with a few taps on your phone screen.
This is probably the most complicated part, but not if you use the right accounting tools. This part of business includes determining the financial position of your business. The following things are most crucial from SMB’s perspective.
Here is how you can determine the profit and loss of business at the end of the financial year.
For Trading Industry:
Profit/ Loss = Sales – Cost of Goods Sold – Expenses
COGS (cost of goods sold) = Opening Stock + Purchases – Closing Stock
For Service Industry:
Profit/ Loss = Total Value of Services – Expenses
Current Liabilities
Liabilities are the amount your business owns to pay others. Here’s how you can calculate Liabilities during any point in time:
Current Liabilities = Amount Payable to Suppliers + Other Creditors + Unpaid Expenses
Current Assets
It represents the ability of your business to pay back the liabilities.
Assets = Amount Receivable from Customers + Stock in Hand + Cash in Hand/Bank + Pre-Paid Expenses
There are a few other things to keep in mind when managing your small business accounting:
Using simple invoicing software or smartphone-based accounting software will ease your basic bookkeeping tasks. AlignBooks, myBillBook and Vyapaar are some of the most and easy-to-use accounting software used by thousands of SMBs in India. You can also generate invoices by using these accounting apps.
Always use separate bank accounts for personal or business transactions. This will improve accuracy and reduce complexity in accounting.
It’s harder to trace cash transactions. Use bank transfer, UPI, or cheque to make or receive payments.
Whenever you make digital payment from PayTM, Gpay, etc., always enter remarks about the payment like ” for electricity.”
Accuracy is vital. If you make a manual entry, always double-check the calculation for errors or mistakes.
If you enter a bulk of invoices, payments, or receipts at once, it’s prone to error and omission. Regularly update your books of account for accuracy.
Here is our checklist of the most important tasks to manage your business account books better:
Suggested Read: How Accounting Automation Can Help Businesses
“The word accounting comes from the word accountability. If you are going to be rich, you need to be accountable for your money.” – Robert T. Kiyosaki
Besides long-term future positioning of the company, here is why you need to invest in the accounting software of small business.
Small businesses need to keep track of their income and expenses to determine their financial position, due balances, and receivables.
Yes, you can do your accounting with the help of simple bookkeeping or accounting software. AlignBooks is an easy-to-use accounting app that can assist in maintaining your books of account yourself.
Yes, accounting is necessary for small businesses to track their income and expenses, understand their tax requirements, and comply with government regulations.
Bookkeeping is the recording of financial transactions, while accounting is the interpretation and analysis of those transactions to provide information about a business's financial position and performance.
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