To effectively expenses, track gross receipts, purchases, as well as other transactions, all firms must keep essential financial records. The records management can be whatever you want it to be, but a well-designed small business bookkeeping software will maintain your financial data in order, make reporting easier, & grow with the firm as it grows.
Choose between cash accounting and accrual accounting
Accrual accounting or Cash accounting can be used to monitor how cash goes into and out of a company with annual revenues below $5 million.
Revenues are recorded when cash is transferred by the business, & expenses are recorded when payment is made by the firm. Individuals employ the same type of accounting when checking their cheque books.
Accrual accounting tracks revenue when it is earned, which could be a long period of time until the client pays the company. Expenses are also reported when the company incurs them rather than when it pays for them.
Make a bank account for your business
For small and medium businesses, creating a different bank account for the business is essential. Ensure that all company transactions, not any personal bank accounts, move into or out of the account. Similarly, never use a business bank account for personal activities. We’ve already discussed how merging corporate & personal accounts can lead to problems.
Make a list of accounts for your business
The list of accounts you’ve created in the bookkeeping system to keep track of all the financial transactions. This chart serves as the skeletal framework for your complete bookkeeping system.
Make sure the bank reconciliation procedure is in order
While having the bank transactions immediately imported saves time, it does not eliminate the necessity for bank reconciliation. That’s the practise of checking the monthly bank statement to a Cash account in the business’s list of accounts to ensure that they are both correct.
The following is an example of a common reconciliation procedure:
Add all outstanding items to the payslip, like checks that haven’t been cashed yet. Just at the end of the declaration, write the updated total.
Check the payments on the bank statement for every error. If you discover an error, notify the bank right away.
Adjust your bookkeeping software’s Cash account to include bank-generated payments such processing fees & interest charges.
The rectified bank-statement balance should now be the same as the rectified Cash account balance. If not, you’ll have to look at all the bank statements as well as the bookkeeping account transactions to find out what’s going on.
Finding the source of a discrepancy between the bank statement total & your Cash account amount can be difficult. If you make it a habit to balance the accounts each month, you can easily limit your search to the transactions that are stated in that particular month. However, if you haven’t been trying to keep up with the reconciliation, you may have to hire an accountant to assist you in identifying the issue or issues.
Create a financial reporting system that works for you
Reports assist you in determining the overall financial health of your company. Most bookkeeping systems provide a plethora of reporting choices, but the majority of them will be irrelevant to your organisation. There are three essential reports that you should prepare and examine on a daily basis
Obtaining bookkeeping assistance
Setting up a strong tiny bookkeeping system can indeed be time-consuming, especially if you aren’t a professional bookkeeper. Getting Freshbooks is best for assistance rather than putting in a lot of time & effort to get the books up & running. We’ll set up the bookkeeping system for you so that the business gets off to a good start – and then we’ll save you a lot of time & stress in the process.
Keep track of your expenses
Managing to track your costs efficiently is the cornerstone of good company record keeping. This is an important step that helps you to track the business’s development, create financial statements, manage deductible costs, prepare tax returns, & back up what you say on the tax return.
You should start by creating a system for managing receipts as well as other key documents. You can do it yourself also. The IRS does not require business owners in the United States to maintain receipts for expenditures under $75.00, although it is a good practise to have.
Calculate the gross profit margins
The very first step toward generating more money overall is to increase your store’s gross margin. To figure out your gross margin, you’ll need to know how much it costs to make your goods. Let’s define the terms Price of Goods Sold (COGS) & Gross Margin for a better understanding.
COGS (Cost of Goods Sold): These would be the direct costs of manufacturing and selling a company’s products. This covers both direct labour and materials expenditures.
Gross margin: This is the percentage of total sales income that is maintained after all direct expenses of producing the service or product have been paid.
You should pay special attention to the following five sorts of receipts:
Entertainment and meals:
Everything’s a wonderful idea to hold a work meeting in a café or restaurant, but make sure you document it well. Write who attended as well as the objective of the dinner or trip on the reverse of the receipt.
Business trips outside of town:
The IRS and Canada Revenue Agency are cautious of persons who claim personal costs as company expenses. Your receipts, thankfully, also give a paper record of your company activity while you’re gone.
Expenses associated with the vehicle:
Keep track of when, where, and why you utilised the car for business, then apply the proportion to vehicle-related costs.
Receipts for gifts are as follows:
It depends whether the gift recipient attends the event alongside the receiver when giving tickets to a concert. If they do, the cost will be classified as entertainment rather than any gift. Make a note of these specifics on the receipt.
Home office receipts:
Calculate what proportion of your house is utilised for business and apply the percentage to home-related costs, just like you did with car expenses.
Starting a business from home is a fantastic way to keep costs down while still qualifying for certain unique tax benefits. You can deduct the amount of your house utilised for business, and also your internet connection, mobile phone, plus transportation to & from work places and errands.
Any cost that is utilised for both personal and commercial purposes must indicate the dual usage. For example, if you just have one mobile phone, you may subtract the proportion of time you use it for work. Gas mileage charges are fully deductible; simply keep track of all receipts and keep a diary of the business miles (where you’re going and why you’re there).
Create a method for bookkeeping
Before we get started on setting up a bookkeeping system, it’s important to know what bookkeeping is and how it varies from accounting. The day-to-day practise of documenting transactions, classifying them, & reconciling bank statements is known as bookkeeping.
Accounting is the high-level procedure that examines the development of a firm and uses financial statements to make sense of the information gathered by the bookkeeper. You’ll have to decide which bookkeeping system to utilise as a small – business owner:
- You may do it yourself using some tools. Alternatively, a basic Excel spreadsheet may be used.
- You get the option of hiring a local or cloud-based outsourcing or part-time bookkeeper.
- You can retain an in-house bookkeeper or accountants whenever your company is large enough.
- With so many possibilities, you’re bound to discover an accounting solution that meets your requirements.
Business owners in Canada and the United States must decide whether to utilise the cash and accrual method of bookkeeping. Let’s examine the differences between the two approaches.
Revenues and costs are recorded when they are genuinely received or paid using the cash method.
- Revenues and costs are recognised when a transaction takes place (even if the money isn’t yet inside or outside the bank), and this method necessitates the tracking of payables and receivables.
- Although Canadians are technically obligated using the accrual method, you can utilise the cash basis accounting throughout the whole year and make a single present estimation at year close to account for remaining receivables & payables for tax reasons.
If revenues are less than USD $5 million, American company owners can utilise cash-based accounting; otherwise, they need to use the accounting system.
Re-evaluate your approaches on a regular basis
When you initially start out, you could decide to handle your books with a basic spreadsheet, but as your business grows, you’ll want to look into more advanced options. As your business grows, it’s important to keep track of how much time you’re spending on the books & how much the time is paying you.
Because bookkeeping is no more on your plate, you can devote more time to your business and perhaps save money.