Small Business Bookkeeping: The Basics You Can't Afford To Ignore

Bookkeeping is an essential part of every business regardless of its size. Many small business owners overlook the importance of business bookkeeping and forget that financial data is the key to making accurate business decisions. According to the Small Business Administration, over 50% of small businesses fail in the first year and 95% fail within the first five years.

These numbers could likely be greatly reduced if small business owners understood the importance of business bookkeeping and business accounting. After all, without the proper accounting system, it’s not possible to survive because a good financial plan is like a road map that shows us exactly how to make the correct choices for your small business.

If you’re a business owner and you don’t understand the different types of “accounts” your outsourced bookkeeping service uses to organize your books and finances, measuring the success of your business will be impossible. It doesn’t matter how good you are at online marketing if you don’t have a clear financial picture of your business you’re going to run headlong into cash flow problems. 

Bookkeeping tells you the state of your business. For example, where are your finances? And where are they going? Can you quickly answer that question? We hope so. What do your accounts receivable look like? Are you constantly paying your own bills late? Not sweating the small stuff like understanding your own books is trouble in the making.

If you’re new to managing your finances, we recommend outsourcing your small business bookkeeping. Here are some of the accounting and bookkeeping basics you need to understand:

Cash Account- It doesn’t get more basic than this. Cash is an important account because cash transactions affect all other business and financial processes. Every transaction passes through the cash account and it is so important that outsourced bookkeeping services often use two journals, Cash Receipts and Cash Disbursements- to track the activity.

Inventory- Products you have in stock to sell are like money sitting on a shelf and must be carefully accounted for and tracked. Inventory is an asset and its ending balance is reported in the current asset section of a company’s balance sheet. Inventory is not an income statement account. However, the change in inventory is a component in the calculation of the Cost of Goods Sold, which is often presented on a company’s income statement.

Accounts Receivable-  On a company’s balance sheet, accounts receivable are the money owed to that company by entities outside of the company. The Accounts Receivable account tracks money due from customers and keeping it up to date is critical so to ensure that you send timely and accurate bills or invoices.

Accounts Payable- Sending money out of the business can feel tough, but it is a little less painful if you have a clear view of everything via your Accounts Payable. Accounts Payable are current liabilities that will be paid off within one year. They are short-term debt for items such as office supplies, taxes payable, and short-term loans. Once they are used by the business, they are shown as an expense.

Does Your Business have a Debit Ratio of .04 or higher?

Loans Payable- Money your business has borrowed to buy new equipment, vehicles, furniture, or other items for your business falls into the Loans Payable account. It is classified on the balance sheet as a current liability and is where you will track what’s owed and what’s due.

Payroll Expenses- It’s a fact of business—if a company has employees, it has to account for payroll and fringe benefits. Managing payroll expenses are one of the crucial tasks, as you have to look after government tax policy and other responsibility. Not filing accurate reports can eat up a lot of the time you should be spending on growing your business because you’ll have to be dealing with the government.

Owners’ Equity- Owner’s equity represents the owner’s investment in the business minus the owner’s draws or withdrawals from the business plus the net income (or minus the net loss) since the business began. The owner’s equity is viewed as a residual claim on the business assets because liabilities have a higher claim. Usually what happens is “Small business is owned by a single person or a group of people, so there’s no share of stock exists”, according to Epstein. Instead, these investments are shown in the capital account and if any amount is withdrawn for personal use, it is mentioned in the drawing accounts of the owner.

Sales- Net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales. Recording sales in a timely and accurate manner are critical to knowing financial condition.

Purchases-  The Purchases Account is an account in which the inventory purchases of a business is recorded. The Purchases Account is where you track any raw materials or finished goods that you buy for your business. It’s a key component of calculating “Cost of Goods Sold” (COGS), which you subtract from Sales to find your company’s gross profit.

Retained Earnings-  Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. This amount is adjusted whenever there is an entry to the accounting records that impacts a revenue or expense account. A large retained earnings balance implies a financially healthy organization. Managing this account doesn’t take a lot of time and is important to investors and lenders who want to track how well the company has done over time.

Many small business owners think of bookkeeping as an unwelcome chore but if you understand and make effective use of the financial data your bookkeeper collects, bookkeeping can be your good friend by helping you run your business more effectively.

Limitless Investment and Capital Outsourced Bookkeeping Services in Denver

Accounting is all about using financial data to drive decision making. This financial data is prepared through outsourced bookkeeping services. Bookkeeping is the process of tracking your business assets, liabilities, income and expenses to help you make smart, informed business decisions. This is an ongoing process that should be performed at least monthly. To save time and the headache associated with this, it is smart to invest in bookkeeping services for your small business.

Our professional outsourced bookkeeping services will help your small business produce useful, accurate data on a monthly basis. Our Certified Public Accountants will work with you to help you understand the financial health of your small business. Get in Touch today to learn more about our small business outsourced bookkeeping services.