Small business owners often wear many hats while running their business such as being responsible for sales, customer service, and accounting. Small business bookkeeping is especially important to the stability and growth of businesses, and although their transactions may not be as large as some big companies, they often use the same system of accounts. By understanding the types of accounts and some common accounts of each type, you’ll know how to organize your company’s financial statements and where to find similar accounts on the financial statements of other companies.
Whether you’re just starting a small business or you’ve had one a few years, this breakdown of small business bookkeeping accounts will you stay organized if implemented properly.
It doesn’t get more basic than this. All of your business transactions pass through the Cash account, which is so important that often bookkeepers actually use two journals, cash receipts, and cash disbursements, to track the activity. Cash receipts are money received from consumers for the sale of goods or services. Cash disbursements are monies paid out to individuals for the purchase of items that are needed and used by a company.
#2. Accounts Receivable.
If your company sells products or services and doesn’t collect payment immediately you have “receivables” and you must track Accounts Receivable. This is money due from customers, and keeping it up to date is critical to be sure that you send timely and accurate bills or invoices.
Good accounting requires that an estimate should be made for any amount in Accounts Receivable that is unlikely to be collected. The estimated amount is reported as a credit balance in a contra-receivable account such as Allowance for Doubtful Accounts. This credit balance will cause the number of accounts receivable reported on the balance sheet to be reduced. Any adjustment to the Allowance account will also affect Uncollectible Accounts Expense, which is reported on the income statement.
#3. Accounts Payable
All small businesses have bills to pay. But it’s a little less painful if you have a clear view of everything via your Accounts Payable. Good small business bookkeeping helps assure timely payments and, importantly, that you don’t pay anyone twice. Paying bills early can also qualify your business for discounts.
The term accounts payable can also refer to the person or staff that processes vendor invoices and pays the company’s bills. That’s why a supplier who hasn’t received payment from a customer will phone and ask to speak with “accounts payable.”
#4. Loans Payable.
Sometimes small businesses borrow money from the bank to start the business and then make payments to the bank to repay the loan. These types of payments are “loans payable. Loans payable appear under liabilities on the balance sheet. A loan or note payable is an amount owed to a creditor for a line of credit or for capitalization of the business.
#5. Payroll Expenses.
Most small businesses have employees. This is the biggest cost of all for many small businesses. No matter how much you beg, few people want to work for nothing. Keeping this account accurate and up to date is essential for meeting tax and other government reporting requirements. Shirking those responsibilities will put you in serious hot water.
The Sales account is where you track all incoming revenue from what you sell. Recording sales in a timely and accurate manner is critical to knowing where your business stands and to track your sales goals.
The purchases account is a general ledger account in which is recorded the inventory purchases of a business. This account is used to calculate the amount of inventory available for sale in a periodic inventory system.
Under the periodic system, the amount of purchased inventory is compiled throughout a period and added to the beginning inventory to arrive at the amount of inventory available for sale. A physical count at the end of the period establishes the ending inventory valuation, which is subtracted from the amount of inventory available for sale to arrive at the cost of goods sold for the period.
#8 Capital Account
Capital is the owner’s claim against the assets of the business and is equal to total assets less all liabilities to external parties. The balance in capital account increases with the introduction of new capital and profits earned by the business and decreases as a result of withdrawals and losses sustained by the business.
Benefits of Small Business Bookkeeping
#1. Cash Management Benefits
Certain benefits of cash management include the ability to manage supplier and customer accounts by seeing them on paper, create a business budget, and track deposits and payments. With cash management, you’re able to account for every dollar and cent your business spends.
#2. Business Decision Benefits
Small business bookkeeping records offer benefits that help you make smart business decisions. With bookkeeping, you can identify money-making opportunities, avoid cash-flow problems, and find ways to increase income or decrease spending
#3. Compliance Benefits
No matter what type of business you have, compliance with business tax laws is a must. Certain benefits of bookkeeping, depending upon your situation, include the ability to pay income taxes, payroll taxes, workers’ compensation, and sales taxes. You’ll be less anxious about your bookkeeping records if you find yourself facing an Internal Revenue Service audit.
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