If you’re starting a business, then you’ll need to become familiar with at least a few bookkeeping and accounting basics. We talk you through the main tasks, some time-saving tricks, and explain where we fit in.
What is accounting?
Accounting is concerned with tracking money as it comes and goes from a business. Some of the information collected is reported to the government for tax purposes, but most of it is used to help the owner manage the business.
The three business accounting basics
Accounting is a big topic, but for most small businesses it boils down to:
- Keeping records of business transactions (basic bookkeeping)
- Creating accounting reports to help manage the business
- Filing business tax returns
1. Keeping records of business transactions (bookkeeping)
A major goal when starting a new business is to make some money. And you won’t know if that’s happening unless you have a reliable picture of income versus costs. Good record-keeping will:
- tell you if you’re profitable, or at least moving in that direction
- tell you if you’re likely to run out of money (even profitable businesses sometimes do)
- make tax season far easier because you’ll have all the information required to lodge your tax returns
This record-keeping is commonly referred to as bookkeeping. It’s critical to small business accounting, and there’s a real science to it.
How to do bookkeeping for a small business
You need a way to record transactions accurately and, preferably, quickly. Some businesses keep a logbook (a cashbook) for this sort of thing. In it, they write down every sale and every expenditure. But there are fewer manual options.
Recording income from invoices
Note all the invoices you send and check bank deposits to see you receive the money. Or use accounting software to send invoices and the rest will happen automatically.
Recording income at point of sale
Download sales data and transfer it to your accounts. Or get a POS system that can send the data directly to your accounting software.
Recording expenses
Use a dedicated bank account for business purchases and transfer bank data to your accounts. Or get your bank to send the information directly to your accounting software.
Keeping proof of purchase
Keep your receipts (photograph them on your phone before they’re lost) and enter the extra details into your accounts too. Or get an app which can read pictures of receipts and enter the data for you.
You can base your small business accounting on money received and spent, which is cash accounting. Or, for a more accurate picture of your finances, you can also take into account any money that you’re waiting on or planning to spend. This is called accrual accounting.
Double-checking your numbers
One job that business owners may not see coming when they start out is bank reconciliation. It’s where you cross reference your business books against business bank statements to make sure they agree with each other. It can take up a lot of time, but there are smart ways to speed up the process.
Keeping the books: the early days
As soon as you start incurring expenses during the set-up of your business, you’ll need to keep tabs on them. It’s simplest to set up a bank account that’s just for your business and use it for all your business transactions as far as possible. That way, business costs and income are kept separate from your personal finances.
Make sure you keep receipts and keep track of what each expense was for. One way is to print out bank statements and make a note beside each item. Then, when you have accounting software set up, all the details will be in one place ready to pull into it.
2. Creating accounting reports to help manage the business
Once your business is up and running, you’ll get a feel for how things are going. You’ll know whether you’re busy or not. And you’ll have a rough idea of whether costs are higher or lower than you thought. But you’ll need some formal reports to confirm what you think.
What are accounting reports?
There are dozens of accounting and management reports you can use to assess the performance of your business. But the most common are:
P&L (profit and loss) report
A comparison of expenses and income so you can see if you’re making money.
Balance sheet
Identifies what the business owns (including cash) versus what it owes.
Cash flow report
Shows if you have more, or less cash after all the sales, expenses, and lending activity have been boiled down.
Business dashboard
A live online report tracking your choice of business performance metrics.
This information will help you make numerous decisions: whether to borrow more money, whether or not to hire help, which products or services to focus on, and which ones to let go. Online accounting software such as Xero makes it simple for you to create these reports whenever you like. It always helps to have an accountant involved in the deliberations that follow.
Do I need an accountant?
Accountants are often thought of as tax people and, yes, we can certainly help you with taxes. But we can also help with so much more: creating and interpreting accounting reports for you, showing you which numbers really matter, and suggesting next steps for your business.
- Filing business tax returns
Tax is money that you’re legally required to pay the government. It’s applied to a lot of the things we buy, it’s taken out of people’s regular wages each payday, and your business will need to pay tax too.
Business tax comes in many forms and some businesses run into more than others. But three of the most common are:
- Income tax or Corporation Tax
Where you pay a portion of profits to the government. - VAT
Where you add a tax to your sale prices and later pay that money to the government. This only applies if you’re VAT registered. - Employee-related taxes
Where you collect tax from employee pay and send it to the government.
Lowering your business taxes
Business costs reduce your taxable income and therefore your tax bill, so make sure they’re all accounted for. Quality bookkeeping is vital here.
You need some accounting knowledge to work out all your costs. For example, you can claim wear and tear on assets, and the diminishing value of intangible assets – but you must follow specific rules.
Getting a tax professional
Many new businesses wait until tax season to hire an accountant. But you shouldn’t leave it too late. Make sure you have comprehensive, well-organised records of income and costs beforehand. Tax season will be upon us before we know it!
