Small Business Accounting: 12 Essential Basics You Should Know

12 Essential Basics of Small Business Accounting

Let’s take a look at the 12 essential basics of small business accounting that help you make informed financial decisions.

1. Set Up A Separate Bank Account

Setting up a separate bank account is a good starter for small businesses to manage their accounting. This will prevent you from blending personal and business transactions, which can lead to further confusion.

Not only will opening a separate bank account prevent a mix of personal and business transactions, but it will also make it easier for you to manage your overall accounting aspects, from bookkeeping to financial reporting.

1. Choose An Accounting Method

Before starting to do bookkeeping or record your business transactions, it’s best to decide on an accounting method. There are two primary accounting methods, the cash method and the accrual method, that you can choose based on your business needs.

How do they differ? Let’s take at the definition below:

• Cash method: Cash accounting records revenues and expenses when received and paid. This method emphasises the cash flow in and out of the business rather than basing it on when revenues and expenses are physically earned and incurred.
• Accrual method: Accrual accounting is the opposite of cash accounting. It recognises revenues and expenses based on when the physical goods or services have been exchanged, regardless of when the payment is made.

1. Perform Bookkeeping To Record Your Transactions

After deciding on an accounting method, it’s time to do bookkeeping to record your transactions. Inside your bookkeeping, there should be details about your financial transactions, including income, expenses, purchases, sales, and other financial activities.

The bookkeeping process produces journal entries. These entries are further classified into different categories, such as income, expenses, purchases, sales, and other finance-related entries. Consolidating all of these journal entries into a general ledger is what you should do next for a comprehensive overview of your financial records.

1. Issue Invoices and Track Receivables

Invoicing is an important aspect of small business accounting. The documents, or invoices, serve as documentation of receivables or amounts owed to your business that you must track as they provide a basis for tracking future income.

After making invoices, the next thing to do is to hand them to your customers. This is done to ensure they make on-time payments for your goods or services, further allowing you to retain a stable cash flow to support your operations.

Using invoices is always recommended as they provide legal protection in case of disputes, build your professional image, and create better customer communication regarding any applicable discounts or taxes.

1. Track Your Business Expenses

Aside from keeping track of your transactions and future income, small business accounting also entails tracking expenses. Expenses are the costs you incur for running your business. Rent, salaries, maintenance, and depreciation are among the factors included as expenses.

By tracking your expenses, you can gauge how much costs are needed to run your operations. This will help you in setting benchmarks regarding how much income you should be earning to bring profit to your business.

1. Set Up A Payroll System

Many small business owners start as single-man shows. However, as their businesses grow, they should consider hiring employees to help handle and finish the tasks.

If your small business hires employees, you should set up a payroll system. By having a payroll system, you can make accurate wage disbursement, tax deductions, and benefit calculations for the employees working for your company.

Not only will a payroll system aid in the aforementioned tasks, but it also saves your time on complicated payroll processing. This, in turn, enables you to pay your employees on time, preventing customer dissatisfaction and possible legal consequences.

1. Understand Your Tax Obligations

Tax obligations can be a challenging subject to bring to the table. But, as a business owner, you must understand your tax obligations and make timely payments to avoid penalties.

Fortunately, the Ministry of Finance grants a corporate income tax system to encourage enterprise growth. This makes it easier to pay taxes on time while retaining a larger portion of your profits.

The system is divided into:

• Start-up tax exemption scheme

Income from companies in Singapore is taxed at a flat rate of 17%. However, a start-up exemption scheme exempts newly established companies from taxable profits in the first three years.

• Partial tax exemption scheme

The government has designed a partial tax exemption scheme for small and medium-sized enterprises (SMEs) to impose these businesses with partially taxable profits.

• Group relief

A group relief system is designed for multiple holding companies. It reduces the overall tax burden for the whole group.

• Tax incentives

The Singapore government adopts tax incentives to encourage new and high-growth activities. Tax incentives are provided for qualifying activities and income generated. Otherwise, earnings from non-qualified activities will be taxed at the corporate income tax rate.

1. Reconcile Your Bank Statements

Reconciling your bank statements with accounting records is another process you should do. This process ensures that the financial records in your accounting system are accurate and have been reported by the bank.

Furthermore, it assists you in identifying any discrepancies or errors in your accounting records. Thus, you can take proactive steps to correct them, ensuring the reliability of your financial data.

1. Prepare Financial Statements

After reconciling your bank statements, you can proceed to prepare the financial statements. Financial statements include the income statement, balance sheet, and cash flow statement. We’ll go into greater detail about each of them below.

• Income statement

An income or profit and loss statement is a significant financial document you should have in hand. It gives you insight into your Company’s revenues, expenses, and profits or losses over a month, quarter or year.

• Balance sheet

A balance sheet is a financial statement that shows your Company’s assets, liabilities, and capital over a specified period. It details your Company’s income and expenditure.

• Cash flow statement

A cash flow statement summarises your Company’s inflow and outflow of cash over a specific time, providing valuable insights into the financial health and operational efficiency of your business.

1. Develop A Budget Plan

After obtaining insights about your Company’s financial status from the financial statements, the next thing to do is develop a budget plan. Solid budget planning gives many benefits that help your business strive towards success.

When you have a budget, you can easily plan your expenses, prioritise valuable projects based on their expected ROI, and determine resource allocations. Without a budget plan, you risk overspending, misfocusing on non-beneficial activities, or misaligning resources, resulting in financial losses.

1. Leverage Accounting Software

Many small businesses conduct accounting using manual methods, such as writing on pen and paper or using Excel spreadsheets. While using this method may appear to be easier at first, it could get more complicated as the business expands.

Thus, as a business owner, it’s always best for you to leverage accounting software. Using software will allow for more streamlined bookkeeping to record your transactions, gather your invoices, and track your expenses.

Here’s the list of small business accounting software that you can choose from:

Best Small Business Accounting Software

Xero

Xero is a user-friendly cloud-based accounting software that supports real-time collaboration. It has notable financial management features, such as invoicing, expense tracking, bank reconciliation, and more. Using Xero, you can seamlessly integrate with a variety of third-party apps to simplify accounting.

Zoho Books

Zoho Books is an accounting solution that streamlines several tasks, such as invoicing, expense tracking, inventory management, and more. It also has a user-friendly interface and provides ease of integration with third-party apps.

QuickBooks Online

QuickBooks Online is an accounting software that provides both cloud-based and mobile access for convenient financial management. It comes with a range of features that benefit small to medium enterprises (SMEs), including payroll processing, financial reporting, invoicing and more.

NetSuite

NetSuite is a comprehensive cloud-based business management that’s suitable for small businesses. It offers several valuable accounting functionalities, such as financial management, order processing, inventory management, and more.

Sage

Sage is an accounting solution with notable features for small businesses, such as Sage 50cloud and Sage Intacct. It supports invoicing, expense tracking, and financial reporting that small businesses can use for their accounting.

Wave

Wave is a free accounting software option that caters to small businesses. It includes features for invoicing, expense tracking, and basic financial reporting. Wave is suitable for startups and small businesses with straightforward accounting needs.

1. Seek Accounting Guidance

Seeking guidance from professional accountants is always recommended for small businesses to manage their accounting. Even if you understand the basics of small business accounting, applying them the right way may be challenging if you’re just starting.

So, how can an accountant help with your small business accounting? Take a look at the general services provided below:

Bookkeeping Services

Bookkeeping services entail a bookkeeper to record, sort, and store your financial transactions. Later, you’ll have detailed insights into how your business performs based on your income, expenses, purchases, and sales.

Tax Compliance Services

Tax compliance services ensure that your company adhere to the tax laws and regulations. Calculating the appropriate tax amounts and making sure you make on-time payments is what an accountant will do for your small business when you avail of this service.

Payroll Services

When you opt for payroll services, you’ll have your payroll activities, such as calculating employee salaries, disbursing wages, computing deductions, and making on-time payments covered.

XBRL Conversion Services

XBRL (extensible business reporting language) conversion services help you process and convert financial data into a digital format. This simplifies financial reporting and compliance with existing regulations.

FRS Advisory Services

FRS (financial reporting standard) advisory services support you in preparing financial statements. Financial reporting often involves complex standards and regulations, which you can simplify by outsourcing the entire process.

Final Thoughts

Small business accounting is an essential knowledge that should be implemented to bring your business the growth it deserves. It requires thorough financial recording, reporting, and analyses to make well-informed decisions to guide your business toward success.

However, if you’re still unsure about how to do it the right way, you can always outsource your accounting services. Our accounting professionals will handle the bookkeeping, tax compliance, payroll, and other financial management aspects for you.

This way, you can focus on more important things, which is to drive your business towards success.

Ready to streamline your small business accounting? Get in touch with us today for a free consultation. Our representative will get back to you shortly.

FAQs

Is it better to do small business accounting by myself or outsource it?

Performing your small business accounting or outsourcing it is entirely your decision. There are several factors to consider, including efficiency, accuracy, and expert guidance, all of which can be obtained easily by seeking assistance from an external party.

How much do accounting services cost?

The cost of accounting services will depend on the type of assistance you need. It also varies depending on the service provider. Get a free consultation and quote from us today.