Small business accounting

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 less manual options.

Double-checking your numbers

One job that business owners don’t 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 chew through 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‘ve got 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:

Do I need an accountant?

Accountants are often thought of as tax people and, yes, they can certainly help you with taxes. But they do so much more. They can create and interpret accounting reports for you, show you which numbers really matter, and suggest next steps for your business.

And if you think you can’t afford one, think again. Many accountants and bookkeepers offer starter services for a really modest flat fee, so you’ll know what it’s going to cost you every month. Check out these guides on what an accountant does, when you should hire an accountant, and when you should hire a bookkeeper.

3. 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
  Where you pay a portion of profits to the government.
• Sales tax
  Where you add a tax to your sale prices and later pay that money to the government.
• Employee-related taxes
  Where you collect tax from employee pay and send it to the government. In some countries, the employer is also expected to pay extra taxes.

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 have to follow specific rules.

Getting a tax professional

Many new businesses wait till tax season to hire an accountant. But you shouldn’t leave it too late – they’ll already have a bunch of clients who need their tax done at exactly the same time. And make sure you have comprehensive, well-organised records of income and costs before you go to see them. Otherwise tax season will be gruelling and slow for everybody.