A startup business owner can be many things—an attorney, a restaurateur, a designer, a dentist, or a metal fabricator. But small business owners have 1 thing in common: most of them are inexperienced in bookkeeping and accounting.
However, properly tracking your financial transactions is part of having a startup business scale and grow. Accounting and bookkeeping systems can help you control costs and maximize revenue.
We understand that accounting and bookkeeping can be complicated for startup business owners. To help you get started, we created this guide about what to do to track and keep your business’s numbers properly. But first, let’s differentiate bookkeeping from accounting.
Bookkeeping vs. Accounting
Bookkeeping is how a small business like yours keeps financial affairs in order. It’s the practice of tracking daily transactions and collecting all the data needed for further analysis. The accounting records will also allow you to claim tax deductions.
Accounting, on the other hand, is seeing the bigger picture. It uses the records gathered during the bookkeeping process and focuses on understanding the financial health and costs of the business.
Accounting and Bookkeeping Basics for Small Businesses
The following covers the basic and most important steps you should take to keep your accounting and bookkeeping departments precise:
1. Open a bank account.
Suppose you have registered your law firm accounting in Ottawa and are about to start business operations. Before generating significant cash flow, open a bank account where you can stash your income and ensure it’s safe. Opening a bank account will protect your assets in unfortunate cases like lawsuits, bankruptcy, and audits.
It also makes tax time easier if you keep your business transactions separate from your personal transactions.
2. Choose a bookkeeping method.
Choose from 2 main bookkeeping methods, single-entry or double-entry, to determine how and where you record each financial transaction before you can start keeping them.
Single-entry bookkeeping method is a more straightforward choice; it requires you to record each financial transaction only once in your overall bookkeeping record. This works for startups with no more than 1 or 2 business transactions per month.
On the other hand, double-entry bookkeeping will have you record each financial transaction twice, once as a debit and another as a credit. If you choose this method, make sure you’re keen on catching the most minor mistakes to prevent them from becoming major financial problems.
3. Establish an accounting system to track your small business expenses.
Think of your accounting system as the foundation of your small business bookkeeping. This is crucial to track expenses and organize receipts and other vital records.
Establishing an accounting and bookkeeping system helps you monitor your business’ growth, build financial statements, keep track of deductible expenses, prepare tax returns, and legitimize your filings.
4. Set up a ledger.
Setting up a general ledger is like making a journal entry. You should record each financial transaction—making a sale, accepting a client’s invoice, paying bills, etc.
You can set up a ledger by using a spreadsheet, although this can be complicated when you juggle multiple accounts. To avoid costly consequences caused by a simple error, you can purchase bookkeeping software to automate the record-keeping process. You can also opt to work with an accountant or outsourced professionals for bookkeeping, accounting, and auditing in Malta.
5. Create a payroll system.
Hiring outside help makes sense, especially when your business starts to expand. Aside from having self-checkout systems to allow for smoother and faster transactions for customers, pay attention to your workforce and decide whether you should hire a helper from an employee or an independent contractor.
For employees, make sure they have payroll schedules and that you’re withholding the correct taxes.
6. Determine your tax obligations.
A tax expert will help you determine your potential tax obligations, which will vary depending on the business’s legal structure. For example, most self-employed enterprises claim business income on their personal tax return. Meanwhile, corporations have separate tax entities; they are taxed independently from the owners. On the other hand, your income from a corporation will be taxed as an employee.
7. Find the right business accountants and financial professionals.
As a business owner, you naturally want to understand generally accepted accounting principles (GAAP). Although this is not a rule, educating yourself about it will help measure and discern your company’s finances. For extra guidance and financial planning help, consider working with small business accountants and financial professionals. You can choose an accountant, a certified public accountant (CPA), a bookkeeper, a tax preparer, or a tax planner.
8. Reevaluate your methods periodically.
Business financial statements, along with your business growth, can get more complex. As you’re expanding, do away with using a simple spreadsheet to manage your books. You can opt for more advanced methods, like online resources and bookkeeping and accounting software.
You must reevaluate your methods periodically to reassess how much time you spend on your books and how much it costs your business.
Launching a small business can be overwhelming, especially when you need to deal with bookkeeping and accounting tasks. Although you can hire professionals to track your financial transactions, you must at least learn the basics for both. This way, you’ll navigate the business world and have your store’s finances in order from the beginning. Make sure your business thrives by following the basic rules outlined above.