Accounting for small businesses is keeping track of, recording, and evaluating their financial transactions. It converts numbers into an understandable statement about their company’s profitability. Accounting is a more time-consuming component of running a business, but it is essential to avoid cash flow problems and heaps of paperwork. Purchases, sales, liabilities, and payments are all tracked by small business accounting. It is a big topic, but for small firms, it boils down to one thing:

  • Bookkeeping
  • Making financial statements
  • Tax returns must be filed

Accounting enables people to assess the health and value of a firm to make better short- and long-term decisions.

How to Account for a Small Business:

Here’s how to set up their small business’s fundamental accounting cycle.

Create a new bank account – 

To keep their work and personal finances distinct, they should open a separate bank account. A business checking account, as well as a savings account, will aid in the organization of revenue and the planning of taxes at the end of the year.

Record all income and expenses – 

A good small company bookkeeping system is built on the foundation of learning how to track and record business transactions. The source papers assist them in keeping track of their deductible expenses, preparing financial statements and tax returns, and tracking your company’s progress. It’s crucial to remember that they should only keep track of expenses that are directly related to their business.

Choose an accounting method – 

Before establishing a bookkeeping system, people must first decide on an accounting method for their company. The cash vs. accrual basis of accounting is the two basic techniques of recording accounting transactions. When they receive or pay cash, they record income and costs using cash-basis accounting. People employ the double-entry method of documenting transactions in accrual accounting, which implies they must make two entries for each transaction.

Transactions to trial balance – 

Transactions are documented as journal entries in a double-entry accounting system. The journal records the sums debited and credited, transaction dates, and explanations of the transactions in chronological sequence. After then, the journal’s balanced entries are uploaded to the general ledger. Changes are made to the ledger and the trial balance is created based on previous transactions and current balances.

Create an adjusted trial balance – 

Adjusting journal entries account for periodic expenses and income if people are utilizing the accrual method of accounting. This guarantees that the income and expenses for the period represented in the financial statements are accurately matched. An adjusted trial balance is created after the adjusting entries have been made to ensure that the debits and credits match the adjusting entries.

Create Financial Statements – 

After completing the adjusted trial balance, people can create financial statements for their company.

Reconcile and close their books – 

Making post-closing entries is the final phase in the accounting cycle. This is used to zero out temporary account balances and resume the accounting cycle. To capture the transactions for the next quarter, income and spending accounts must be closed. They could use cloud-based small business accounting software if they are new to accounting and find the whole procedure too confusing.