Running a small business is no child’s play. Starting from coordinating resources and handling manpower to delivering products or services, everything is complex.
Moreover, when small business operations come with the added burden of handling finances, it can become quite daunting to manage money efficiently during the early stages of business development. Hiring an accountant is an option, but for budding businesses, it can be expensive. This is why every small business owner must master the art of accounting at some level.
In India, where the economy thrives in a dynamic state, learning accounting can be greatly beneficial for managing finances. Small business accounting involves a clear-cut analysis of the people, system, and process. With accounting, you can complete your payrolls and clear invoices easily while managing your taxes.
Besides, when you have a sound knowledge of accounting terms, you can clearly define your financial plans and curate strategies to review your company’s financial goals. Now, we move on to a comprehensive guide of how to do accounting for small businesses in India.
What is small business accounting?
There is no denying that implementing efficient accounting policies is the best way to counter the financial problems of a small business. Businesses often struggle with debts, insufficient working capital, underestimating start-up costs and late fines on payment of taxes because their accounts aren’t structured or settled. With a perfect accounting system in place, the financial health of a business can be greatly benefitted.
But the question is: What exactly is small business accounting? Well, small business accounting is a high-end, orchestrated process that analyses the financial progress of a business.
Small business accounting involves gathering financial data and generating financial statements to track the influx and efflux of money from business accounts. Accounting activities are responsible for tracking processes such as sales, payments, purchases, and obligations.
With small business accounting, budding businesses can measure the worth and financial health of a business to ensure long-term and short-term success. This can help businesses to make a better-informed decision regarding their business economy and find out what financial methods best suit their organisational objectives in the long run.
Accounting Terminology & Accounting Statements You Should Know
Sound knowledge of the various account terminologies and statements is necessary to understand the financial and legal obligations involved in accounting. To help you with accounting basics, here are some terms that you need to know for your financial success. Have a look!
- Assets: They are the resources with economic value that can provide future benefits for businesses. The assets provide future benefits as they hold the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the business entity or facilitate future services already paid in the past. Assets are reported on the company balance sheets and can help businesses generate cash flow, reduce expenses and improve sales for their business. They include current, fixed, liquid and prepaid expenses. Assets are responsible for business growth.
- Liabilities: Liabilities are the money that you owe to someone. Liabilities also represent funds received in advance from customers or any other party. Types of liabilities include mortgages, loans, accrued expenses, account payables, bonds etc. The major difference between liabilities and assets is that liabilities present a future obligation for the business, whereas assets offer an economic benefit. In a nutshell, assets are the entities in your company’s balance sheet that can promote your company growth, whereas liabilities are what you owe to others.
- Accounting period: The accounting period denotes the span in which a set of financial statements are released. The accounting cycles or periods track financial events from when the transactions first occur to when they end.
- Accrual: This type of record-keeping adjustment includes expenses and revenues not yet recorded in companies’ accounts on account of them not being “actually” paid/ received in cash/ bank. This is necessary to get a more realistic idea of income and expenses during a specific time to draw a long-term picture of the business that cash accounting can’t provide i.e. this gives more a periodic view of expenses and revenues
- Capital: The capital of a business refers to the money put into the business by an individual or proprietor. It represents the net ownership interests of investors/ owners in a business. It is used by enterprises to pay for the ongoing production of goods and services to generate profit.
- Cash flow: Cash flow is the total amount of money that comes into and goes out of a business, and it includes all cash that a business receives from operations, investments and financing.
- Depreciation: The depreciation process is about determining the reducing value of a tangible asset over a given period of time. It helps gauge an asset’s overall useful life and helps understand the benefits of the investment in the asset over the course of the business.
- Dividends: Dividends include an enterprise’s earnings or profit, which a business pays to its shareholders as a reward for their investment in its equity.
Most common accounting reports you will need to create for small businesses
A crucial aspect of small business accounting is keeping records and reports updated for taxes. Businesses can use structured, accurate reports to grow and expand. Here are some common and important reports that every small business owner needs to create.
Statement of Profit and loss or Income & Expenditure
Source: Adobe Stock
When it comes to financial reports, this is one of the most important records. This record tells you how much profit your business makes, where your money comes from and where you spend your money. Every business has different accounts for income/ revenues and spending categories. Small businesses should create and analyse the profit and loss report at least on a monthly basis to compare results, look at the trends and figure out what is working and what isn’t.
The balance sheet of a business gives an idea about what a business has as its assets and what it owes as a debt in a certain period of time. A balance sheet includes bank account information, investment account information, and account receivables which is an amount owed by customers for purchases made on credit. It also includes the worth and information of assets like equipment and other saleable and intangible properties. There are liabilities as well that include business loans, credit card loans, etc. In fact, the accounting equation is also based on the data of the balance sheet, and it states:
The accounting equation is the cornerstone for the double-entry bookkeeping system, and it establishes the relationship between assets, liabilities, and business equity. As per the accounting equation, for each transaction, the total debits equal the total credits.
Contingent liabilities are liabilities that are incurred depending on the outcome of a specific event. Some examples of contingent liabilities include potential lawsuits, product warranties, and pending investigation, etc. For contingent liabilities, there are three GAAP-specified categories: probable, possible, and remote.
Accounts payable aging reports
When you have any vendors associated with you, the A/P report helps you pay on time. This report tells you who you owe and how much you owe so that you can keep your books updated and make the payments before the due date. By doing so, you can avoid late fees and other costs. If you pay on time, you can also get early payment discounts for your reliability from trusted vendors.
Account receivable aging reports
If you aren’t running an NGO and your business doesn’t belong to the charity group, then you need to send invoices for all of the work that you do. As small business owners, you must look into every detailed aspect and ensure that all payments are paid and collected. The A/R aging reports are all about what you do regarding payment collection. This helps you clear outstanding dues and manage your company situation without incurring any financial strain.
Revenue by customer
The customer revenue report denotes how much money you made from each customer over a period of time. This helps you focus on reliable sources of revenues, boost conversions, hike return on investment (ROI) and focus on customer retention while you plan your taxes before time.
A step by step guide to do accounting for your small business
If you have been searching for the answer to your question about how to do small business accounting, here are some basic tips.
- For starters, you need to plan your budget, strategise about where your money comes from and determine how you plan expenses.
- Then you need to make sure that you get your payments on time, and if you don’t, make sure that you have a backup source of income or any backup influx of money to keep your working capital firm.
- Ensure that you have a separate bank account for your small business because this can help you to save money on taxes and keep track of your money. With a separate bank account, it will be easy to check for expenses and write separate checks so that every financial activity can be monitored easily.
- Select a method from different accounting blueprints and develop a payroll system. The payroll system is integral to calculate the payroll accurately in compliance with the specified tax system. Defining a payroll system allows companies to easily manage their employees’ salaries, taxes and other essential deductions needed to calculate EPF, SOCSO, etc.
- Plan your tax payments ahead of time and avoid fines that are applied as late fees.
- Have accounting software and integrate it with your business instead of paying for a full-time accountant.
Follow the above-listed steps so that you can make accounting easy for your business. In a dynamic economy, your goal is to be a stable financial organisation. Plan your accounts ahead of time and propel your business growth to new heights.
1. What is the best accounting system for small businesses?
The best way to handle your accounts is through an accounting software that automates all your financial operations. It can help small businesses to have a clear understanding of their profits and losses, track the account receivables and payables and be ready for the tax season. When small businesses grow, they need more complex and custom ERP and finance solutions. To fulfill their growing needs, there are several accounting software available in the market. These include:
● Tally.ERP 9.
● QuickBooks India.
● Zoho Books.
● MargERP 9+
● Busy Accounting.
2. Do I need an accountant for my small business?
Although most businesses don’t need an accountant, a small business can engage an accountant if their budget permits. This helps them to evaluate their accounting software, review the internal controls, get tax advice, etc. Accountants are usually needed when a small business needs its financial statements to be reviewed or audited to get a bank loan, bid on a job, to apply for grant, etc.
3. Does a sole proprietor need an accountant?
Sole proprietors don’t usually require individuals to maintain separate records for their business and personal assets. But if you are considering expanding your business, then you can hire one.
4. Do I need an accountant if I am self-employed?
Small businesses must hire an accountant to streamline their financial front because accountants aren’t that expensive. SMEs can also consider remote accounting as it is flexible, the perks are manifold and it is inexpensive as well.
5. What is the current market size for small business accounting?
In India, the accounting software market is expected to grow at a CAGR of 8.5 % during the forecast period 2019 – 2024. So, it can be concluded that the current market size for small business accounting is massive in the global sphere.