Welcome to the world of bookkeeping! Here’s a fun, but awesome way to get an overview of what is involved in small business bookkeeping.
Imagine you’re the captain of a ship, and your books are the ship’s log. For a smooth sail, first, set up your chart by organizing your financial accounts: assets, liabilities, equity, income, and expenses. Every transaction is like a new entry in your log. When you buy supplies, that’s a debit to your expense account and a credit to your cash account. Sales bring in the treasure, recorded as a credit in your revenue account and a debit in your cash or accounts receivable.
Regularly reconciling your ship’s log with your bank statements will ensure you’re on the right course. Then monthly or quarterly, you summarize your logs into financial statements like the balance sheet and income statement. These show you the health of your ship and help you plan your next voyage. Remember, bookkeeping isn’t just about recording numbers; it’s about steering your business towards success with clear, accurate, and up-to-date financial information. Happy sailing!
Setting Up a Bookkeeping System
The biggest question when learning how to do bookkeeping, is how you plan to record and document your financial records. Some like the old fashion way of doing things by having a tangible system for organizing financial documents thru a company’s general ledger book. This would require having someone manually, with pen and paper, recording all invoices and receipts and performing regular manual reconciliations of bank statements. Depending on the size of the company, this can be cumbersome, slow and inopportune. In nautical terms, this will take longer to get from your home port to your final destination.
However, in today’s digital world, there are many very effective and efficient accounting software packages available that will do the job in a fraction of the time. Freeing you up to explore further afield with your business.
Choosing the Right Accounting Software
It’s important to research and select bookkeeping software that meets the needs of your business and allows for efficient bookkeeping practices. Some of the more popular, recognised and comprehensive systems are as follows:
- Xero – Highly versatile and easy to navigate system that performs a wide range of functions that address invoices, receipts, bank reconciliation, payroll, and GST. They also offer an eco- system of 3rd party Add-on Apps to create a custom accounting system, tailored for your specific business needs.
- MYOB – Has a number of software options for a range of business sizes from standard accounting features to larger business systems that offer multiple add-on options.
- QBO Quickbooks Online – Like Xero and MYOB, there are many advantages to using this bookkeeping software system. It is scalable, cloud-based, has a mobile ap and is very cost friendly.
Each of these software systems, and others, will easily fulfill all the requirements of a small business’ bookkeeping needs. If you really want to set your business’ sails against the wind, implementing an online accounting software system is key to charting your course in the right direction.
Establishing Chart of Accounts
Our first port of call when organising a business bookkeeping system is to establish a chart of accounts. So, let’s get our log book ready to categorize financial transactions and ensure consistency in recording income and expenses.
A chart of accounts (COA) is an index of all financial transactions in a company’s general ledger. As suggested above, it’s like a ships log which outlines everything going on in your business. It separates expenditures, revenue, assets and liabilities to give an overall financial picture.
Recording Financial Transactions
Key to any well-oiled business is regularly entering all financial transactions into the chosen accounting software, or ledger, accurately to maintain up-to-date and reliable records. Let’s have a look at some of the different elements of bookkeeping, what they are and their relationship to running a successful small business.
Income Tracking
Income tracking involves recording all sources of income, including sales, services rendered, and other revenue streams to monitor the financial health of the business. It’s vital for every smooth sailing business to keep a record of everything that comes in for various reasons.
Cost of Sales (or Goods)
The Costs of Goods Sold, also known as Cost of Sales or Direct Costs are the costs a business incurs as a direct result of producing a goods or service. They are expenses that would not be incurred if nothing was produced or sold. For example, Direct Costs cover items such as:
- Materials and Raw Products purchased to create a saleable item
- Direct Labour costs are wages incurred to produce a good or service
- Factory overheads are the costs associated with running a factory to produce goods to be sold
- Packaging and freight costs appliable to the good produced
Gross Margin or Gross Profit
A businesses Gross Profit is the amount left once you have deducted your COGS (Cost of Goods Sold) from your Total Sales.
Overhead Expenses
Overhead expenses are those costs and expenses which are incurred whether a sale of a good or service is made, or not. Costs such as Office rent, Phones, insurances, admin wages, utilities etc are all considered to be overhead expenses that are incurred in the running of a business.
By deducting your Overheads from your Gross Profit, you will arrive at your Net Profit.
Closely tracking and categorizing all expenses, (Cost of Sales and Overheads) will show you where the company’s money is going. Just as the incoming revenue is tracked, so should the outgoing be tracked, for the very same reasons as above.
Reconciling Accounts
Regularly reconciling your bookkeeping accounts is a critical action for any small business. It’s like a marker point along the chart of your journey. There are two key reconciling actions in bookkeeping.
Bank Reconciliation
Bank reconciliation marries up your incoming and outgoing cash flow and helps to identify any inconsistencies in your bookkeeping. Reconciling bank statements help to monitor the health of your business, prepare budgets and forecast future costs, remain tax compliant, control costs, evaluate and manage cash flow. Any good bookkeeping software package will include the ability to reconcile all your incoming and outgoing cash flow automatically.
Accounts Receivable and Payable Reconciliation
Accounts receivable reconciliation verifies that the amounts owed to the company by customers are accurate and match the actual amounts billed and collected. Accounts payable reconciliation verifies that the accounts payable ledger matches the detailed subledger or individual supplier accounts. They are critical for maintaining financial integrity and supporting effective financial management. If your chartered course doesn’t match up with your location, then this action will help identify that. The process involves:
- Comparing ledger to subledger or customer accounts
- Matching invoices to payments
- Resolving discrepancies
- Adjusting Entries to reflect accurate balances
Generating Financial Reports
This is where a good bookkeeping software system truly lightens the load for a small business owner. Utilizing the data recorded, the system can generate financial reports, such as balance sheets, income statements, and cash flow statements. It is thru these reports that you can really ensure your business is heading in the right direction.
Interpreting Financial Data
Once you have generated the necessary reports, you are free to make informed analysis and gain insights into the company’s performance, and plan for future growth. Having an accurate and up to date accounting system will ensure you can gather all the necessary information and reports to deliver:
- Financial Health Assessment
- Budgeting and Forecasting
- Tax Compliance
- Performance Evaluation
- Investor and Stakeholder Reporting
- Cash Flow Management
Need Help?
We’ve given you some bookkeeping tips, and suggested the best way to go about it. But if you are still not sure, or feel you need help in setting up a good bookkeeping system for your business, then contact us at Numble for an obligation free consultation.
