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January 18, 2023

Accounting and bookkeeping for small business: What do you need to know

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Correct financial activity is vital for a small business if you want your company to be successful. Initially, you can play the role of an accountant, but as the firm develops, you may need more free time. Whether you plan to handle economic responsibilities independently or delegate these duties to professionals, it is essential to realize what accounting and bookkeeping for small business are and what the distinctions are between these concepts.

The definition of bookkeeping for a small company

Bookkeeping is the regular recording of company insights and transactions in a particular order, e.g., debits, credits, payrolls, invoices, and other financial operations.

Insights that are received from the bookkeeper are entered as a general ledger. Once upon a time, all transactions took place on paper, but as technology developed, all accounting became virtual.

Depending on the number of daily operations, your general ledger may fit on one Excel sheet or require a particular program to be installed.

The definition of accounting for a small business

Accounting is an approach that allows you to record, interpret and analyze the financial data of your small business. It lets all interested parties (the firm owner, creditors, and investors) objectively assess the organization’s economic position.

Besides, accounting uses financial documents to summarize the movement of capital within a company. These reports show whether the firm is making a profit or loss, whether its assets are getting cheaper or more expensive, what the organization’s cash flow is, and what operations generate the most revenue.

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Principal distinctions between accounting and bookkeeping

The main misconception about accountants and bookkeepers is that people often see them as one profession. Although these financial services have much in common, critical differences exist. To eliminate confusion, experts have compiled a checklist of the principal distinctions between accounting and bookkeeping.

Criterion Bookkeeping

Accounting

Definition The job is related to the detection and registration of monetary transactions. Ensure the collection, interpretation, and study of financial operations identified during bookkeeping.
Decisions making Data is not enough to make informed decisions. Depending on the data provided by accountants, management can make crucial decisions.
Goals The main objective is to record monetary transactions properly. Allows business owners to assess the financial situation and transfer the necessary data to authorized bodies.
Formation of financial reports Does not include the preparation of documents. Preparation of economic reports is one of the primary tasks.
Required skills Does not require special skills. Requires special skills due to complex analytics.
Analyze An analysis is not performed. Uses bookkeeping insights to interpret and analyze data.
Specialists Accountants must be well-versed in financial matters and are often supervised by an accountant. Accountants with the necessary experience and knowledge can obtain the status of a certified public accountant (CPA).

A common problem that many companies face at different stages of development is finding the right person to provide accounting and bookkeeping for a small business. Many professionals in the industry are willing to do both types of work; however, when hiring a bookkeeper, you should not require him to prepare financial statements. Likewise, only some accountants are prepared to deal with data entry.

How to do bookkeeping in a small firm?

Bookkeeping provides a consistent record of everyday transactions. It is the key to collecting the economic data you need to run your business successfully. As technology advances, many bookkeeping tasks have become more automated, but it’s essential to guarantee the monetary system works correctly from the first stage. Consider the main steps of bookkeeping:

  • Control of transactions: it is necessary to study financial processes and enter into the accounting system the procedures related to the business object, e.g., company owner loans taken for personal needs are not included in the documents.
  • Journal entries: all commercial procedures are journaled chronologically using a double-entry system. Transactions are indicated on debit and credit accounts. To facilitate operations, accountants use special journals to record repetitive processes, including buying, selling, capital receipts, etc.
  • Unadjusted trial balance sheet: bookkeeping involves preparing a trial document to ensure the total debit equals the credit. Parity violation means that the trial balance contains errors; they must be found and corrected immediately.

The complexity of bookkeeping depends on the number of transactions made daily, weekly, and monthly. All business purchases and sales must be recorded in the ledger, and some operations require supporting documents; you can study more about them on the IRS website.

Accounting and bookkeeping for small business: What do you need to know

How to implement a small business accounting system?

Accounting is a high-level process that utilizes insights from a bookkeeper or an entrepreneur to build a financial model. Accounting procedures are more subjective than bookkeeping processes, which are more transactional. Let’s talk about how to properly keep records to avoid fines and ensure maximum financial efficiency:

  • Open a business bank account: if you have decided to start a company, you should open a separate bank account to keep your business money separate from your savings.
  • Choose an accounting method: there is a cash-based method and an accrual-based method. With the cash-based algorithm, it is necessary to register transactions when money changes hands without considering invoices and unpaid bills. Accrual-based accounting records accounts until the moment capital flows.
  • Recording operations: small business owners can hire an accountant, manually record operations, or install special software to record processes.
  • Chart of accounts: it lists all personal business transactions and is used to create reports and view operations progress.

An experienced accountant can determine whether the company is making a profit or loss, the cash flow status of the business, and how much the current assets and liabilities of the organization are worth. Analyzing financial data is a critical component of their work, so they actively dig into the numbers to provide a better comprehension of trends and variances.

Which is easier: accounting or bookkeeper?

At first glance, bookkeeping looks simpler than accounting because you don’t need a university degree to work as a bookkeeper. Some people who have yet to gain experience have successfully held this position. However, the duties of both specialists are tedious, so it will be challenging for everyone.

The bookkeeper typically does:

  • record of all transactions
  • check receipts
  • billing
  • payroll preparation
  • work with debtors and creditors
  • preparation of basic reports

The duties of an accountant are fundamentally different:

  • audit
  • tax calculation
  • creation of final financial reports, e.g., cash flow statement
  • company performance control
  • assistance with the registration of licenses and permits for the payment of sales tax
  • drawing up a business plan
  • providing financial advice to business owners
  • budget development

Responsibilities may vary depending on the requirements of a particular company; we have listed only the main types of work. In any case, specialists can use special software to facilitate their work, regardless of whether they hold the position of a bookkeeper or an accountant.

Advice on the organization of financial activities

Small business owners often combine the roles of sales managers, customer service specialists, and accountants. Keeping business records can be daunting if you don’t have experience in finance. Below there are several tips to help you stay organized:

  • Remember accounting and bookkeeping jargon: when you first planned your business, you wanted to make more money than you spent. Now it’s time to get acquainted with all the subtleties; studying is always possible.
  • Strictly adhere to all deadlines: never make late payments, set payment deadlines for customers, and remind them when necessary.
  • Track every business expense: Since you will have a separate business account, use it to keep track of all expenses with receipts and business debit cards. It allows for the reduction of the tax base and monitors income.

When launching a business, it may make sense to control financial transactions independently. As your organization grows, keep track of how much time you spend filling out books per week. If this work takes longer than planned, consider hiring a specialist or outsourcing.

Final words

Understanding the distinctions between accounting and bookkeeping for small business goes a long way in managing your money. Bookkeeping focuses on the details of financial insights, ensuring that all transactions are correctly recorded and up-to-date economic reports, while accounting analyzes the big picture. It is essential when calculating taxes, budgeting, and forecasting. You can significantly simplify the decision-making process if you receive a clear picture of the economic situation of the firm in terms of accounting and bookkeeping simultaneously.

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Author: Charles Lutwidge

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