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Bookkeeping Basics for SMEs

There’s a lot involved in running a small business. In order to remain on top of things – particularly your finances – you need to have a coherent, dynamic system in place. This is where bookkeeping comes in. Whether you’re in the process of setting up a limited company, are thinking of bringing your bookkeeping in house or simply want to bolster your knowledge of the subject, this guide covers all the bases, including examples of bookkeeping for a small business.

What is bookkeeping and why is it important?

Bookkeeping is essential for any size or type of business. It’s the day-to-day practice of recording, classifying and organizing all of the individual financial transactions pertaining to your company. Embracing both incoming and outgoing capital, the information documented must be thorough, accurate, and up-to-date.

Without bookkeeping, your business would be in a chaotic state. You need it to determine and maintain cash flow, which enables you to pay your staff, suppliers and taxes, and it’s a crucial way of measuring your growth and success. For many business owners, bookkeeping can be a dreaded chore. However, if you understand the data collected, it has many advantages. Bookkeeping is not the enemy, it’s your best business ally.

What is the difference between bookkeeping and accounting?

A major misconception regarding bookkeeping and accounting is that they are the same. Although bookkeeping and accounting are separate activities, they often overlap as both involve the handling of financial data. So, what is the difference between bookkeeping and accounting? Bookkeeping focuses on measuring, recording, storing and retrieving financial data, whereas accounting is the interpretation, analysis, and communication of that data.

Types of bookkeeping systems

The single-entry and double-entry bookkeeping systems are the two methods most commonly used within business. Both have pros and cons, so it all really depends on which is the best fit for your needs.

Single-entry system: With this cash-based bookkeeping method, only one sided entry is required to record financial transactions. It is typically used within small enterprises with a low volume of activity.

Double-entry system: Most businesses use double-entry bookkeeping. It is characterized by the fact that every transaction affects two types of accounts – debit and credit – simultaneously.

Examples of bookkeeping for a small business

To understand the fundamentals of small business bookkeeping, you need to be aware of the different types of accounts – some of which are outlined below.

  • Cash: All of your business transactions pass through a cash account, making it easy to track financial activity.

  • Accounts payable: This type of account gives you a clear view of your spending, from bills through to invoices.

  • Accounts receivable: The opposite of accounts payable, accounts retrievable is where you collect and track payments from your customers.

  • Inventory: Your inventory is all the products your business currently has in stock.

  • Purchases: The purchases account records transactions involving the buying of goods.

  • Sales: The sales account is where you record all incoming revenue.

  • Payroll expenses: Likely to be your most significant cost, you pay your employees from this account.

  • Loans payable: If you’ve borrowed money for your business, these expenses fall under the loans payable account category.

  • Owners’ equity: This type of account determines the amount the owner(s) have put into the business.

  • Retained earnings: The retained earnings account is used to track your profits that are reinvested into the business.

Bookkeeping methods

Traditionally, bookkeeping was a tedious, painstaking process that involved ledgers and charts of accounts all recorded manually and stored in binders. Fortunately, advances in technology have made bookkeeping much simpler. Now, everything can be handled via a computer-based system. There are many different software packages to discover, unlimited storage options, and convenient apps so you can fulfil bookkeeping tasks on the go from your mobile phone. Whatever system or methods you decide to use, proper bookkeeping is crucial to ensure your business runs smoothly.

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