Bookkeeping helps figure out two crucial aspects of running a business- making money and spending money. Though sounds simple, it takes a lot of time, dedication and attention to detail. No wonder most businesses seek assistance for their bookkeeping in Saskatchewan, Alberta & Manitoba. However, hats off to you if you’ve decided to do the books on your own. This blog breaks down the complex bookkeeping tips for businesses to make it easy for you.
Entrepreneurs often wonder if doing the books is worth their time. Well, it is the process of keeping detailed and accurate records of all your company’s financial transactions. In other words, it provides you with valuable financial insights about your business. Where is your business spending money? Which tax deductions will you be able to claim? How to earn more revenue in the current market?
So, without further ado, let’s check out the detailed bookkeeping tips for businesses.
It is easier to keep both funds in one account. But, it isn’t a good idea. Small businesses conduct hundreds, if not thousands, of transactions in a day. What if you spend from the same account for your personal needs as well?
Imagine the mess you will fall into while reconciling bank statements at the end of the year. You will have to read every receipt, remember if it accounts for your personal expense or is related to business and sort them accordingly. And hell may break loose if you cannot remember how you spend the money.
Separate accounts also protect your assets from legal action. Let’s say you run a limited liability entity. In the case of any debts incurred by your business, high chances are you will be held personally liable for that. Your personal assets can also fall into trouble if you have no separate accounts.
Thus, bookkeepers always recommend business owners keep separate accounts for business and personal expenses.
As mentioned earlier, bookkeeping is a record-keeping process of all the financial transactions within your business. But, before you record the transactions, decide how you want to do so.
There are two ways- Cash-basis and accrual.
Cash-basis accounting– Records transactions only when the cash changes hands.
Accrual accounting– Records transactions when the product is delivered.
In cash-basis accounting, you can record the transaction only after receiving the payments or making the payments directly. The CRA allows some businesses to use it while filing taxes in Canada. Businesses in the fishing and farming industries, for instance, can follow the cash-basis accounting method to maintain their books. Corporations, however, should follow the accrual method.
In accrual accounting, you record the transactions as and when they happen whether you have received the payment directly or not. Let’s say your business sold oranges on account for $1000 in June. So, you record that transaction in the Accounts Receivable account and wait for the payment. Most businesses follow this method to maintain their daily books.
Single-entry bookkeeping is perfect if you want to do your own bookkeeping. It is simple and easy. You record the entries one at a time either as an input or output.
Double-entry bookkeeping is complicated. But, it also provides valuable information regarding the financial health of your company. This practice minimizes the chances of errors and keeps books balanced efficiently.
The key formula for the double-entry bookkeeping system is:
Assets = Liabilities + Equity
This system involves the combination of credits and debits for each transaction in a bookkeeping entry. Credits are the amount that you have received in the account while debits are the amount you have spent from the bank accounts. You write the credits on the right side while the debits are on the left side.
Let’s say you bought office furniture for $1000. So, your business books shall look something like this:
This shows that you spent an asset ($1000 cash) to purchase another asset (furniture). The books stay balanced in this case because the increase in the furniture account balances the decrease in the cash account.
The meaning of debit and credit is quite different in the bookkeeping world. Business owners may find it hard to identify the difference initially. This is where the role of professional bookkeepers comes into play. They can keep your debits and credits straight while maintaining your overall books.
Businesses record multiple transactions every day. The Chart of Accounts lets you designate each transaction to a specific account, which comprises the Balance Sheet and Income Statement. It’s a list of all the accounts you use to keep a record of financial transactions in a general ledger. This list is what you need to track where your money goes and comes from in the business.
The account categories present in the Chart of Accounts:
Assets- records all materials that your business owns. Examples include buildings, inventory, cash on hand, etc.
Liabilities- records the money your business owes. Lines of credit are the most common example of liabilities.
Equity- records the claims the owner has against the business assets and the money they invested in the business.
Revenue- records the money your business receives. Dividends from investments, sales and rents are some of examples.
Expenses- records the money your business pays to earn revenues.
These are the main categories you need to record the financial transactions. You can also add some more according to your business needs. The chart provides you with a detailed overview of how and where your business makes and spends money. It consists of three columns such as account name, type of account and a short description of the transaction made.
You first record each business transaction in the journal chronologically based on the date. The debits are on the left side while the right side has the credits. You need to make the entries every day or as and when it happens. Also, explain the purpose of each transaction in the journal.
|Date||Type of Transaction||PR(Put the account number here after making entries to the ledger)||Debits||Credits|
|Buying a laptop for a new employee|
There are different types of journals. The sales journal, for instance, records all transactions related to your sales. Similarly, there are cash receipts journals, general journals, purchase journals and so on.
Now you add up the columns in each journal and summarize the records at the end of every month. Develop an entry to the General Ledger with that summary. Remember, all entries to the Ledger should be balanced as is the rule of double-entry bookkeeping.
Accurate bookkeeping helps you gauge the success and even the potential risks associated with your business. The financial information you gather through the process can help you make key decisions in terms of business strategies, product marketing, sales planning and other aspects.
But, the reality is business owners already have a lot on their plates. Keeping track of every penny spent and earned is nothing short of a struggle. You barely would have time to implement all the bookkeeping tips for businesses.
Experienced bookkeepers, on the other hand, toil day in and out to capture and record every transaction within your business. From checking the books to preparing financial reports, we have got you covered. Have a word with us today.