Starting up a small business of any kind is challenging. But starting up a small business in this Covid landscape we find ourselves in – the “new norm”; presents even bigger challenges.
As full-service accountants on the Gold Coast and Tweed Heads, we at Grow Advisory group have all the tools and knowledge to help small businesses like yours get off the ground running. We’re all about supporting local businesses, so sharing some small business accounting basics with you only makes sense.
Whether you’re wearing the hat of a small business accountant and business owner or looking for an accountant for your small business, these accounting basics will place you in good stead for what’s to come.
Continue reading as we discuss the fundamentals of small business accounting, including bookkeeping, invoicing, accounting, payroll, and cloud accounting.
Table of Contents
- Budgeting for Small Business
- Bookkeeping for Small Business
- Accounting for Small Business
- Payroll for Small Business
- Cloud-Based Accounting for Small Business
The most critical element to the success of any small business is a budget. Having a budget allows you to set business goals and objectives, formulate good business decisions, and help to get finance and investors. It enables you to stay on track to avoid any nasty accounting blowouts.
Creating a budget involves setting a time frame and calculating all fixed expenses, such as rent, salaries, insurances etc., and variable costs, such as utilities, materials, and wages. It also involves including an emergency fund and setting an expected income, which shouldn’t be plucked out of thin air. Be conservative with your revenue forecast; it’s better to budget based on a smaller predicted income vs. a fluctuated income that you may never reach.
Once you have formulated your budget, you then need to monitor your finances to track how you’re travelling, comparing accurate figures with your estimated amounts, which is where bookkeeping comes into play.
Bookkeeping is an essential element of small business accounting. It’s the first step in the accounting process that gets your ducks in line, so to speak.
Tracking your budget, along with all other financial aspects of your business, such as expenses through bookkeeping, is vital for any small business. Not only will it allow you to use your budget to look for ways to cut costs and avoid overspending, but bookkeeping can also help you look for ways to reduce debt, create a financial safety net, and grow your business.
Bookkeeping will hold you accountable for your finances. You’ll know if you’re spending more than you’re making and have accurate and reliable figures on hand at all times.
Having records of all financial transactions is vital for submitting an accurate tax return and for attracting future investors.
The first step to bookkeeping for small business accounting is to set up business accounts to record transactions. This can be done via a spreadsheet, desktop accounting software, or cloud-based accounting software. Accounts in bookkeeping refer to a record of all financial transactions of a particular type, not a business bank account (although that is also required). So, business account examples would be Accounts Payable and Interest Payable (Liability), Accounts Receivable, Cash, Equipment, and Inventory (Asset), Dividends and Owner’s Capital (Equity), Rent expense, Supplies expense and Utilities expense (Expense), and Sales income and Rental income (Revenue). There are many more to consider.
Next, decide on a bookkeeping method, either single-entry bookkeeping or double-entry bookkeeping. Single-entry bookkeeping records a single entry for every transaction. On the other hand, double-entry bookkeeping records two entries for every transaction – a debit and a credit. While this method is more complex than single-entry bookkeeping, it is also more popular because it ensures your books are balanced.
You can now start bookkeeping, which begins by correctly recording every financial transaction for your business, making sure the transaction is recorded in the correct business account (Liability, Asset, Equity, Equity, Expense or Revenue). Determine the accounts that will be debited and credited and add the journal entry.
The last step is to balance the books, which should be reasonably straightforward if you record transactions correctly. Tally up the account debits and credits, and the totals should match. If they don’t, you’ll need to go back through your journal entries to locate errors and start over.
Small businesses accounting is an unavoidable task. While you can take it on yourself, most small business owners only take on the bookkeeping duties and hire a small business accountant like Grow Advisory Group to manage the more complex accounting tasks.
Accounting picks up where bookkeeping left off, handling such items as preparing and lodging BAS, bank reconciliations, depreciation, analysing financial transactions, financial statements. Bookkeeping and small business accounting tasks can also overlap. Small business accounting can include the process of recording journal entries, maintaining the general ledger, unadjusted and adjusting trial balances, and adjusting entries, which are all typical bookkeeping duties. Thus, if you choose to hire a small business accountant, it’s essential to signal the responsibilities you will take on and where they will pick up from to ensure no double handling.
The fundamental step of accounting for small businesses is the bookkeeping duties mentioned above, namely keeping records of all financial transactions.
Bookkeeping will then allow you to create accounting reports to help manage the business. Standard accounting reports include balance sheets, income statements, cash flow statements, and statements of shareholders’ equity. These reports can give you the insight you need to make strategic business discussions for the direction and growth of your business.
The final area of small business accounting lies in BAS and taxes – preparing and lodging your BAS and filing business tax returns, including income tax, GST, and employee-related taxes.
The benefit of hiring a professional to manage your small business accounting is the added financial and business advice they offer, and of course, ensuring you are managing your tax correctly.
Another essential element of small business accounting is payroll. Payroll ensures your employees are paid the right amount and at the right time and involves making correct deductions from employees pay for tax, superannuation and child support.
Payroll is heavily governed by compliance and regulation, which must be adhered to avoid non-compliance and fines. Such laws include making correct payments and deductions, providing employees with a payslip, lodging and paying taxes on time, paying deductions such as superannuation, keeping payroll records for 7-years.’
Small business payroll is usually not too complex due to the smaller number of staff. However, it can become more complicated if you have a mix of staff on wages, salaries and commissions, contract workers etc.
The first step is to decide how you want to manage your payroll. There are various options at hand, including a spreadsheet, desktop or cloud-based accounting software, or professional bookkeepers and accountants.
If you are managing payroll yourself, you will need to register for Pay As You Go (PAYG), which you can do on the Australian Taxation Office (ATO) website. You will then need to confirm your employee’s details, including their TFN and the bank account they want their pay paid into, reconcile your bank accounts to make sure the funds leaving your bank account matches the actual funds spent.
Setting up Single Touch Payroll (STP) is the next step. This mandatory process allows small businesses to report their payroll information after each payday and can be done through STP-enabled software such as Xero, MYOB or Quickbooks.
You can then reconcile your PAYG withholdings with the PAYG you have paid or will be paying in the future.
As a small business owner, no doubt your time is precious, which is why using cloud-based accounting software is so popular today. Seldom do business owners count on spreadsheets for their small business accounting today because they increase human error, aren’t time-efficient and lack the functionality to produce essential financial reports needed to make good decisions and tax lodgement.
If you look at the items above, each relies on cloud-based accounting software in some way to help complete the process. Whether it’s financial reporting, STP, or otherwise, investing in cloud-based accounting software will help streamline the process so you can reduce the time you spend doing the books to spend more time running your business.
There are several cloud-based accounting software on the market today to consider, with the top four options being Quickbooks, MYOB, Xero, Reckon, and Sage. I wrote a detailed review of each of these options in a post titled ‘Which Accounting Software Is Best for Small Business?’, which I strongly recommend you read.
Xero, MYOB, QuickBooks, and Sage are similar in features and pricing. However, we at Grow Advisory Group find Xero the superior choice for small businesses. Xero is the easiest to set up and use, and it’s also the easiest to integrate with third-party apps. If you’re after the bare minimum, Reckon One may be a viable option; however, it is not as user-friendly.
Ultimately, which cloud-based accounting software comes down to the features you need for your business.
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Disclaimer: The information contained in this blog is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from an accountant and/or financial adviser.