The 2021 small business owner’s guide to bookkeeping
Successful businesses need financial information to control costs, manage cash flow and generate a profit. Without reliable data, you may not be able to make the best decisions for your business. A bookkeeping system provides the information you need to manage your operations.
What is bookkeeping?
Bookkeeping includes gathering financial data into a record-keeping system and posting transactions to an accounting system. The definition often includes additional tasks to keep your business running smoothly. If you’re handling bookkeeping for your small business, you’ll work on several essential tasks.
What does a bookkeeper do?
If you’re acting as a bookkeeper for your business, you’ll review source documents and record basic accounting information. These are not administrative tasks. They’re critical steps that can affect your business.
You’ll post two everyday financial transactions to your accounting system.
Expenses: You’ll review suppliers’ invoices and suppliers’ payments and record expenses in your accounting system. Reviewing expenses can help you manage your spending.
Revenue: When a worker makes a sale, they record the transaction and customer number. Then you can generate financial reports to see which customers generate the most revenue.
Why does bookkeeping matter?
To understand the importance of bookkeeping, think about your company’s stakeholders. Investors, creditors, suppliers and regulators need accurate financial records regarding your business. Proper bookkeeping can help you provide much of that data.
Bookkeeping can help you manage BAS compliance.
Using bookkeeping, you can record your revenue and expenses and prepare BAS lodgements. If the data is incomplete or contains errors, you’ll have to amend the lodgements, resulting in interest and penalties.
Bookkeeping can help you make management decisions.
Managers need accurate data to increase sales, manage costs and oversee the cash flow. Using basic bookkeeping principles, you can post and access information that managers need to make decisions.
Bookkeeping can help you finance your business.
Eventually, your business may need to borrow money to operate. Your lender will require accurate financial statements to fund your loan. You can use accounting transactions to generate balance sheets, income statements and cash flow statements.
Your business may post dozens of accounting transactions each week. When you have a reliable system, you post fewer errors. And if you make a mistake, you’ll be able to correct it much faster.
Four steps for basic small-business bookkeeping
1. Separate your business and personal expenses
Open a bank account using your company name and Australian Business Number (ABN). Activity in the business account should not include any personal expenses. Separating your expenses can protect your assets from any business liability or a lawsuit. If your business is a corporation, for example, it should be a legal entity separate from you.
If you post business and personal transactions in the same bookkeeping system, you risk the accuracy of your financial statements and tax returns. Let’s assume that you post $2,000 in personal expenses in the company’s accounting records. The costs in the income statement won’t be accurate, and your business tax return will contain errors.
2. Choose a bookkeeping method: double-entry or single-entry
Every business should use the double-entry bookkeeping method. This concept is essential because each accounting transaction impacts at least two accounts. Using the double-entry method, you can get a clearer picture of your business activity. And when it’s time to post a journal entry to your accounting system, the double-entry method accounts for debit entries, credit entries, and totals.
Debit entries are on the left side of each journal entry. In most cases, asset and expense accounts increase with each debit entry. Credit entries are on the right side of each journal entry. In most cases, liability and revenue accounts increase with a credit entry.
Finally, the total dollar amount of debits must always equal credits. Accounting and bookkeeping software requires each journal entry to post an equal dollar amount of debits and credits. However, the number of debit and credit entries may differ.
On the other hand, the single-entry method of accounting presents a distorted view of the business results. This accounting method records one entry to one account for each transaction. Posting activity to your cheque book is a single-entry accounting system. When you write a cheque, you post one transaction that reflects a decrease in your bank balance.
Business owners should not use the single-entry option because they can’t generate the account activity required to create balance sheets or cash flow statements. If you’re managing your business with the single-entry method, a bookkeeper can help you move to the double-entry process.
3. Choose your accounting method: accrual or cash basis
Business owners should use the accrual basis of accounting so that their financial statements are clear and accurate. The accrual method matches revenue earned with expenses incurred to generate the payment, which presents a clear picture of the company’s profit.
Let’s look at an example:
– Riverside Landscaping bought $1,000 of soil in February.
– Riverside Landscaping paid $2,000 in labour costs in March and billed the Jones Family for $3,500 on 20 March.
– The Joneses paid Riverside’s invoice in April.
Assuming Riverside paid $100 in overhead costs, you can subtract the revenue and material, labour, and overhead costs to calculate their profit from the Joneses’ project. Riverside’s profit is $400.
The material, labour, overhead costs, and revenue from the landscaping job were posted when Riverside performed the work. Riverside’s $400 profit was posted when they billed the Joneses on 20 March. When you can match revenue with expenses, you’ll know the profitability of each product or service.
On the other hand, the cash method posts revenue and expenses based on the cash inflows and outflows. Using the cash method, Riverside would post $1,000 in sod expenses when they pay cash in February. Their $3,500 revenue would be posted when they receive the money from the customer in April.
Essentially, revenue and expense transactions would be posted to other months. So Riverside couldn’t look at the March income statement and see the Jones project’s revenue and expenses. Therefore, they couldn’t determine the profit earned on that job.
4. Categorise your transactions
As you post transactions in your bookkeeping system, you need to post the information to the correct accounts consistently. Maintain an updated chart of accounts to post your accounting information to the right places.
Every business creates a chart of accounts—or a list of each account needed to manage the business. Sometimes the stores are listed with a corresponding account number. As the company grows, you may add, remove or change the accounts you use to post transactions. The balance sheet accounts are numbered first, followed by the revenue and expense accounts.
Three benefits of online bookkeeping
The right accounting solution allows you to automate many basic bookkeeping tasks. As a result, you can:
Collect payments faster
Invoice your clients and accept payments automatically to speed up the cash collection process.
Capture and organise receipts
Scan and attach receipts to a transaction to eliminate paper files and stay organised for the tax season.
Manage tax deductions
Track your expenses to maximise tax deductions for things like travel expenses.
Basic accounting terms every business owner should know.
Every new business owner needs to quickly familiarise themselves with key accounting terms to ensure they stay on top of their finances. Even without any financial background, business owners are expected to understand core principles, including cash flow, accounts receivables and liabilities. Here are 14 key accounting terms every business owner should memorise.
Key accounting terms
Accounts receivable: This is the money currently owed to your business by customers or clients. Because it’s money you can expect to receive, it’s listed as an asset on your balance sheet.
Accruals: Expenses that you have been invoiced for but are yet to pay and sales that you have fulfilled but have not yet received payment for are called accruals.
Assets: These are all the things your company owns. Purchases can be fixed or current; current assets are those that can be converted to cash within one year, such as inventory or accounts receivable, while fixed assets are purchased to provide a long-term benefit to the company, such as factory equipment or property. Help can also be intangible, for example, copyrights or trademarks.
Audit: The Australian Tax Office (ATO) may carry out an official review of the accuracy of your financial reporting, which is known as an audit. You can also conduct an internal audit to understand the financial health of your business better.
A balance sheet summarises what your business owns (its assets), what it owes (its liabilities), an owner or shareholder equity to give an overall view of your current financial standing.
Capital: This can refer to financial assets, such as cash, or the value of financial aid, such as inventory. Working capital is your current liabilities subtracted from your existing assets to show the money your business has readily available.
Cash flow: This is the amount of cash expected to flow into your business from sales and the resulting expenses over a given period. A cash flow statement compares the two to provide a clearer view of your ability to pay creditors and stay profitable.
COGS: This stands for the cost of goods sold. It’s a measure of how much it costs you to make or buy your products. Subtract your COGS from the sale price to determine your gross profit margin.
Depreciation: Depreciation is an accounting method for recording the cost of business equipment or expenses. Rather than deducting the total cost of an asset as you purchase it – which could create an artificial loss for that financial year – depreciation allows you to record the expense in increments based on the depreciation method you choose.
Expenses: These are the costs associated with running your business and tend to be categorised as either fixed, variable, accrued, or operational expenses.
General ledger: Think of this as your business’s accounting master file. It is a complete record of all your company’s financial transactions.
Gross profit margin: This is the difference between how much it costs to produce your goods or services and the price you sell them for. It’s vital to understanding your business’s profitability.
Liabilities: These are the debts or expenses incurred during business operations that you’re expected to pay in the short or long term. A current liability is one you’ll pay within the year, while long-term harm might involve regular payments over a given period.
Profit and loss statement: This is a financial report that lists your earnings, expenses, and net profits over a specified period.
Revenue: Also known as turnover or gross profit, this is simply the total amount of money you receive for selling your goods or services.
Financial accounting glossary for business owners
Often, one of the trickiest parts of starting a new business is wrapping your head around the financials. Knowing the difference between your capital and a capital cost could be the difference between one or five visits to your accountant or financial advisor, especially during the EOFY period.
A system of accounting that records transactions when they happen regardless of when they are paid. For example, a sale made on December 31 but paid on February 2 will be recorded in the accounts as occurring on December 31.
Things your business owns that can generate cash or be converted into cash. Typical assets include property, vehicles, inventory and equipment (and cash itself, of course).
A check is performed by an auditor or tax official on a business’s financial records to make sure everything has been accounted for correctly. You can also audit your business accounts.
A balance sheet is a snapshot of a business’s financial position at a particular date (usually the end of a financial year) that lists all of a business’s assets and liabilities.
The recording of a business’s financial transactions and a part of the accounting process. Double-entry bookkeeping is the method most commonly used.
The business’s wealth in the form of cash or assets it owns.
A fixed, one-off substantial purchase of physical items such as plant, equipment, building, or land.
A system of accounting records transactions when the cash is received for them, rather than when they happen. For example, a sale made on December 31 and paid by the customer on February 2 is recorded on February 2.
The measure of actual cash flowing in and out of business. A business’s cash flow over a period can also be viewed on its cash flow statement.
A term is used when a customer purchases goods or services with an agreement to pay later – for instance, an account with a supplier, a credit card, or a loan.
Credit is also a term used in double-entry bookkeeping to record one side of a transaction in the accounts (debit is the other side – hence ‘double entry’).
An amount owed by a person or business – for example, unpaid bills and loan repayments. Bad debt is money owed to a business that is unlikely to be paid in the foreseeable future.
The value of ownership interest in the business, calculated by deducting liabilities from assets. Also known as net assets, net worth, owner’s equity, or shareholders’ equity.
A 12-month period over which a business operates, typically from July 1 to June 30.
A financial statement listing sales and expenses is used to show the profit and performance over a period. Also known as a profit and loss statement.
The actual goods or materials a business currently has on hand, either for selling or producing sellable goods. Also known as stock.
A financial obligation (such as a loan) or amount owed (such as an unpaid bill or credit from a supplier).
The difference between the selling price of goods or services and the profit. Generally, the margin is worked out as a percentage showing the profit margin for each sales dollar.
Cash kept on hand for small miscellaneous purchases, like office supplies.
The revenue a business earns minus the expenses or costs. If this figure is negative, it is called a loss.
Unlike profit, revenue is the amount earned (usually from a business’s sales) before expenses, tax, and other deductions are taken out. Also known as turnover or gross income.
This is the cash a business has available for its day-to-day expenses.