Your success in business will rest on good record books and solid cash flow. Without good record keeping, it’s impossible to determine your financial condition and meet your tax obligation or file your tax returns each year.
1. Bookkeeping Process for Small Businesses to Maintain Up to-date Books
The bookkeeping process generally involves the following basic steps:
1. Gather the source documents, including cheque records, deposit records, bank statements, bills from vendors, receipts for purchases, and invoices issued to customers.
2. Analyze these financial transactions and write original journal entries that credit and debit the appropriate accounts.
3. Perform end-of-period procedures, balance accounts, and perform reconciliations
4. Close the books for that accounting period.
2. The Importance of Record-Keeping?
Bookkeeping is the recording of all transactions, including financial records of purchases, sales, receipts, and payments, as well as payables and receivables. The goal of bookkeeping is to record all of the company transactions in an organized and detailed way that provides useful information for business owners and other relevant parties. There are two main reasons for keeping financial records and getting help from a bookkeeper.
Reason 1: Knowing your financial situation
You need to know where your company is standing daily, quickly, monthly, quarterly, and annually. Doing your books will give you quick access to the vital figures and information: Are you really making money, do you have enough cash flow in the bank to cover accounts payable and other operating expenses, how much inventory you have on hand, how much do you need to order, the credit terms your supplies offers.
Maintaining daily financial records will allow you to easily keep track of your business’s financial condition. With a better understanding of your financial health, you are able to effectively manage your business cash flows, have business strategies to reduce operating costs, and obtain the best prices from suppliers as well as the best interest rate from your lenders.
Reason 2: Meeting your tax obligation
Anyone who is carrying on business activities, whether it is a sole proprietorship, partnership, or corporation has an obligation to submit income tax returns and pay income taxes. With good financial records, preparing an accurate tax return will be easier and you’re more likely to do it on time when tax seasons come around. Poor bookkeeping may result in your overpaying taxes or filing late and having penalties.
These obligations also include complying with federal and state payroll tax rules. Late payments of payroll taxes cause serve and unnecessary penalties. You must file payroll tax results every quarter. Then, at the end of the year, you’re required to give your employees and the government W-2 forms, which must agree with your quarterly payroll returns. Good bookkeeping practice will make compliance with these regulations easy.
3. How Long Should You Keep Records?
The length of time you should keep a document depends on the action, expense, or event that the document records. Generally, you must keep your record until the period of limitations for that tax return runs out. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
4. What Kind of Records Should I Keep?
If your business has complicated financial records or if you want to be able to prepare financial statements with the click of a button, business accounting software can be a big help. Your recordkeeping system should include a summary of your business transactions. Your books must show your gross income, as well as your deductions and credits.
The following are some of the types of records you should keep:
Gross receipts
Purchases
Expenses
Travel, Transportation, Entertainment, and Gift Expenses
Assets
Employment taxes
5. How Should I Record My Business Transactions?
Business transactions are ordinarily summarized in books called journals and ledgers.
A journal is a book where you record each business transaction shown on your supporting documents. You may have to keep separate journals for transactions that occur frequently.
A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.
Electronic Records: All requirements that apply to hard copy books and records also apply to business records which are maintained using electronic accounting software, point of sale software, financial software, or any other electronic records system. The electronic system must provide a complete and accurate record of your data that is accessible to the IRS.
6. Financial Records: Key Bookkeeping Accounts for Small Business
Cash: All the transactions, coming in or going out of your business, pass through the Cash account. Your bookkeeper has used two journals – Cash Receipts and Cash Disbursements, to track activities. At the end of each month, your bookkeepers will reconcile the bank account for any outstanding transactions or errors.
Accounts receivables (A/R): This is money due to your company, mainly for goods or services delivered or used but not yet paid for by your customers. A sub-ledger shows the details of each account. And all of the sub-ledgers should be reconciled to the total accounts receivable listing to ensure they balance. Also, your bookkeeper must track A/R and keep up it today so that you send timely and accurate bills or invoice
Inventory: This may be raw goods, work-in-progress or ready-to-sell inventory. They are like money sitting on the self and must be carefully accounted for, tracked, and allocated. This process can be very complex. So often, there are variances between actual and accounting inventory, that can result from inaccurate tracking of raw inventory used and finished goods sold, or can be the result of theft. Therefore, doing physical accounts of inventory on hand is necessary to make sure the numbers match your books.
Accounts payable (A/P): This is the sum of all outstanding amounts owed to vendors or suppliers for goods or services that have not yet been paid for. Concise bookkeeping helps manage AP properly to avoid slow invoice proceeding, unsatisfactory payment terms, late/duplicate/under/over, or missed payments.
Loans payable: If you’ve borrowed money from shareholders or friends and family to cover business, it’s important to be aware of the interest, and track payments, and due dates.
Sales: This account tracks all income your business has earned for selling products or services. Tracking sales in a timely and accurate manner is critical to knowing where your business stands.
Expense accounts: These accounts record all of the costs incurred by the business. They are divided into different types of costs such as office expenses, rent, insurance, and cost of goods sold
Payroll expenses: Payroll makes up a substantial portion of business expenses, including salary paid to the employees, vacation paid, employee benefits, and more. Keeping this account accurate and up-to-date is essential to meeting tax obligations and other government requirements.
7. Why You Should Hire a Bookkeeper?
A Bookkeeper can ease the burden of the above responsibilities so you can focus on growing your business. This person has the financial expertise and experience to help you understand the financial aspects of your business and meet compliance.
If you have a high volume of administrative tasks, including managing customer billing and vendor payments, you may consider hiring a bookkeeper to process customer invoicing, collect receivables and pay bills. A seasoned and dedicated bookkeeper will handle all these back-office and data management tasks properly.
If you need help with your bookkeeping to maintain financial records properly, contact Irvine Bookkeeping today to get paired with a mentor!
