Basics of business accounting: What to know

When you think of accounting, you might be thinking of a dreary room piled high with paperwork and occupied by hassled, grim-faced accountants. The truth isn’t nearly as bad – business accounting simply requires you to record all your transactions correctly and on time and regularly review your books to gauge your financial performance.

Particularly if you’re a small business starting out, it’s crucial to have a handle on what accounting entails, not only to free yourself of misconceptions but also to make important decisions such as whether or not to outsource this function. Here’s a quick guide to the basics:

What is business accounting?

Simply put, business accounting refers to the systematic process through which financial information is recorded, analysed, interpreted, and presented. It enables the business to keep track of its financial position and operations and helps the business leaders to make intelligent decisions.

Key functions in accounting for business

Business accounting enables a company to stay compliant with the regulatory norms. In general, this involves the following functions:

1. Bookkeeping

This is how a company’s raw transaction data is converted into structured financial accounts that give a clear picture of how the business has been faring over a certain period.

Transactions are recorded by listing them as either debit or credit, be it the purchase of goods or the depreciation of an asset.

Bookkeeping requires a sound grasp of business accounting principles, an eye for detail, and the ability to interact with non-bookkeeping personnel to gather all the information necessary to record complete transactions.

2. Trial balance review

This is the step after bookkeeping, wherein the debit and credit items are listed in two columns to check whether the totals are equal. It is a vital precursor to preparing formal financial statements.

It helps to identify errors and inconsistencies before they lead to any awkward questions from stakeholders or any trouble from a legal perspective.

3. Preparation of financial statements

This is the final internal step in business accounting before the organisation’s performance becomes public knowledge. Complete financial statements include a balance sheet, a profit and loss statement, a cash flow statement, and a statement of owners’ equity.

These documents, when used together, can provide a view of the operational efficiency of the business.

4. Regulatory compliance

There are multiple accounting, financial, and general business regulations that a business of any size must comply with. A good business accountant will be up-to-date on all these requirements and make the necessary provisions when preparing the statements.

A checklist for business accounting

Accounting is as much about when you do a task as it is about what you’re doing. Following a proper timeline helps a business stay abreast of its financial situation and eases tax preparation. Here, we round up a checklist of essential tasks related to business accounting to do, as well as when to do them:

1. Check your cash position for the day

It’s vital to start the day by checking how much cash is on hand, as this will fuel the transactions for the rest of the day.

2. Have a weekly/monthly cash flow statement

Periodically making cash flow statements with your expected inflows and outflows for the week/month is vital. This helps you determine how and when you can pay your creditors and what new investments to make. Always use a standard cash flow statement template for consistent records..

3. Record transactions regularly

Depending on the volume of transactions the business handles, it’s essential to record everything in the proper column (debit or credit), either daily or weekly. This can be done manually via spreadsheets, although it’s much more efficient to use accounting software.

4. File all paperwork

It is necessary to have copies of all invoices, receipts, payment slips, and other essential documents. They act as a reference in case of any discrepancy or if an auditor wants to verify something. Have a set of files to organise each category of documents and keep updating as you go to avoid trawling through piles of paperwork at tax time. You can also scan copies of each document and store them in the cloud.

5. Pay vendors on time

Stay on top of your accounts payable and ensure that you pay your due amounts on time. This helps maintain positive relationships with your creditors and increases the likelihood that they will extend the due dates to net 60 or 90 for you.

6. Review your unpaid bills

Every week, look at the documents related to your unpaid vendors, including the billing amount and date due for balance payment. In many cases, vendors may offer benefits for early payment, so you can take that call at the time of each review, depending on how much cash there is on hand.

7. Send out your invoices

You need to be punctilious about getting paid too! If you work with multiple vendors, send out invoices on standardised templates with services rendered, the amount due, and payment terms clearly listed.

The due date is essential, as it helps you forecast your revenue for the month. For both bills and invoices, use a business accounting tool such as Xero or FreeAgent to sort things out tidily and avoid manual errors.

8. Balance your chequebook every month

Monthly reconciliation of your cash transaction entries lets you spot any errors early on and address them.

9. Review your ageing receivables

Maintain a record/report showing unpaid invoices and how long they are past their due date. At the start of every month, you can send out reminders to your customers about them. This report is also helpful in indicating whether some of them may need to be written off.

10. Keep tabs on your inventory

Have a regular cycle, be it fortnightly or monthly, where you assess your inventory and replenish the items running out of stock.

11. Keep an eye on your payroll and taxes due

You will likely have a monthly or semi-monthly payment schedule for employees. However, there may be payroll tax requirements, such as national insurance, to meet at different times in compliance with the tax laws, so make sure you’re on top of those deadlines.

12. Check out your P&L

Every month or quarter, study your profit and loss statement for the current month and the year to date and then measure it against your budget and projections for the same period.

Mark out areas where you’re spending too much or too little and decide how you want to fix those. For quarterly P&L statements, pay special attention to your net assets, how you are spending profits, and the patterns in your revenues and expenses.

13. Update monthly balance sheets

Balance sheets aren’t just for the end-of-year reckoning. Done monthly, they give you a picture of how you’re managing assets and liabilities and allow you to course-correct in a timely fashion as needed. This helps you spot anything significantly out of the ordinary (like accounts receivable being higher than usual) and figure out why.

Over to you

By now, you hopefully have a clearer insight into what business accounting entails from a skill and time perspective. Have an experienced accountant on your team to handle the function or outsource it to an expert third party like Golding Accountancy. We are a team of expert accountants in Essex who can help your business with quality accounting services.

And if you’re a small business with limited resources, several excellent accounting software options will help you do it on your own, should you need to. All the best!