Starter Guide to Accounting for Small Businesses

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Updated July 27, 2022

4 min read

accounting advice

Bookkeeping for a small business is an essential role if you want your finances to make sense. Initially, the accountant may be you, but as your business grows, you may find that you have no time to waste.

Whether you plan to handle the role yourself or hire someone to help you, this quick primer will help you understand the essentials of bookkeeping and why it’s so important to a successful business.

What is the difference between bookkeeping and accountancy?

Accounting and bookkeeping are often confused. In fact, accounting is a small but vital part of the overall accounting function. Accounting is the process of recording and reporting financial information while bookkeeping is the process of using this data to establish the financial position of the business and make decisions about managing finances.

In short:

Account bookkeeping = recording and reporting of financial information

Accounting = analyze financial information and create a financial strategy

What is Accounting?

Accounting involves managing the day-to-day finances of a business. He understands:

  • Make payments (e.g. invoices)
  • Monitoring of customer and customer payments
  • Make sure your business pays the right amount of tax
  • Tax claim for your business (e.g. expenses)
  • Manage payroll to properly pay your staff and HMRC

Accounting tracks incoming and outgoing payments to the business using three financial registers:

Cash Book – this records your cash flow (everything that goes in and out of your company’s account)

sales receipt – this records what you have sold, including paid and unpaid invoices.

Invoice – this records what you purchased (including services) and how you paid for each purchase.

These are usually the minimum records (“books”) you will keep – there will likely be more. Accurate record keeping is important for financial reporting and vital if your business faces an audit.

8 accounting tips for small businesses

The following pointers will help you get started with accounting for your small business.

1. Keep track of every payment

Use your books to track each payment and clearly show when they were made or received so you can easily find them if you need to refer to them later.

2. Choose an accounting method

Your bookkeeping will underpin your bookkeeping, so decide upfront which method you will use. Traditional accounting records income and expenses on the invoice date. Cash accounting records them on the date you actually receive or pay the money. Cash accounting reduces the risk of having to pay tax on money you haven’t received yet, but is only available if your turnover is £83,000 or less.

3. Be strict with deadlines

Never make late payments (especially to HMRC) and give your customers a deadline for payment so you can hunt them down effectively. Take note of any latecomers and consider not working with them if they continue to miss payments. It’s called credit control, and the goal is to keep your cash flow healthy.

4. Keep track of expenses

You can claim a tax refund on many business expenses to reduce your overhead costs. You will need receipts to support your claims with HMRC, so keep them in a safe place and organized into different business categories.

Be sure to separate business expenses from personal expenses, so you can easily identify which ones can be deducted from profits to reduce taxes.

5. File bank statements and bills in order

Or, don’t waste your accountant’s time and money. Make sure that all bank statements and invoices (purchase and sale) are present and correct, and in date order. Otherwise, you’ll be paying your accountant for the time spent searching and sorting through these documents, when it’s easy to do yourself. Worse still, if documents go missing, you could end up with a late filing fine.

For purchase invoices (i.e. money you owe), keep separate files for paid and unpaid invoices, and file them alphabetically by vendor name. Always remember to move bills once you’ve paid them.

For sales invoices (i.e. money owed to you), number them in the order of when they are due, so you can search them efficiently.

6. Choose suitable software

You may not need specialized accounting software – this can be done with Microsoft Excel or its free equivalents. However, as your needs increase, you may want a more specialized package. Ask your accountant what software he recommends.

7. Produce monthly reports

Generating reports at least once a month is the surest way to stay on top of your company’s finances and ensure you don’t get caught out by any nasty surprises. Your monthly reports should include at least a profit and loss statement and balance sheet. You now have continuous feedback on your business performance.

8. Know when to outsource your bookkeeping

If your business is starting small, it might be a good idea to handle the accounting yourself. As you grow, note how much time per week you spend on the books. Determine the monetary value of your own time (eg, how much you generate for the business per hour) and compare it with the cost of an accountant. A professional accountant may only take a few hours to handle a month’s accounts, so it won’t be long before it’s better value.

What’s more important right now – accountant or accountant?

For a small business, finding an accountant may initially be more urgent than having an accountant. However, in most cases this is not a decision. If you outsource your accounting function, bookkeeping and payroll can usually be included as part of the service. Having a comprehensive finance function can reassure you, save you time and allow your business to grow as quickly as you want.

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