Every business whether online or not involves bookkeeping or maintaining the records of various accounts. This is essential because it is difficult for an entrepreneur to keep all the financial details of their business in their minds. Bookkeeping also plays a key role in business planning and financing besides helping keep track of investments made, expenses incurred, revenues and profits recorded.. Bookkeeping is thus essentially an accounting process that involves recording of all information regarding the transactions and financial activities of a business. This aids enterprises in smooth and efficient management of their businesses while taking the necessary measures to smoothen the seasonal ups and downs in the cash flows. Read to know more about the basics of bookkeeping for an SME and startup companies.
Bookkeeping: Essential Accounts to be Maintained
A business or a startup entrepreneur may be an expert in developing products and providing services or managing their staff and establishing a good customer base, but if he is not aware of the basics of bookkeeping he may face several problems. It is essential that every SME owner understands the different types of accounts that are needed to be maintained to organize his finances, keep track of his funds and measure the success or failure of his business. Although most bookkeeping functions need to be relegated to an accountant, the enterprise owner should be aware of the accounts that need to be maintained. Here are some essential accounts that need to be maintained for all businesses:
- Cash: All cash transactions whether receipts or disbursements need to be tracked diligently. This is important for keeping track of the movement of the funds and knowing the exact status of cash available.
- Accounts Receivable: Several times businesses do not collect payments for their products or services immediately. In such a scenario one needs to keep track of the pending payments in an accounts receivable account. This will help in knowing what is yet to be received and who needs to be sent reminders. Enterprises can even use ready-to-use software systems that help maintain such accounts.
- Inventory: All businesses have to maintain an inventory of products to meet sudden orders or send samples. Maintenance of an inventory means blocking of funds and thus proper records need to be maintained to track them. Inventory records help businesses to prevent pilferage, track buying trends and place timely orders for refurbishing the stocks.
- Accounts Payable: SMEs also buy raw materials or hire the services of other firms and pay them after a lag period. Details of such payments that are due or accounts payable need to be maintained by every business. Such records enable an SME to establish good credit.
- Loans Payable: Similarly an entrepreneur may have taken a loan whose installments may be due at various points of time during a year. A record of such funding and due payments also needs to be maintained to ensure that you make timely payments and thus maintain a good reputation.
- Purchases: This account keeps track of all purchases made for carrying out your business. This helps in calculating the cost of production or provision of goods and services.
- Salary and Other Expenses: Employees form the backbone of any business and keeping track of their payroll forms an essential part of an SME’s bookkeeping activity. Apart from this, all other expenses incurred to run a business also need to be recorded in the books of an enterprise.
- Sales: All products and services sold bring in revenues which need to be tracked to get a clear picture of a startup company’s revenues.
- Owner’s capital investment and equity: This account tracks the amount invested by each owner.
- Retained earnings: these accounts display the amount that is reinvested into the business and not paid to the owners. This account is important for investors and even lenders who provide funding to a business to track the latter’s performance.
Apart from these essential accounts that should be part of every business’ bookkeeping records, an SME can use the following tips to have an efficient account system:
- Every business should have the source documents of all transactions, operations or events carried out as part of its operations. Also these source documents should be updated on a regular basis with the financial impact of the various transactions.
- An SME should plan for all major expenses if it wishes to avoid last minute problems or hassle. This includes acknowledging expenses relating to seasonal changes or maintenance after a certain period of time or replacement of components etc.
- Record all expenses and receipts correctly to have a true view of the performance of the business.
- Summarize all your accounts on a regular basis whether daily, weekly or monthly.
- Use these summaries to prepare financial reports that tell you about the health of your business and help you take decisions about future funding or business opportunities.
- Keep track of your tax deadlines and set aside the estimated amount in advance. This will aid in timely filing of returns and avoiding any kind of tax problems.
Follow these tips and you can have an efficient bookkeeping system to keep track of your company investment and long term goals. Regular maintenance of all essential books and records will help an enterprise to keep track of its income and expenses besides aiding in timely filing of returns.