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The importance of bookkeeping for small businesses

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Continuously evaluating your financials and ensuring that your books  are essential to running a successful business run by an owner. Learn more about the most important steps involved in bookkeeping for small businesses.

How do you define bookkeeping?

Bookkeeping helps you understand how your company is doing by tracking the cash flowing into and out of your company.

It is the process of keeping detailed reports of all your income, expenses, and costs. It aids in understanding the success of your company. It also provides the details that you require to complete the annual Self-Assessment Tax Returns processing sales and purchase invoices, and pursue unpaid invoices.

The word “bookkeeping” comes from the usage of physical ledgers, daybooks, and cash books. Nowadays, a majority of small companies employ accounting software that is digital.

What is double-entry bookkeeping?

Double-entry bookkeeping refers to a method of accounting which has been utilised since the 13th century.

By using double-entry bookkeeping, a business owner can monitor all financial transactions and see how their business is performing in terms of cash balances, and expansion.

It also permits the business owner and their accountant access to the data needed to comply with financial and tax filing demands, such as tax returns for VAT, annual accounts taxes, tax returns along with Cash flow forecasts.

The principle behind double-entry bookkeeping is that each transaction includes two equal and opposite components. For example, if you sell items the cash balance rises and the stock levels go down.

The accounting records of a business consist of double entries that can be compiled into what’s known as general ledger.

A general ledger is typically divided into at most nine categories principally:

  • Assets
  • Liabilities
  • Capital Introduced
  • Owners’ equity/shareholding
  • Income
  • Expenses
  • Drawings
  • Gains
  • Losses

What are the major differences between accounting and bookkeeping?

Accounting and bookkeeping can be confused as they are often incompatible in many ways.

Bookkeeping is the daily recording and categorising of a company’s financial transactions, and accounting involves putting those financial data into use by analysis strategy, strategy and planning.

Basic bookkeeping and bookkeeping for small companies

A current, accurate bookkeeping system is an essential aspect of a properly run company.

Bookkeeping allows you to:

  • determine if your business is earning money
  • Access the data you need to prepare accurate tax returns and business plan
  • Check to see whether a cash flow issue is looming so that you can plan for it
  • identify incorrect payments or the possibility of fraud

Traditional accounting in contrast to. the cash-based accounting

In order to keep track of your books and determine your taxable earnings You must choose an accounting system. The options are either conventional (accrual) account or cash-based accounting.

Traditional accounting is the process of recording earnings and expenses in accordance with the exact date you invoiced or were charged. Cash-based accounting means that you will only have to declare the income or expense when it enters or departs your company.

A typical example of accountancy: The invoice was sent on February 18th, 2021 but didn’t get the funds until April 20th, 2022. The invoice was recorded for the tax year 2021/22 even when it was paid during the tax year 2022/23. The amount of income must be recorded on the tax return for 2021/22.

A case study for cash-based accounting. You paid an invoice on the 20th of March 2021, and received payment by the 30th of April in 2022. The invoice is recorded as the tax year 2022/23 because that’s the tax year that you paid the funds. Although the invoice was dated the 2021/22 tax year, you can claim it on your tax 2022/23 return.

You can utilise cash basis accounting for self-employed sole partners or a partnership that has businesses that have a turnover less than £150,000 per year.

If you manage multiple businesses Cash basis must be applied to all of them and the total turnover of all businesses should not exceed £150,000.

If your company grows beyond a £150,000 profit in the course of the year, you may continue to utilise cash basis until the amount of £300,000 annually. If your business grows beyond that, you must use traditional accounting when you file your tax return in the future.

Limited liability and limited company partnerships are not able to use the cash basis. There are other specific kinds of companies that are not able to utilise the scheme.

The government has stated that cash basis is not suitable for your business in the following circumstances:

  • are looking to claim bank fees or interest that exceed £500 to be a cost
  • are more complicated to operate for example, holding large levels of stock
  • You’re seeking business financing A lender might ask to review the financials that are compiled using traditional accounting before deciding to lend funds
  • Have losses you wish to offset against other tax-deductible revenue (‘sideways loss relief’)

In order to keep a traditional accounting system you must keep these records as well as the standard expense and income records:

  • the amount you’re owed, but haven’t yet received
  • charges you’ve made a commitment to but haven’t yet paid
  • the value of your stock and work in progress at close of the accounting period
  • Balances of the year-end financials
  • the amount you’ve put into the company during the year
  • the money you’ve gotten from the company for personal use

It is suggested that you consult a professional accountant to help you determine the best accounting strategy for your company.

Software for bookkeeping and accounting for small enterprises

If you are using software for bookkeeping, your procedure will be more efficient.

The automated bookkeeping applications for small companies speeds up the process and allows your accountant to assist you by allowing them to login and look up the way in which items are classified.

Other benefits of using online bookkeeping and accounting software are:

  • Automatically issue invoices to customers.
  • Automatically pay bills
  • You should keep track of the amount your customers owe you.
  • Be aware of what you are owed by your suppliers.
  • get financial data on the move
  • have up-to-date information required by suppliers or lenders who offer credit

Do I have to manage the bookkeeping myself?

Although it is recommended to work with an experienced bookkeeper or accountant however, you can complete your own bookkeeping. If so, you have to be aware of the steps involved. It might be more economical to employ the services of an expert.

If you do your own bookkeeping, you’ll need to:

  • Choose and comprehend the method of accounting
  • Learn what records you must to keep and preserve (read tips for landlords and sole traders)
  • Keep a solid auditor trail for all of your financial transactions
  • Select the best accounting software
  • Allocate tax funds to
  • be informed of deadlines for tax returns to avoid paying fines

Small business bookkeeping class

While it’s not legally required for business owners to possess qualifications to manage the books of their company, it is recommended to have an accounting course or hire an experienced expert to assist and ensure that all financial activities are properly recorded.

Certificates in Bookkeeping are offered by different organisations. They are:

  • Institute of Certified Bookkeepers
  • Association of Accounting Technicians
  • International Association of Bookkeepers

It is possible to learn bookkeeping on your own in time, but business owners must decide whether they have time and energy to learn it. Some bookkeeping strategies take years to learn, while many owned businesses do not have the capability of regular tracking of expenses and income.

With the amount of time and money required to complete an accounting course It is economical and advantageous to seek out the assistance of an experienced bookkeeper.

Bookkeeping can be simple for small and medium-sized companies.

Account Ease Accountants are skilled bookkeepers with years of experience. We eliminate the need to keep a long-running manual record and boost the effectiveness of your bookkeeping and provide you with real-time, important insight into your operations.

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