Being the owner of a small business is an exciting prospect. You get to run things the way you want, can pursue a craft or service you love, and get the chance to build something great by yourself. But running a business comes with a host of challenges that you must adapt to. Accounting, especially for those inexperienced in financial management and tax, is one of the most pressing ones.

However, it’s absolutely possible to learn how to manage your accounting. Let’s go over the basics so you can get off to a strong start.

 

Accounting basics

To understand accounting, you need to understand bookkeeping – the process of recording financial transactions in a business. Bookkeeping includes logging sales, purchases, payments and receipts.

Accounting, on the other hand, goes further. It involves analysing and interpreting what bookkeepers have collected. Accountants then transform the raw data into financial reports (see financial statements, below), which business owners will use to inform their strategic decisions.

This information is also what HMRC uses to work out your taxes, and companies by law must file certain accounting documents called annual accounts to Companies House.

Pretty quickly, you’ll see the importance of accounting, including:

• to make the right decisions, you need to present your data accurately
• to avoid overpaying tax or underpaying and receiving a fine, you need to present your data accurately
• to remain compliant with Companies House, you need to present your data accurately.

Financial statements

Financial statements are a great tool to understand your business. Only limited companies are legally required to prepare them, but they’re beneficial to all. They show a mixture of information.

• • Balance sheet: The balance sheet provides a summary of the assets, liabilities and equity of a business at a particular time. Assets are everything that the business owns. Liabilities are everything the business owes. Equity is the difference between the two.

• Profit and loss account: The profit and loss account shows the gross and net profit or loss during a specific time period. Gross profit is your revenue (all the money you make) minus the costs of providing your goods/services; net profit is your revenue minus all your costs, including rent, salaries, taxes and loan payments.
• Cashflow statement: Your cashflow is a summary of the money flowing in and out of your business. Your cashflow statement essentially acts as a forecast that predicts how much you expect in costs and sales each month over the next year.

If you’re a company, make sure that you actually understand the figure in your statements and don’t just forget about them after you’ve sent them to Companies House. They provide a host of financial information that you can use to make long-term plans. Interpreting them can be difficult, so consult an accountant if you need some assistance.

Accounting tips for small businesses

Accounting is a complicated task with lots of minute details to pay attention to. With best practices, you can get started with confidence. Here are our top tips.

• Keep personal and business finances separate: Sole traders should separate their personal and business finances. It’s extremely confusing if everything is done in the same place.

• Keep all your records: You should keep all financial records, especially invoices and receipts. Keep them organised so you can complete your accounting and tax work more efficiently.

• Stick to tax deadlines: Make sure to send your tax returns before the deadline to avoid penalties. Start as early as possible so you have the time to check your figures are correct.

• Use cloud software: Online accounting software is a game changer for businesses that want to work more efficiently through automation and real-time data.

• Consult with an accountant: Accountants train for accounting and tax work, and are extremely experienced in both. They can provide detailed advice that matches your situation or take on the job entirely.

 

Looking for help with your accounting. Talk to us about our accounting services for small business owners.