Basic Accounting 101 for small businesses

If your business is under your sole proprietorship, you are not legally obligated to maintain a separate business account than from your personal account. However, in all cases regardless of the conditions, it is advisable to maintain a separate business bank account called corporate savings or checking account. This would simplify arranging and managing your funds apart from preparing taxes at the end of a tax year. If you do still choose to opt for using your personal account, ensure that you have understood the terms and conditions as a possibility of account cancellation stands when account activity indicates multiple commercial transactions.

A determining factor of business success can be how well you track your costs and cash outflows. The cornerstone of effective bookkeeping is being able to monitor your costs with precision. It can be tempting to ignore your spending in the early days of running your business, but failing to do so could result in cash flow concerns that could have otherwise been prevented. Keeping track of your costs and cash outflows allows you to analyze your company's progress, create financial statements, keep a record of eligible spending, prepare tax returns, and formalize your filings.

Many people use the terms "accounting" and "bookkeeping" interchangeably, but the two terms actually refer to different processes. Bookkeeping is the everyday process of recording, grouping, and settling a firm’s transactions. On the other hand, accounting is a complex procedure that brings together the data obtained from bookkeeping and the business activity performances together to prepare actionable reports.

The primary objective of accounting is to ensure that all transactions of a business is accounted for and recorded in a systematic manner. These reports can be used as references later to make business decisions.

An accountant can be immensely resourceful to your business. It will be difficult for you to stay on top of all the aspects of your business and to have an accountant on your team will make life easier for you. Accountants handle various tasks from loan applications, tax registrations and preparations, forecasting etc. Apart from these accountants, most accountants are also competent to carry out other managerial roles too. To hire a suitable accountant for your firm, you should match your requirements to the amount charged by the accountant. These charges are mostly on a fixed monthly basis for the accounting and bookkeeping services they provide.

Taxes to be paid varies as per the form of ownership. For example, if your business is formed under a sole proprietorship, only your business revenue would be taxed. However, if you own a corporation, you are also an employee under that corporation that is treated as a separate tax entity hence your income is taxed too.

An increment in gross margin will result in overall income growth. Gross margin is calculated as the amount obtained by removing total expenses from the income earned out of the total sales. To calculate gross margin, you should know the total expenditure to produce your goods and services. This is referred to as costs of goods sold (COGS)and involves direct material and human capital costs.

Setting up a business might demand you opt for multiple funding methods such as business loans, creditors, investors, or business partners. In the occasion of unfortunate and unforeseen poor-performing phases, you might require additional funding. If expansion and growth through innovations are in your vision, you would have to invest additionally in R&D, more employment, and other expenses.

Choose what fits your business. A cash-based accounting only accounts for and records transactions that have been completed. For example, income will be considered only if payment has been received. This system is generally followed by organizations such as NPOs, government entities, community organizations and small firms.

Accrual-based accounting on the other hand records transactions even before money is actually obtained or paid. This system uses accounts payable and receivable to keep track of the transactions like credit owed by clients and amounts owed to suppliers etc.