Keeping accurate records of all income and expenses is essential to small business accounting. Keeping track of and managing money effectively is critical to small business success, especially during the early stages. Small business accounting not only helps you keep track of the past and present performance of your business, but it also helps you generate invoices and prepare payroll.

What is the Best Way to Do Bookkeeping for a Small Business?

Analysis of financial transactions

Generally, the first step in accounting is to analyze financial transactions and enter them into the accounting system pertaining to the business entity. For example, a loan taken for personal reasons is not considered an accounting transaction.



As part of the accounting process, it is necessary to prepare the source documents. Whenever a transaction is recorded, it is based on a source document or business document.



Journal Entries

A journal (also known as a book of original entry) records business transactions chronologically in accordance with the double-entry system. The journal entries include two accounts – debit and credit.



Accounting professionals use special journals to record recurring transactions, such as purchases, sales, cash receipts, etc. This simplifies the process. Transactions that don't qualify for a special journal are recorded in a general journal.



Ledger

A general ledger is a group of accounts that displays the difference between the old balance and the new one, as well as the current balances of each account. Likewise, it is called the Book of Final Entry.



Unadjusted Trial Balance

Using a trial balance, you can determine whether the total debits and credits are equal to each other. Accounts are compiled from the ledger and organized in a report. Both debits and credits should be equal.



Otherwise, errors in the trial balance must be found and corrected with correcting entries. Despite the fact that debits equal credits, there may still be errors due to double postings or omissions.



Adjusting Entries



To update the accounts summarized in the financial statements, the accountant must adjust entries at the end of the accounting period. These entries include unrecorded income.



Adjusted Trial Balance



The adjusting entries must be made first to prepare an adjusted trial balance. The purpose of doing this is to test if the debits are equal to the credits after the adjustment entries have been made. This last step must be completed before the business' financial statements are prepared.



Final Thoughts



Many cloud-based accounting software applications are available to small businesses that cannot afford to hire a professional accountant. In the meantime, these business owners may consider automating their bookkeeping for small businesses with one of the numerous applications available.