The Purpose Of Small Business Bookkeeping

All companies that operate within the borders of the United States have specific reporting requirements to the Internal Revenue Service. They also have state reports that need to be submitted regularly. Depending on the business type and the transactions that go in and out during a given month, a business may have to file monthly, quarterly, or annual reports to both their state the federal government tax agencies. It's important to find out what the reporting requirements are in your state before starting a small business.

There are several reasons why small business bookkeeping is important. One reason is that it provides you the data that is required to file reports with both the IRS and state tax agencies. If bookkeeping is done appropriately, it can provide you with the facts that tell you how well the business is doing. If you have year-end profit goals in place, bookkeeping can help you determine if you are in line to achieve them. Making corrections throughout the year based on data from financial reports can help you reach your goals at year-end.

Determine Your Accounting Method

There are two basic accounting methods to choose from. They are cash basis and accrual accounting. The fundamental difference between cash and accrual accounting is the point at which revenue is recorded. For cash basis accounting, revenue is not recorded until a check, cash, or payment of some kind has been deposited into your business bank account. Accrual accounting records revenue as soon as a sale is finalized. Customers that are invoiced, for example, may have terms that allow them to wait a specified period of time before the invoice becomes due and payable. Accrual accounting does not take into consideration how long it might take to collect money, only the fact that a sale has been finalized.

What Are Asset, Liability, and Equity Accounts?

There are three accounts that have to be balanced in order to generate accurate financial reports; they include assets, liabilities, and equity accounts.

- The Asset Account. Assets include anything that is owned by the business. It can include cash, vehicles, equipment, land, and inventory. In accounting terms, assets are defined by using the following mathematical equations:

1. Assets = Liabilities + Stockholder's Equity (Equity)

2. Assets = Liabilities + Capital

- The Liability Account. The liability account represents the financial obligations that a company has. They include obligations that have arisen from past events that usually require the payment of money in return for the use of an asset. The debt associated with a piece of equipment that a company does not own outright is an example of a liability.

- The Equity Account. Shareholders' equity, also known as stockholders' equity, shareholders' funds, and shareholders' capital, represents the shared interest that individual owners in a company have as it relates to business assets. When a company is started, for instance, owners usually fund the emerging enterprise with their own cash in order to pay for operating expenses. This results in a liability for the business that can be repaid in the form of future capital.

Accurate Bookkeeping Helps Determine Business Profitability

In order to accurately determine whether or not a business is in the black or in the red, the precise recordation of accounting entries is essential. Bookkeeping and accounting functions must be maintained so real time business decisions can be made. There are free online accounting tools to help your company stay on track without spending hard earned money.

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