10 Bookkeeping Basics You Can’t Ignore As A Small Business Owner

Tuesday, 19 Nov 2019

Operating a small business in a big city like Melbourne is no mean feat. It goes without saying that business ownership brings along a plethora of responsibilities that cannot be mastered by one person. This is the reason why most companies find themselves struggling in just a few years of their establishment.

Financial blunders are often the culprit behind the plummet of an enterprise. Also, the obliviousness of the entrepreneur towards the importance of bookkeeping adds to the challenge. The significance of an standardised and streamlined accounting system cannot be overstated.

It paves the way for a thriving venture which is built on the foundation of robust financial data. All professional bookkeeper in Melbourne recommend that the business owner must have a basic knowledge of their accounts to make key financial decisions.

Moreover, bookkeeping information saves time, effort, prepares the business for the tax season, reduces the chances of fraud and helps in auditing. So you need to have a clear idea of the different types of accounts to gain an insight into the documents. Let us look at the ten bookkeeping basics that you cannot afford to ignore being a small business owner.

1. Cash Account

The cash account is the most crucial element of your accounting system, which records payments received and money spent in a given time period. In simple words, it gives you the data of all the business transactions in terms of revenue and expenses.

These are recorded by the bookkeepers in cash receipts and cash disbursements journals to monitor the flow of cash. This information is needed by every company in Melbourne for budgeting, requesting a loan, making investments and much more.

2. Sales Revenue

The money generated from the sale of goods and services, being offered by your business in Melbourne, forms the sales revenue. The bookkeeper maintains a record of the incoming sales revenue to measure the performance of the business.

This information is essential to understand if the products are working in the market or not. Also, it helps in keeping a tab on the financial health of the organisation.

3. Inventory

Inventory, as the name suggests, is the total number of goods in possession of the business, which will be sold in due course of time. It must be tracked regularly by bookkeepers to understand the value of assets in the balance sheet. The amount received from the sale of these goods becomes the income of the business operating in Melbourne.

4. Loans Payable

It is the amount that a business borrows to purchase assets like equipment, vehicles, etc. and has to be repaid. This is recorded as a current liability in the balance sheet by the bookkeeper and helps in keeping a check on the timely payment of instalments and the remaining amount to be paid. It is different from accounts payable because it charges interest. 

5. Accounts Payable

It is the account that showcases the amount owed by a business to its creditors, and it must be paid back in a defined timeframe. It can be considered a short-term debt which the company owes to suppliers and vendors.

The account helps in tracking the due dates and avoiding any delays or double payments. After the payment is made, they are viewed as an expense by the business. 

6. Accounts Receivable

It is mentioned in the balance sheet as a current asset by the bookkeepers and is the money owed to the business by its customers and debtors.

If the entity in Melbourne is not taking money immediately from the customers after providing them with goods and services, then they have to keep track of the amount that is due to be paid. It helps in raising accurate and on-time invoices. It involves billing the customers for the goods and services ordered.

7. Payroll Expenses

It is one of the significant portions of business expenditure in Melbourne and comprises the amount of money paid by the company to its employees for their services. It also includes other expenses related to workforce management, such as payroll taxes, employee benefits, etc.

In a nutshell, it is the cash paid to employees in an accounting period in the form of wages and salaries. To ensure all the tax payments are stress-free, businesses must be extra cautious about maintaining this account.

The Single Touch Payroll system makes it mandatory for businesses in Melbourne to report the employee salaries, wages, superannuation and PAYG withholdings to the ATO, which makes the use of this accounting component quite prominent.  

8. Owners’ Equity

As the name suggests, the owner’s equity is the amount invested by the business owner in the entity after deducting the amounts withdrawn and adding the net income from the time of the establishment of the business.

It is the owners’ share of assets of the entity that can be claimed by the owner or the shareholders. The mathematical formula for calculating the owner’s equity is as follows:

Equity = Assets – Liabilities    

9. Purchases

The money spent on buying raw materials and goods to be sold to the customers later is recorded as purchases by bookkeeping companies in Melbourne. It aids in determining the cost of goods sold which is deducted from sales to establish the gross profit of the business.          

 10. Retained Earnings

Retained earnings are the net income of the business after paying dividends to shareholders. The profit generated by the entity can be utilised by the owner to reinvest in the business for further growth or make payments to the shareholders.

If the money is not given to the shareholders, then it becomes retained earnings. It is the collective amount retained from the commencement of the venture and helps to gauge the performance of the business.

Conclusion

Bookkeeping is often neglected by small business owners in Melbourne as they shift their focus on building the business. However, the data produced by bookkeepers is the key to making informed business decisions. So make sure you are able to make sense of the terms mentioned above to understand the ledgers.       

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