Small Business Bookkeeping Essentials: Basics You Can’t Ignore

Sunday, 16 Feb 2020

Running a small business in Melbourne can make you feel both excited and anxious in equal measures. While you are eager to make profits, the groundwork required to reach that point makes the goal seem like a distant dream. Gradually, as you propel the small set-up through the initial roadblocks and manoeuvre your way towards your destination, you realise the significance of bookkeeping.

Learning the art of bookkeeping is an indispensable part of being an entrepreneur, even if you hire professional bookkeepers in Melbourne to take care of the accounting tasks. It is essential for the entrepreneur to be aware of the basics to understand the data organised by the bookkeeper and make crucial business decisions.

If you have been shying away from understanding the bookkeeping essentials, then take some time out of your busy schedule to take a look at the basics listed below which should not be ignored.

1. Know About The Basic Accounts

The vast number of transactions taking place in the company are categorised into various accounts during the recordkeeping process. Most bookkeepers utilise cloud-based accounting software for this job as it eliminates the chances of human error and provides accurate results.

Different businesses in Melbourne set up different categories. However, the five basic accounts that should be known to the entrepreneur are as follows:

  • Assets – These include the capital, equipment, stock, etc., possessed by the business.
  • Liabilities – These cover the loans and debts as well as the accounts payable.
  • Income – It is the total amount earned by the business through sales.
  • Expenditure – It is the amount that is spent by the business in Melbourne on buying inventory, equipment, paying wages, etc.
  • Equity – This amount is calculated by subtracting liabilities from the assets and symbolise the owner’s interest in the entity.

2. Decide Between Cash And Accrual Accounting

Micro businesses and even small businesses in Melbourne which use only cash-based transactions usually begin with a cash accounting system. It covers both hard cash and online transactions.

In some cases, as the business expands, many companies make the switch to accrual accounting as it includes credit-based transactions. An entrepreneur can opt for accrual accounting if he intends to purchase or sell things on credit.

In the accrual accounting system, the transactions are recorded in the books even if the money is received or paid at a later date.

3. Data Collection And Recordkeeping

The first step of bookkeeping is to gather all the financial data of the business related to every transaction and organising and storing it. The information to be recorded includes invoices, receipts, bill statements, payroll records, bank statements and tax returns.

In a nutshell, all the incomings and outgoings need to be documented as these help in determining the cash-flow in the business and following up with clients for payments and making profit and loss projections.

Equipped with the information, the entrepreneur gets a fair idea about the revenue generated by the entity and how it can be utilised for managing the expenses and making investments in Melbourne. 

4. Balancing The Books

The balancing part is the most critical aspect of bookkeeping as all the accounts must be recorded accurately and categorised correctly to get the right results. To maintain the balance, entrepreneurs and bookkeepers must always abide by the basic accounting formula:

assets = liabilities + equity.

If the two sides of the equation do not match, then it is evident that you have made an error, and it must be rectified to get accurate results. Once the books are balanced, you can begin working on the financial reports.

5. Creating Financial Reports

The reporting task takes a lot of time, and bookkeepers are engrossed in this activity all through the day. The most common financial reports prepared by the bookkeeper are balance sheets, profit and loss statements and cash flow statements.

These are highly significant for understanding the financial well-being of the entity and take future decisions. These can be understood in a simple manner right here:

  • Balance Sheet – The report consists of a summary of the assets, liabilities and equity during a specified time. The assets must be equal to the sum of liabilities and equity, which gives a clear picture of the financial health of the business.
  • Profit and Loss or Income Statement – It displays the revenue and expenditure experienced by the business in Melbourne during a fixed period of time. Thus the entrepreneur gets to know about the profitability of the business.
  • Cash Flow Statement – It displays how much money is coming into the business and how much is going out. It keeps track of cash used in operating, financing and investing, and explains how the business has developed in a given period.

6. Maintain The Records

Compliance with regulations in Melbourne makes it mandatory to keep your financial documents safe and secure. After you have inserted the data into the accounting system, do not throw away the documents.

The detailed past records are valuable in determining the changes that have taken place in the current financial year as compared to the previous ones. The auditor will need to look at these details to conduct the evaluations.

The digital copies must be stored in the cloud backup so that they can be easily pulled up when required. The ATO can also ask for the records during the tax period, so make sure you have them handy.

7. File Tax Returns On Time

Financial recordkeeping plays a vital role in identifying the applicable tax deductions. Your bookkeeper in Melbourne can aid in this regard by providing information related to the tax concessions.

The income tax return needs to be lodged annually in addition to the submission of the business activity statements. It can be done quickly and comfortably online. The tax law makes it obligatory to keep a record of all tax returns and reports for at least five years so these must be stored safely.  

Conclusion

Bookkeeping is the most fundamental element of a business, and it has a plethora of benefits. Entrepreneurs in Melbourne can keep track of the income and expenditure and the amount of money generated by their business with this tool. Plus, it allows the owner to make smart and calculated decisions based on accurate data and projections.   

 

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