Whether you sell your products on a traditional ecommerce platform or use an accounting software program to manage sales, it’s essential to keep the books up-to-date. To do this, you must have a clear understanding of the fundamentals of accounting and bookkeeping.
Bookkeeping is the process of recording transactions and creating an account ledger. This information can then be used to create accurate trial balances and financial statements.
Recording Transactions
Recording accounting transactions is one of the most important parts of the bookkeeping process. Whether you’re using accounting software or a manual system, it’s essential that every transaction is recorded accurately and in a timely manner. This will allow you to generate accurate financial statements and ensure that the information portrayed on them is valid.
There are several different ways to record business transactions, but the most effective method is to use a double-entry bookkeeping system. This means that each transaction is recorded as both a credit and a debit to the appropriate accounts. This allows you to maintain an accurate account balance and prevents mistakes.
Once you have an accurate account balance, it’s time to start classifying your transactions. There are five main categories of accounting transactions: assets, liabilities, equity, revenue and expenses. Assets are anything that your company owns, including cash, inventory, equipment or even intellectual property. Liabilities are things your company owes to others, such as suppliers or banks. Revenue is the money that your company receives for the goods and services it provides. Expenses are the costs of running your company, such as utility bills, office supplies, and marketing campaigns.
Each category of transaction is classified and recorded in a specific journal or ledger. A general journal template is a good place to begin, and it should include columns for date, amount, account code and description of transaction. Other fields may be added to this template if you need them, such as payment method or customer information. Once your chart of accounts is complete, you can begin recording daily transactions in the journals on a regular basis.
In addition to the general journal, you should also have a cash receipts journal and a cash disbursements journal. These journals will help you reconcile your cash receipts with your bank statements each month and catch any errors that you may have missed in the daily recording process. You can also use these journals to create a list of deposits in transit and outstanding checks, which will help you to identify problems if they arise.
Preparing Financial Statements
One of the most important aspects of bookkeeping is preparing financial statements. These reports provide details about the company’s position at a certain point in time, and they are used by lenders and investors to evaluate companies. Financial statements can cover a single period, such as a month or quarter, or multiple periods, such as a year. The three major financial statements are the income statement, statement of retained earnings, and balance sheet. These reports combine information from accounting journals and the general ledger to show how a business has performed over a specified period.
When preparing financial statements, the first step is to create a chart of accounts that separates and organizes different types of transactions. This chart will categorize and record different types of financial information, such as sales, expenses, assets, liabilities, and equity. After the chart of accounts is established, transaction details are recorded in the appropriate journal, such as the cash receipts journal or the cash disbursements journal. Then, these journal entries are transferred to the general ledger to ensure all debits and credits are reflected in the proper accounts. Finally, the company’s bank statements are reconciled with these accounting records to identify any discrepancies.
The next step is to prepare the income statement, which is also known as the profit and loss (P&L) statement. This report shows how profitable your business was during the specified period. It includes all revenue from sales and other sources, such as interest income, and subtracts expenses to arrive at a net profit figure. This is a critical report that will be needed at tax time.
A business’s statement of retained earnings is a summary of the amount of money the company has earned to date, including net profit. The statement of retained earnings is prepared after the income statement, and it is useful to investors to compare companies’ performance over time.
The last of the core financial statements is a balance sheet, which shows a company’s assets on one side and its liabilities and shareholders’ equity on the other. The balance sheet is useful for evaluating the company’s strength by comparing its assets to its liabilities and shareholders’ equity.
Payroll
Payroll accounting is a specific type of bookkeeping that involves recording all payroll-related transactions. These include paychecks distributed to employees, deductions from wages (like taxes and health insurance), and employer contributions (like worker’s compensation and FUTA). To get the most accurate picture of your business’s payroll expenses, you need to record these payments in a general ledger and payroll account.
The chart of accounts is a list that helps categorize the financial transactions that your business generates, like payroll and other operating expenses. You can set up separate accounts for payroll and other expenses to make it easier to reconcile your cash flow statements. To keep track of your expenses, you’ll need to use an accounting software system that has built-in payroll features. This way, you can be sure that your books are always correct and ready for tax filings.
You’ll need to determine how often you want to pay your employees based on the hours they work, their job title and services rendered. This can be weekly, biweekly or semimonthly (15th or 30th of each month). In addition to setting up a payroll schedule, you’ll also need to complete essential paperwork for employee onboarding. This includes the I-9 form, which helps verify that an employee is a legal citizen of the United States, and the W-4 form, which allows employees to designate how much they want withheld from their paychecks for taxes.
As you go through the payroll accounting process, make sure to match your expenses with your sales revenues in the proper period. This will help you determine the profit or loss from your operations and ensure that your business is following all relevant laws and regulations.
During the payroll accounting process, you’ll also need to record your accrued wages at the end of each accounting period. These are the amount of wages you owe to your employees, which will eventually be paid once you record a second journal entry to decrease your Payroll Liability account (a liability) and increase your Cash account (an asset). You’ll then need to record an additional journal entry to credit your Payroll Liability account when you actually pay the employees, so that your accounts balance match.
Taxes
Taxes are an important part of bookkeeping and accounting. It’s crucial to have accurate information on gross receipts, purchases, expenses, assets and employment taxes. This will help with filing annual tax returns. It can also prevent a big surprise when the IRS comes calling and ensure that you have enough money set aside for your quarterly or annual taxes.
This guide covers the basics of accounting and bookkeeping for small business owners. It will give you a solid understanding of the foundations of bookkeeping and accounting so you can build upon this knowledge as your business grows.
Disclaimer: This is not a substitute for professional advice. Please consult an accountant for further guidance on your specific situation.