A small business owners’ complete guide to accounting

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As a small business owner, we know you’ve got a lot on your plate. Between managing supplies and satisfying customers, the last thing you need to worry about is an accounting error (or any error for that matter). With the right processes and tools in place, you can be well equipped to handle any challenge that might come your way.

One essential part of running a small business is managing your internal accounting cycle and bookkeeping. Creating a clear picture of your company’s financial health can be daunting, but with an understanding of the accounting cycle and easy-to-use accounting tools , you can come prepared and continue doing what you love, so let’s get started.

What is the accounting cycle?

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The accounting cycle is a series of 8 steps that an organization uses to identify, analyze, and record transactions and the accounting procedures of the company — it’s an accounting term that all business owners should know.

Through this 8-step process, accountants will use the accounting cycle as a checklist to run through a set of well-planned procedures to determine which step to perform next to complete the cycle. When completed correctly, the accounting cycle ultimately delivers an accurate set of financial statements.

Why does the accounting process matter?

The accounting cycle is the foundation of accounting practices in your company, it sets the bar for financial organization and consistency. Small businesses often operate on narrow profit margins, and access to cash may be limited. These businesses have less room for error. Following the accounting cycle helps the business owner stay on track by accomplishing several tasks at once and helps with organization, asset protection, and financial reporting.

Now let’s dive into this process a bit more.

  • It keeps financial transactions organized
  • Failure to account for all financial transactions can result in lost revenue, or a possible discrepancy on financial statements.
  • It protects your assets from theft
  •  Businesses must invest in asset purchases and maintenance. Without assets, businesses can’t operate. The accounting cycle protects assets from loss and theft by keeping track of your assets and revenue.
  • It makes financial reporting easier The accounting cycle requires accountants to review the general ledger and the trial balance before using the information to create the financial statements. When business owners can generate reliable financial statements, they can understand and manage their business better.

The accounting cycle’s 8 steps

As we noted above there are 8 steps to the entire accounting process. Think of each step as a pillar that stands all on its own, and when brought together delivers a comprehensive visual of a company’s financial standing (sort of like a company’s financial report card). The detailed steps of the accounting cycle can be seen below.

1. Identify your transactions

Bookkeepers or accountants are responsible for recording the transactions over the accounting timeline.

For example, a marina that sells boats will need to keep track of each transaction that is made through purchases of equipment, parts, or services rendered over the accounting period. They will also want to take note of important information to make categorizing and following steps easier.

Important info to identify includes:

  • Transaction dates
  • Product prices
  • Amounts paid

2. Record the transactions

Storing information is a crucial part of the accounting process and can happen either at the point of sale (during the first step) or as a second step on its own. This can be done manually but many companies use accounting software for simpler storage recall and organization of transactions.

A few notes to remember when recording transactions:

  • Maintain chronological order of transactions
  • When using credits and debits, they must always balance each other out
  • Include important notes for the accountant for easier reconciliation
  • Luckily, accounting software can easily track all of this information for you.

3. Post transactions to the general ledger

Think of the general ledger as a summary sheet where all of the transactions live and are categorized. The general ledger is the master list of any transaction information listed in journals or sub-ledgers.

4. Create the trial balance

For the fourth step in the accounting cycle, transactions will need to be balanced at the end of the period. The accounting period can vary (monthly, quarterly, annually) depending on the company.

The trial balance provides the company with insight into the balances in the account and discovers any discrepancies. Since no accounting method is seamless you will almost always find some discrepancies when balancing your books.

5. Analyze the worksheet

Arguably one of the most intricate steps in the accounting process is the worksheet analysis. When you have credits and debits from your transactions that don’t balance (as in one cancels the other) you have to make corrective adjustments accordingly.

6. Adjust journal entries

The final step before you create your financial statements is making any adjustments, which need to be made to account for any corrections for accruals or deferrals. An example of an adjustment might be a salary or bill that is paid later on in the accounting period. Since it was recorded as an account payable when the cost originally occurred, it requires an adjustment to remove the charge.

7. Create financial statements

In this step, we generate financial statements—including the balance sheet, income statement, and cash flow statement—from the trial balance. Here’s a brief explanation of each financial statement and some must-know accounting formulas:

The balance sheet summarizes a company’s financial position as of a specific date. It’s a financial statement that subtracts assets from liabilities to determine equity:

  • Assets – liabilities = equity

The most crucial part of the balance sheet is the profit and loss statement.

An income statement reports a business’s profit or loss over time—typically, a month or year. It’s a financial statement that subtracts revenue from expenses to determine net income or profit:

  • Revenue – expenses = net income

Net income increases equity in the balance sheet. Many business owners focus on the balance sheet and income statements. But the cash flow statement is equally important.

The statement of cash flows reports cash inflows and outflows over time. Accountants or business owners can separate cash flow into three activities: operating, investing, and financing. The ending balance in the cash flow statement must equal the company’s cash balance on the balance sheet.

8. Close the books

Ask any accountant and they will confirm that finally closing the books is extremely satisfying. This happens at the end of each accounting period, signifying that the next accounting cycle can begin. Then we begin the accounting process all over at step 1.

5 Tips for successfully managing the accounting life cycle

With records and receipts strewn throughout your office, completing the accounting cycle can be a challenge. Use these 5 tips to improve your speed and accuracy.

Know your timing well

Whether your accounting period is done monthly, quarterly, or annually, timing is crucial to implementing the accounting cycle properly. Taking the time to map out plans and dates that coincide with your accounting deadlines will increase productivity and results.

Troubleshoot errors quickly

Having 8 steps in the overall accounting cycle may seem pretty straightforward, but it also means there are 8 chances for your process to go awry. Locating and solving problems early will be a defining task in making sure your process is carried out with much more ease and efficiency. This can be done by setting up proper procedures for each step, and creating checks and balances to catch unwanted errors along the way.

Modify the process to fit your needs

There is no one-size-fits-all solution when it comes to accounting practices. Each industry, company, and team operate differently. You may find early on that your system needs to be tweaked in order to accommodate your accounting habits.

For example, it can help to appoint one person to handle transactions because leaning on two or more could lead to discrepancies regarding which transactions are recorded to the proper accounts. It’s situations like these that can easily lead to an incorrect trial balance and risk delayed closing of your company books.

Set your team up for success

Give your staff the tools they need to succeed in implementing the accounting cycle. This could mean providing quarterly training on best practices, meeting with your staff each cycle to find their pain points, or equipping them with the proper accounting tools. The better prepared your staff is the more efficient they can be.

Try accounting software to lighten the load

Utilizing great tools to automate accounting processes will not only make your job easier but will also lessen the overall load that accompanies keeping your books. There are many tasks that can be automated and streamlined through the use of a business accounting platform; having your process go digital may seem daunting at first but will save you a lot of time in the long run.

Accounting cycle FAQ

We know the accounting cycle can seem daunting at times, so we wanted to cover common themes and answer your most urgent questions.

What is the most important step in the accounting cycle?

Each step in the accounting cycle is equally important, but if the first step is done incorrectly, it throws off all subsequent steps. If you’re unable to track your transactions accurately, the following steps won’t be able to create a clear accounting picture.

Why is the accounting cycle important?

The accounting cycle is important because it gives companies a set of well-planned steps to organize the bookkeeping process. It helps you avoid falling into the pitfalls of poor accounting practices.

Without the cycle, companies could risk going out of order, mishandling their records, and ultimately damaging their financial statements which could give a bad picture of the company’s financial health.

How many steps are in the accounting cycle?

Each company decides if they would like additional steps, but the accounting cycle typically includes these 8 steps:

  1. Identifying transactions
  2. Recording transactions
  3. Posting the general ledger
  4. Trial balancing
  5. Analyzing the worksheet
  6. Adjusting journal entries
  7. Producing the financial statements
  8. Closing the books

With accounting software, many of these steps are simplified, reducing errors that can come from manual processes. The accounting process is also significantly faster due to automation, saving time for small business owners and accountants.

Spend more time growing your business

As your business grows, so will the number of people who complete accounting tasks. Typically, bookkeepers post accounting transactions. Accountants, on the other hand, supervise bookkeepers and produce financial statements.

Creating an accounting process may require a significant time investment. Consider trying out accounting software to work more efficiently and minimize errors. QuickBooks can make a world of difference when implementing the accounting cycle for your small business accounting process.

Setting up an effective process and understanding the accounting cycle can help you produce financial information that you can analyze quickly, helping your business run more smoothly.

 

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This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.

 

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10 steps for building your business credit rating

 

Like personal credit, it’s important to regularly monitor your business credit. Having a business solid score can help you in a number of ways, including:

  • Obtaining a business loan or line of credit more easily and with better terms;
  • Convincing suppliers to extend business credit and/or offer you better payment terms; and
  • Boosting your business’ reputation with potential partners, vendors, and suppliers.

You should begin building your business credit rating as soon as your business is up and running. And if you’re already going, it’s never too late to start. Here are some ways to do it.

 

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If your business is a sole proprietorship, it may be harder to keep your business and personal finances separate. Building business credit is one reason why forming an LLC or corporation could be the right structure for your business. A Limited Liability Corporation (LLC) combines the limited liability of corporations with certain tax benefits.

 

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Get an EIN for your business. This 9-digit number, like a Social Security number for businesses, is assigned by the IRS. Having an EIN number can make it easier to open a bank account or secure funding from lenders.

 

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It’s a best practice to operate your business as a separate financial entity. Opening a business bank account and keeping personal and business funds separate not only provides an opportunity to build business credit, but it can also simplify tax preparation.

 

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Business loans—in addition to helping keep your personal and business finances separate—can help build your business credit as well as categorize and track expenses.

 

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Paying all of your debts on time—including payments to utility companies, vendors, landlords, credit-line payments, and business credit card companies—is critical to building a strong business credit rating.

 

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Consider how much available credit you want on-hand as a financial cushion if you run into a cash flow crunch. If you have more credit available than you need, and keep your utilization across each line of credit to less than 30% you’ll gradually build your business credit rating.

 

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Business loans and lines of credit are powerful tools for funding necessary expenses, including hiring, marketing, or covering unexpected emergencies. They also enable you to grow your business without relying on high-interest credit cards. They’re a great way to build your business credit rating.

 

 

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Make sure the three major business credit reporting agencies have complete and accurate information on your business, including your EIN. Keep them updated on any changes to your business, such as a new address or contact information. Quickbooks Capital partnered with a leading agency, Dun & Bradstreet to provide a free business credit score to to help Quickbooks customers get a better handle on their score.

 

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Not all companies report payments to the business credit bureaus. Therefore, you may have to ask your vendors directly to do this on your behalf. Quickbooks Capital reports to the agencies to help customers build their credit score.

 

 

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Once a quarter, check your business credit report and your business credit rating with each of the three credit bureaus. If you spot any errors or inaccuracies, take steps to correct them. You’ll also be able to see if your credit rating is declining for legitimate reasons, such as late payments or overused credit, and take steps to change that behavior. If you’re a Quickbooks Capital customer, you may already have access to a free score provided to our customers by Dun & Bradstreet.

A strong credit rating is critical for small business. Taking these long- and short-term steps can help you have more and better options available when you decide to seek additional funding for your business.

To learn more, check out this comprehensive guide on how to start a business.

This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.

 

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Featured Image Credit: DepositPhotos.com.

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