There are currently more than 33 million small businesses in the United States, according to the U.S. Chamber of Commerce. To succeed in today’s competitive markets, it’s essential for your business organization to have accurate books and records.
Bookkeeping vs. accounting
For starters, you should understand the distinction between bookkeeping and accounting. Bookkeeping refers to the systematic storing of financial documentation, such as receipts, purchase orders and invoices, as well as recording of daily financial transactions, such as purchases and sales of goods and services. In general, bookkeeping is the basis for accounting. Bookkeepers record journal entries — that is, debits and credits — for each transaction using accounting software, such as QuickBooks®, NetSuite® or Xero™. However, bookkeepers do more than data entry; they also may be responsible for sending invoices, processing payments and payroll, conducting banking activities, and reconciling accounts.
Accounting involves classifying, interpreting and communicating financial transactions. Accounting uses the records maintained by the bookkeeper throughout the period to generate historic and prospective financial statements. These reports — balance sheets, income statements and statements of cash flow — provide financial insights that help management and external stakeholders evaluate financial performance.
2 methods
Business owners must choose a method for recording and classifying financial transactions. There are two main options for small and midsize businesses:
1. Cash accounting. Under this simplified method, a business records revenue when cash is received and expenditures (such as expenses and asset purchases) when they’re paid.
2. Accrual accounting. This method is prescribed under U.S. Generally Accepted Accounting Principles. Here, revenue is recorded when earned and expenses are recorded when incurred, without regard to when cash changes hands. It’s based on the principle that revenue should be “matched” to the related expenses incurred in the reporting period. The chart of accounts for an accrual-basis business includes such items as accounts receivable (invoices that have been sent but haven’t yet been paid by customers) and accounts payable (bills that have been received but haven’t yet been paid).
It’s important to choose one accounting method and stick with it as you record transactions (a bookkeeping function) and prepare your financial statements (an accounting function). Some organizations start with cash accounting and switch to accrual accounting as they grow.
Getting professional help
Complying with accounting rules, tax laws and payroll regulations can be overwhelming for many closely held businesses. Fortunately, you don’t have to go it alone. We can help you set up and maintain a reliable system of reporting financial transactions in an accurate, timely manner. Contact us for more information.
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