Small Business Accounting

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Small Business Accounting has great importance in course of securing success for the business. The financial matters that are associated with small business are a bit different from those of large business houses. The understanding of these financial matters and accounting is very much essential for the proper administration of the small business. This understanding of accounting leads to Proper allocation of credit, right business activities, best use of funds, proper evaluation of competitors and better decision making.

Small Business Accounting mainly deals with three major financial measures- Balance Sheet, Profit and Loss Statement and Cash Flow Statement.

The Balance Sheet portrays the worth of the small business. It is a statement that lists all assets and all liabilities of the small business enterprise at a point of time.

The Profit and Loss Statement shows whether the small business is profitable or not. It is a statement which shows how the business is doing and unlike Balance Sheet covers a time period, either monthly or quarterly.

The Cash Flow Statement gives idea about future cash balance of the small business enterprise. It is a statement which covers future periods of time and thus predicts about the future cash needs of the business before the needs actually arises

There are two main Methods of Small Business Accounting:Cash Basis Method-In this method cash receipts are identified as income and bill payments are identified as expenses. Most of the small business owners use this method for their business accounting purpose as this method is very simple to understand and implement.

Accrual Method-Under this method entry of revenue in the accounts does not depend on the actual collection of cash. Whenever a product is sold, sale is recorded in the accounts as “Accounts Receivable†even if the customer has not paid the price and when the revenue is actually realized then the “Account Receivable†is turned into Cash in the account records. In the same way, if any expenditure is incurred by the small business enterprise, it is recorded as expenses in the accounts even if the bills are paid much later. Generally, the small business owners who are engaged in manufacturing business use this Accrual Method of accounting
Accrual Method of accounting Important Issues regarding Small Business Accounting

  • Tax Liability Issue-In small business accounting there will be two tax liability issues that the business owner has to deal with.

    1) Income Tax-If the small business owner is a Sole Proprietor, then he has to pay social security tax other than corporate income tax on his business income. This social security tax which may be up to 15% of net income is mentioned as a separate item in the income tax return file of the small business owner. If the small business is a partnership firm then also, the partners are bound to pay Self-employment tax other than corporate income tax.

    2) Payroll Tax-Every small business owner is the employer of a certain number of employees though the number may be really small. Being an employer the business owners has to file payroll tax return.

  • Maintaining Separate Business Records-Generally, the business owners who are operating partnership business keep a separate business record by default. But, the small business owner who is the sole proprietor of his business also need to maintain business records separate from his personal records, otherwise problem will occur at the time of paying taxes.
  • Internal Control-Internal Control is a major issue as a business can emerge as a failed venture due to lack of internal control. In a business, products and services are exchanged for money. This money can be in the form of cash, cheque or credit card payments. The small business owner has to make sure that this money income of the business is in no way wasted or mishandled by the dishonest workers or careless employees. The owners of retail business or manufacturing business need to practice internal control on the proper record keeping of Inventories also because inventories just like money can be misused.
  • Quarterly Returns-Quarterly returns are basically Payroll Tax Returns and Sales Tax Returns. Small Business Enterprises are required to file payroll tax return and sales tax return quarterly. From the beginning Accounts should be maintained in a manner that these taxes are paid accurately and late payment or non-payment of these tax obligations does not take place.
  • Bank Account Reconciliation-For any small business it is very much important to check the bank account balance properly at least once a month.
  • Employee Benefits Policy-When dealing with Accounting of Small Business one has to also take care of the facts that, how many hours a day and how many days a week employees work and what kind of medical insurance the are provided with. Consideration of these things is quite important for a flawless business accounting.

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