What are the principles of bookkeeping for small and medium businesses? If you are starting a business it would be ABSOLUTELY NECESSARY to do bookkeeping because it is not only a government requirement but also a must if you want your business to be successful.
What is the process of bookkeeping for small and medium businesses?
1. Gather source documents
Source documents are the starting point of bookkeeping for small and medium businesses. You should prepare source documents for all transactions, operations and other events related to your business.
What types of documents do business usually have?
- Purchase invoice/receipt – when you buy products for sale you usually receive an invoice and a receipt. You can use this in the determination of the cost of goods that you are selling and also record the amount of cash that was paid.
- Receipts – you should document and save all receipts. It can be the receipt that you issued to your client, a receipt for a business related expense, receipt for something you buy for your business such as equipment or office supplies and others.
- Promissory note payable – if you will borrow money from a bank then you should keep this as well.
- Credit card slip – if you plan to use credit card transactions be sure to keep this since it is a record of sale.
- Salary rosters and time cards – this is use for the preparation of payroll cheques for your business. You can also use the generated documents from your Philippine payroll software.
Source documents are important since they are the evidence of your financial transactions and they will be the basis of what you will record in your Books of Accounts.
2. Record your transactions
Once you have source documents the next step is to determine and enter in these source documents to your Books of Accounts. Each of these documents represent a business transaction which include paying employees, making sales to customers, borrowing money from the bank, and buying products to sell to customers.
Determine the relevant information about each transaction based on accepted accounting principles. In bookkeeping for small and medium businesses you should always comply with accepted standards.
Where do you make the entries?
General Journal. This is a chronological record of transactions in the order in which they occur. A hournal entry records the whole transaction in one place after that each individual account transaction is recorded in their respective chart of accounts.
Chart of Accounts. These are separate accounts which are used to determine balances. Usual chart of accounts for bookkeeping for small and medium businesses are as follows:
- Current assets
- Cash and cash equivalents
- Accounts receivable
- Other current assets
- Long term assets
- Property, plant and equipment
- Current liabilities
- Accounts payable
- Other current liabilities
- Long term liabilities
- Retained earnings
- Other Income
- Cost of sales
- Cost of sales
- Research and development
- Sales and marketing
- General and administrative
- Finance costs
- Income tax expense
Remember that in bookkeeping for small and medium businesses, transactions should be entered correctly and in a timely manner. There is a debit and credit rule in bookkeeping which you should follow. You can read our article about it by clicking this link. Be sure to follow this recording process so that you will not encounter any problems later on.
4. End of period adjustments
Bookkeeping involves recording of transactions during an accounting period. A business is usually divided into a one year period usually a fiscal year or a calendar year. A fiscal year usually starts on a date pre-determined by the company while a calendar year starts on January 1 and ends December 31 of each year.
Besides the usual 1 year cycle businesses also prepare financial reports every month and every quarter. This is done so that you will know your current business situation and progress.
End of period adjustments are steps so that your accounting records will be updates and ready for the preparation of accounting reports, tax returns and financial statements. To do this you need to prepare the trial balance per account record necessary adjustments like bank reconciliation, depreciation on your equipment, interest earned or incurred and others.
5. Prepare Financial Statements
After all adjustments are recorded, the adjusted trial balance will then be the basis for preparing all your financial reporting needs. Usual financial statements includes:
- Balance Sheet – This includes all your business assets, liabilities and your capital or investment.
- Profit and Loss Statement – This includes the revenue you generated less the cost of sales and other expenses and your profit. The profit is usually added to your capital account in your balance sheet.
- Statement of Cash Flow – This is a statement of the cash your company receives and the cash that the company had to shell out. It indicates how much cash the business has.
- Capital Statement – a simple statement which indicates how your capital has increased due to your operations.
Preparing financial statements depends on the number of accounts your business has. Bookkeeping for small and medium businesses tend to be more difficult as the company becomes larger. This is the main reason why most businesses uses accounting software like MYOB, QuickBooks or Sage50 in order to make their accounting process easier.
6. Close the books
Every fiscal year or calendar year your business needs to close its books of accounts in order to begin a new bookkeeping cycle for the coming year. Accounts that are usually closed every year includes the income and sales related accounts, as well as expense accounts.
This is just a basic overview of bookkeeping for small and medium businesses and though it seems to be as easy as a 6-step process it is not. You need to really be knowledgeable in basic accounting procedures in order to do it properly. You can also rely on online accounting solutions which can help you start your bookkeeping instantly.
If you are new to accounting you can also read our article on accounting for non accountants.
For questions and comments on this article just add your comment below. You can also send a message or contact us at +63(2)535-SEED / 63(2)535-7333 if you need help in your accounting process.