Starting a small business is an exciting venture, but it also comes with its fair share of challenges, including managing finances. One of the most important steps in setting up your business is establishing an accounting system. This system will help you keep track of your income and expenses, and ensure that you are meeting your financial goals. In this blog, we will walk you through the steps involved in setting up a small business accounting system, from opening a business bank account to determining payment terms.
1. Open a Business Bank Account: When you start a business, open a separate bank account that will keep your business finances separate from your personal ones. You can consider opening a fee-free business bank account with Otterz or other similar alternatives in the market.
2. Choosing an Accounting Method: When setting up a small business accounting system, you need to choose a method of recording financial transactions. There are basically two methods of recording income and expenses– the cash basis and the accrual basis of accounting.
a. Cash-basis: Under the cash-basis method of accounting, you record income and expenses when cash transactions are done. For example, you record revenue for a product only when the customer pays you for the product.
b. Accrual basis: While cash basis may be easier to use, most businesses choose the accrual basis accounting for recording transactions. Under this method, you record income when you make a sale and expenses when you incur them. This is irrespective of whether you received or paid cash for the product or service. You must use a double-entry accounting system and record two entries for every transaction.
3. Recording Transactions: As a small business owner, you have the option of hiring a bookkeeper or an accountant, recording transactions by hand, or using an accounting software like Quickbooks/ Xero to record your business transactions. You can even outsource your tedious and time consuming transactions recording efforts to certified bookkeepers working with Otterz. Check out our accounting services to know more.
4. Compile a Chart of Accounts: A chart of accounts lists all business transactions and is used to compile statements, review progress, and locate transactions. These charts have to be updated often to include various business transactions.
5. Determine your Payment Terms: Based on the nature of your business, you might decide to offer credit to customers. Instead of collecting payments at the point of sale, you may choose to invoice them at a later date. If you decide to extend credit to customers, you will need a consistent system of creating and sending invoices.