ACCOUNTING SYSTEM FOR THE SMALL BUSINESS
Without a proper accounting system your business is doomed to fail. The accounting system allows you to have maximum control over your income, expenditure and growth margins on a daily basis.
The small business is no exception as a good accounting system drives your business to achieve the goals that are set by serving as the “reality check” at every month end. In addition the accounting system is your “backup” particularly for tax purposes and applying for loans to expand
your business.
The small business can benefit tremendously from having an accounting system in place whereby you can track crucial changes in your daily sales and purchases. With this information at hand it will be effortless to find out where to adjust your sales and marketing strategies in order to change your losses into profits.
There are 4 basic components (financial statements) to a good accounting system which are recorded in an accounting
ledger. The general ledger is where you keep record on a daily, weekly or monthly basis of your debtor-and-creditor accounts.
The four financial statements that are crucial to your accounting system are:
1. BALANCE SHEET: assets, liabilities and ownership equity which has to balance at the end of each financial period. The balance sheet shows exactly what the status of your business is at any point in time. The assets equal the liabilities plus the owner’s equity, and this should balance in order for a business to be financially successful.
2. Profit and Loss statement is the INCOME STATEMENT which reflects your sales and expenses over any given financial period.
3. RETAINED EARNINGS STATEMENT will tell you which earnings are retained over a certain financial period, in other words it shows changes in the profits, losses and dividends paid over a financial period. This statement directly feeds from the income statement and into the balance sheet.
4. STATEMENT OF CASHFLOW is a record of cash coming into the account and cashing flowing out of the account. Cash flow encompasses operating activities, investing activities and financing activities. Taken into account all of the above it will reflect the business’ ability to pay bills.
The small business requires an accounting system as much as a large company and although the small business’ system will be much simpler it may need a professional bookkeeper to be responsible for these records. It may even be wise to install accounting software to maintain and update the records. Whichever system you choose to work with, make sure it works for you.
