How to Do Accounting for Small Business: Basics of Accounting

Accounting for small businesses involves accurately extracting financial information from business transactions and keeping a complete record of all income and expenses.

This is an essential task that aids small business owners in effectively tracking and managing their finances, particularly in the early stages. Small business accounting also helps with creating invoices and processing payroll, in addition to keeping you informed about your company’s performance in the past and now.

Analyzing Financial Transactions

Financial transactions are analyzed and entered into the accounting system as part of the accounting process. This is the first step in the accounting process. For instance, personal loans are not included in the business documents. The preparation of source documents is the first step in the accounting process. A transaction is recorded on the basis of a source document or business document.

Journal Entries

The double-entry bookkeeping method records business transactions chronologically in a journal, also known as Books of Original Entry. The debit and credit accounts are included in the journal entries.

Accountants use a special journal to record recurring transactions like purchases, sales, cash receipts, and so on to make this process easier. The general journal contains the transactions that cannot be included in the special journals.

Ledger

To determine whether the total debits and credits are equal, a trial balance is prepared. A report is created after the accounts are taken from the ledger and arranged. The debit and credit columns ought to have equal balances.

If not, there are mistakes in the trial balance that need to be found and fixed with correcting entries. It is essential to keep in mind that despite the debits and credits being equal, there may still be errors, such as those caused by double posting or entries not being entered.

Adjusting Entries

To determine whether the total debits and credits are equal, a trial balance is prepared. A report is created after the accounts are taken from the ledger and arranged. The debit and credit columns ought to have equal balances.

If not, there are mistakes in the trial balance that need to be found and fixed with correcting entries. It is essential to keep in mind that despite the debits and credits being equal, there may still be errors, such as those caused by double posting or entries not being entered.

Adjusted Trial Balance

An adjusted trial balance must be prepared after the adjusting entries have been made. After the adjusting entries have been made, this is done to see if the debits and credits match. This is the last step before the financial statements for the company are made.

Financial Statements

The accounting system produces the final products, which are the income statement, statement of changes in equity, balance sheet, statement of cash flow, and notes.

Closing Entries

The income, expense, and withdrawal accounts, all of which are regularly measured, are closed to prepare the system for the next accounting. The accounts on the balance sheet, also known as the permanent accounts, remain open until the following accounting cycle.

Preparing a post-closing trial balance to verify that the debit and credit amounts are equal after closing entries is the final step in the accounting cycle. Because the temporary accounts are closed during this accounting cycle, this trial balance only contains real accounts.