LET'S TALK ABOUT ACCOUNTING
Accounting 101 for SMEs
Many of SMEs would rather focus on making and selling their products than on keeping their books and records. However, bookkeeping is just as important as marketing and doing business. Many a great business ideas has failed due to a poor bookkeeping system. And ultimately, won't be keeping up if money going out is more than money that is coming in.
Apart from business owners desire to stay in business, two other reasons why book keeping system is most important are:
1) Legal requirement.
2) Bookkeeping records are an excellent business management tool.
It's more convenient for the business owners to outsource their Accounting/Bookkeeping needs to a company that will have an open communication with their clients, who are willing to explain the terms and procedures that only accountants understand and submitting the Accounting Reports on time, giving the business owner to have an ample time to review the report.
But despite hiring third party in handling your Accounting/Bookkeeping needs, it is still important that you know the Basic Accounting Procedures for your business in order to guide u when making important business/financial decisions.
Good basic accounting system will provide useful information that will enable you to run your business proactively rather than reactively when it comes to important financial decisions.
Many of business still operate using checkbook and receipts. Most business use one of the two basic accounting methods in their bookkeeping systems: Cash basis and accrual basis. Cash basis is the simplest one between the two and is used for small business. Income is recorded when it is received, and expenses are reported when they are actually paid. From tax point it is sometimes advantageous for a new business to use the cash basis accounting.
With accrual method, income and expenses are recorded as they occur, regardless of whether or not cash actually changed hands. Credit sales are excellent examples of this.
How to decide which book keeping system should use? The accrual method is usually needed if your business is structured as Incorporated (Inc.). Business with inventory must use this method. This is highly recommended for any business that sells on credit, as it more accurately matches income and expenses during a given period. Where as cash basis is may be appropriate for a small, cash basis business or a small service company.
The first step in setting up an accounting system for your business is deciding what you want to track. A chart of accounts is simply a list of your accounts and is kept by every business to record and follow specific entries. Whether you decide to use a manual system or a software program, you can customize the chart of accounts to your business.Account numbers are used as an easy account identification system. For most businesses, a three-number system will suffice; however, a four-number system is sometimes used for more complex ventures. The chart of accounts is the fuel for your accounting system. After the chart of accounts, you establish a general ledger system, which is the engine that actually runs your accounting system on a daily basis.
The chart of accounts is the foundation on which you will build your accounting system. Take care to set up your chart of accounts right the first time. Keep your account descriptions as concise as possible. And leave plenty of room in your numbering system to add accounts in the future.
To have a firm and true understanding of your business's finances, you need more than just a collection of monthly totals; you need to understand what your numbers mean and how to use them to answer specific financial questions.
(Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press; Business.Com.My /Jennifer Lee & Raja Azura Raja Nazreen,)
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