A Practical Guide to Accounting Books Set Up

• September 21, 2024

Setting up accounting books for your business can feel like a daunting task, especially if you’re starting from scratch. However, once you grasp the fundamentals, it becomes much easier to manage, allowing you to track your business’s financial health accurately. Whether you are looking to organize small business accounting books or considering more sophisticated solutions, this guide will help you navigate the essential steps.

Why Are Accounting Books Important?

Accounting books are at the heart of every business. They allow you to maintain a clear view of your income, expenses, assets, and liabilities. Accurate financial records help with decision-making, tax compliance, and securing funding for growth. Whether you are handling the books yourself or outsourcing bookkeeping services, maintaining well-organized accounting records ensures that you meet your business’s financial obligations while planning for the future.

Steps to Set Up Your Accounting Books

1. Choose the Right Accounting Method

When starting, you will need to decide between two primary accounting methods: cash-based and accrual-based accounting.

• Cash-basis accounting records transactions when money changes hands. This method is simple and great for small businesses with straightforward income and expense tracking.
• Accrual-based accounting records income and expenses when they are incurred, even if the money hasn’t been exchanged yet. While more complex, this method provides a more accurate long-term financial picture.

The basic difference between cash basis and accrual basis is that cash accounting records income and expenses as they are billed and paid while in accrual accounting, you record income and expenses as they are billed and earned regardless of when money is actually received or paid. Accounting standards outlined by the generally accepted accounting principles (GAAP) stipulate the use of accrual accounting for financial reporting, as it provides a clearer picture of a company’s overall finances.

2. Select Your Chart of Accounts

The chart of accounts is the framework of your accounting books. It categorizes every financial transaction into accounts such as assets, liabilities, equity, income, and expenses. When setting up your books, it is essential to tailor your chart of accounts to your specific industry to ensure that all relevant transactions are captured. For instance, if you’re running a retail business, you’d have categories for inventory, sales, and shipping costs.

Prepare a chart of accounts:

A chart of accounts consists of data in several sections, which helps prepare financial statements, review business progress, and check transactions.

These five sections in a chart of accounts are:

• Assets
• Liabilities
• Equity
• Revenue
• Expense

You can break down accounts into sub-accounts for organizing transactions, like product sales. As a business grows, keep adding several sub-accounts as needed to your chart of accounts.

All cloud-based software comes with a pre-populated chart of accounts.

Utilizing accounting services in the USA, like those offered by Clarigro, can help you develop a customized chart of accounts that reflects your business needs accurately.

3. Choose an Accounting System

Small business accounting is usually less complicated than bigger ones, but accuracy can’t be compromised. Even when hiring small business accountants, the software can bring many changes in managing your books.

Look into the price, features, customer support, reviews, user-friendly interface, and everything before selecting one for your business.

4. Choose accounting software

Selecting the right software for accounting firms is crucial for the efficiency and accuracy of your accounting. Cloud-based platforms are popular as they offer real-time access and integration with other business tools. These systems allow for easy collaboration with your accountant or bookkeeper, even if you’re using outsourced accounting services for small business operations. At Clarigro, we offer comprehensive accounting services utilizing leading software such as QuickBooks and Xero to streamline your financial management.

5. Select a book entry system.

Among several bookkeeping methods, the popular ones are single and double-entry accounting.

The single-entry accounting system is suitable for small businesses where you record every transaction once as income or expenditure. Such companies don’t have significant inventory or equipment-related finance entries in books.

In a double-entry accounting system, you need to record every transaction twice as debit and credit to keep your books balanced. This process is complex but prevents errors in recording transactions.

6. Record Every Transaction

Accurate record-keeping is the backbone of any successful accounting system. Record every transaction, no matter how small, into your accounting books. Keeping up-to-date records allows for accurate financial statements, proper tax filings, and insights into how well your business is performing. Implementing automated systems with features of integration can save time and reduce the chances of errors in recording.

Tracking individual expense is very important for bookkeeping, you need to ensure that supporting documentation are on track like invoice, receipts, checks, bills, Form W-2, W9 etc.

If you’re wondering how to get started in accounting with no experience, leveraging modern accounting software that simplifies data entry and report generation can make the process more accessible.

7. Set Up Bank Reconciliation

Reconciliation is the process of matching your accounting records with your bank statement to ensure accuracy. Doing this monthly helps identify any discrepancies, such as missed transactions or bank errors, and provides a more accurate cash flow picture. With cloud-based accounting systems, bank reconciliation is often automated, making the process quicker and reducing the margin for error.

Proper cash flow management

Managing your cash flow in business is an excellent skill for any entrepreneur. Cash flow indicates the amount of money that comes in and goes out of your company.

To have good cash flow management in your business, try to

●  Have a sound credit control system

●  Use sales forecasting

●  Cut unnecessary spending and cost

●  Negotiate with suppliers

●  Manage stocks

●  Apply for small business loans and grants from the government

●  Stay on good terms with lenders

●  Look for warning signs

●  Review your business financial position regularly.

8. Keep track of your financials

Any business, regardless of size, must keep track of its financials. They are usually reports or statements that offer valuable insights into the business’s financial health.

The three most important financial statements in any business include the balance sheet, the income statement, and the cash flow statement.

Balance sheet: The balance sheet identifies a company’s net worth, gives a snapshot of your company’s health, and indicates what you own and how much you owe.

Income statement: The income statement, or the profit and loss statement, reflects business performance and monitors profit and loss at any time.

Cash-flow statement: The cash flow statement reflects how your business makes an income and how to reduce expenses.

9.  Handling accounts receivable and payable

Late paying customers may harm your cash flow and therefore focus on accounts receivable. You can use automation tools to send them reminders before and after payment.

Also, stay on top of accounts payable to be on good terms with suppliers. Pay all your bills correctly and on time.

10. Understand how the business will get paid

To expand your business, your customers need to pay you, and you need a clear customer payment policy. Furthermore, you need to determine what kinds of payments you can accept from customers, including cash, check, credit card, or mobile wallet payments.

11. Make a schedule schedule and set reminders

Finally, if you can schedule an important conference, you must schedule your accounting tasks. Recording your transactions in your book regularly, weekly, or at least a month, is essential to organize records, avoid mistakes, and eliminate unnecessary stress.

However, you can simply purchase small business accounting software to set up and manage books.

The Role of Bookkeeping in Your Accounting Setup

While many business owners handle their books initially, the complexity can grow quickly. This is where outsourcing bookkeeping services comes into play. When you outsource your bookkeeping, professionals handle tasks such as recording transactions, preparing financial statements, and reconciling bank accounts, freeing up your time to focus on core business operations. This solution is beneficial for small business owners who need to focus on growth and expansion but don’t have the resources to maintain full-time in-house accounting staff.

Outsourcing also offers scalability; as your business grows, your accounting needs become more complex, and outsourced firms can offer additional support when necessary.

Finance Books to Expand Your Knowledge

While setting up your small business accounting books, it’s also helpful to invest time in understanding the broader financial landscape. Whether you’re an entrepreneur looking to sharpen your financial literacy or a business owner aiming to improve cash flow management, reading the best finance books can provide valuable insights. Books like “The Intelligent Investor” by Benjamin Graham or “Profit First” by Mike Michalowicz are excellent resources for understanding how to manage money effectively within a business context.

Outsourcing Accounting Services for Small Businesses: A Worthy Consideration?

If you find the day-to-day tasks of maintaining accounting books overwhelming, consider the advantages of outsourcing accounting services for small businesses. Outsourcing firms not only help with basic bookkeeping but can also manage more complex accounting functions such as payroll, tax planning, and financial reporting. The benefit is two-fold: you save time and get access to experts who can offer insights to improve financial performance.

For businesses in the United States, Clarigro offers a range of bookkeeping and accounting services in the USA, including streamlining bookkeeping, payroll, accounts payable specialist services, accounts receivable specialist services, tax preparation, financial reporting, KPI reporting and financial analysis, bookkeeping, payroll, tax preparation, and financial analysis. These services are customizable based on the unique needs of each business, ensuring that you get the support you need to thrive.

You can learn more about the accounting services provided by Clarigro and explore their specialized bookkeeping services here.

Conclusion

Setting up your accounting books is the foundation of maintaining healthy financial records, and the process doesn’t have to be complicated. By selecting the right accounting method, using a tailored chart of accounts, and investing in the right software, you can ensure your business runs smoothly. Additionally, when the workload becomes too much to handle, don’t hesitate to explore outsourcing bookkeeping services or full-fledged outsourcing accounting services for small businesses. This guide is your first step toward organizing your financial records and positioning your business for success.

With the right tools, knowledge, and professional support, you can manage your accounting effectively, leaving more time to focus on what you do best—running your business.