When you start a new business you face a steep learning curve and it can feeling overwhelming. Accounting may be one of the topics that is causing you confusion, so here are the Accounting Basics every Entrepreneur should know to stay organised, reduce accounting fees and keep track of how your business is performing.
Get a Spreadsheet or Sign Up to an Accounting Software
Depending on the number of accounting transactions your business makes (which means the number of things like sales invoices you raise, supplier invoices and transactions on your bank statements) it may be wise to sign up to an accounting software like Xero or Quickbooks. These softwares allow you to input your transactions but handle all your bookkeeping for you and, if you take the time to set them up correctly, can generate up to date reports which show you how your business is performing to optimise your decision making.
If your business does not have many accounting transactions setting up a simple spreadsheet to track sales, purchases and bank transactions may be sufficient to handle your accounting.
Sales and Invoicing
You are in business to make money and get paid. The mechanism to achieve this is to raise a sales invoice which you send to your customer, which contains all the details they need to pay you. Here are our Sample Invoice Templates for you to download:
Note: You should only charge for VAT and show VAT if you are VAT registered.
If you have chosen to sign up to an accounting software then you will probably be able to raise your sales invoices from your system and email them directly to clients (some even offer online payment options so your customers can pay you by credit card, which may be a useful function depending on the type of business you run).
Always Keep Copies of Your Sales Invoices
If you are using Word, Excel or Google Docs to raise your invoices it is really important you keep copies of every invoice you raise and that they are kept in numerical order. So consider setting up a folder in something like Dropbox or Google Drive to store every invoice in. Then remember to log them onto your accounting spreadsheet.
If you use an accounting software then, as long as you keep subscribing, this will store your invoices for you and generate lists or copies as required.
In accounting Trade Debtors refers to the customers who owe you money.
In a perfect world all your customers will pay you straight away or within the payment terms you have set out meaning you will never need to chase them for money. Unfortunately in the real world, and as any experienced entrepreneur will tell you, you will often need to chase your customers for payment. A list of trade debtors will help you stay on top of who owes you money and who you need to chase up.
By entering in money received from your bank statements you can mark off which of your sales invoices have been paid, leaving you with a list of trade debtors so you can identify who you need to chase for payment.
Accounting softwares will generate this list for you but if you run a spreadsheet you can mark off payments received on your list of sales invoices.
An accountant will often make a list of purchases that a business has made to build out the costs that you see in your profit and loss account on your year end accounts.
You can keep your own list of purchases by entering each invoice you receive into a spreadsheet or into your accounting software. Always save copies of purchase invoices either directly in your accounting software or somewhere like Google Drive or Dropbox. Set up a folder for supplier invoices, then store the invoices you receive into a subfolder for each supplier.
Costs reduce your tax and also help you to understand the true profitability of your business, so keeping this list up to date and complete is essential.
You are legally required to keep your accounting records for 6 years from the end of each financial year.
The accounting term trade creditors means the people you owe money to. When you buy goods or services for your business you may not need to pay your supplier straight away, for example, if you have negotiated 30 day payment terms. When you are managing your own accounts you do not want to fall into the trap of forgetting that you owe someone money, so keeping a list of the people you owe money to will help you manage your suppliers, cash flow and avoid any nasty surprises.
By entering all the payments you make from your bank account into your accounting system or spreadsheet you are able to mark off suppliers you have paid, leaving your with a list of the ones you owe money to at a particular point in time.
Your bank statements show you all the money you have received and paid out. Accountants summarise bank statements so they can see what was paid and received to build a list of trade creditors and trade debtors. By summarising this for your accountant you will save them time and ultimately reduce their fees so enter the transactions into your accounting system or spreadsheet on a regular basis. It will also help you check who owes you money and who you need to pay.
The key to maintaining your accounts is little and often. Set aside time each week to keep your paperwork up to date to avoid it building up otherwise it will feel more challenging to get started. Accounting may feel like an administrative burden but by implementing these accounting basics you will not only be able to see where your business has been, but also give you the data you need to make key decisions about its future.