Accounting is and always will be a critical function of the savvy business owner, but accounting doesn’t have to be a nightmare or something to dread. It just takes a little perseverance and planning to ensure that your records are as accurate and complete as possible.
You can make yourself (and your accountant!) happy by following the six accounting tips below. Each of these activities is an “accounting best practice” and represents steps to take throughout your fiscal year.
Disclaimer: I am not an accountant. These accounting tips are based on good advice from accountants … and 28 years of business experience.
TIP 1: Keep Accurate Records
Much of your business’s day-to-day accounting can be handled and tracked via your online banking services, but what’s most important about your financial records is keeping everything in one place so you don’t have to scramble to meet a request, and for the sake of simplicity.
Online banking can track simple debits and credits to your account. However, when it comes time to accurately state how things were spent or earned, separate records absolutely must be kept. The records need to track things like how cash was spent, what things were purchased via credit card, whether reimbursements were made to employees, etc.
Everything you track will only help your accountant later on down the road — which is good news for you and your bottom line! For more information, read “Accounting Basics: What Do Small Business Owners Need to Know?”
TIP 2: Sort and File Receipts
Keeping an accurate count and file of all receipts can seem tedious, but it will save a lot of headaches in the future. It’s a laudable goal to make sure you keep all receipts related to your business, but real receipt accounting goes well beyond just retaining them.
Receipts come in all shapes and sizes, and their ink fades over time. Photocopy (or scan) receipts to a standard letter-sized page, then collate them by date to correspond with your detailed financial records. Additionally, it will really help categorize the expense (and subsequent tax deduction) if you highlight the date and make notes about the reasons for expenses on the photocopied receipt page itself.
TIP 3: Collect Applicable Taxes
Taxes need to be taken out at the time of sale or at the time payroll is generated. Just like with receipts, the longer you go between transaction and proper accounting, the more room for error there is.
You need to collect (or apply) taxes as soon as a sale is made or immediately upon payroll generation. That will ensure that, a) you’re not liable for one lump tax sum at the end of the year, and b) you won’t incur penalties for delayed tax payments. This will help your accountant keep as much profit as possible.
TIP 4: Do Accurate Invoicing
Are invoices just prompts for your clients to make payments? No, they are much more! They’re records of the terms of a transaction, and because of this, it’s critical that you enter information that is accurate and complete.
Reworking or adding to an invoice, creating multiple versions, or cancelling an erroneous invoice will only confuse the accounting (and accounts receivable) process … and your accountant. Don’t do it!
Additionally, accurate invoicing ensures that if any questions come up from your clients, you will be prepared with a record of previously-agreed-upon terms under which you and your clients operate. For more information on improving your invoicing process, read “Collections Problem? Your Invoice Is to Blame.”
TIP 5: Get Donation and Contribution Receipts
Your business may enjoy tax benefits by contributing to outside organizations, but remember this … For each contribution, discuss with the receiving organization whether a receipt for the amount could be generated (some donations require more than just a check to ensure their validity).
This seems like a simple request, but it could mean the difference between a contribution being accepted as a tax write-off or it being denied altogether. Don’t make it harder on yourself (or the charity) than it needs to be; each added step or delay makes it less likely that you’ll make that same generous contribution next year.
TIP 6: Schedule Profit and Loss Statements
Profit and loss statements, or P&Ls, are good ways to check in on the health of your business. They provide a key overview of several areas of your business that can help summarize the activity for a given period, which can be monthly, quarterly, or yearly, depending on your discretion and the activity of your business.
It’s important to find the right time period in which to update your P&L, as your accountant may notice discrepancies from one report to the next that need to be corrected. Also your P&Ls can be a key or legend to deciphering other records being kept.
The previous accounting tips are all great ways to schedule small bits of time each week or month to make sure that everything is in order and accounted for.
Remember that proper, responsible time management of any task, especially accounting, is key. Most of the dread associated with accounting tasks is due to the large chunks of time they consume … because of poor preparation along the way.
This article was originally published in Patriot Software’s Small Business Expert blog.
Couldn’t agree more! Managing accounts for a small business can really be tedious especially if all the documents needed are not properly scheduled. I already focus on keeping my account receivables right and accurate to avoid all the hassles in the future. Excellent tips Mike!