What Are the Basic Principles of Bookkeeping for Small Business?

Every business, no matter how small or large it might be, considers bookkeeping as an invaluable aspect of their company. Apart from the fact that businesses must maintain accurate records and books of financial transactions to abide by the law, a well-scrutinized book apparently saves you from a lot of unwanted frustration in the long run. 

What Is Bookkeeping All About?

An important thing that should be noted here is that- “poor accounting” is known to be one of the main reasons why most of the companies fail, which means without the right bookkeeping you are simply driving your business blindly. Wondering what they are, and how useful they can exactly be for the growth and development of small businesses? Read on to know more. 

Three Core Principles of Bookkeeping Explained:

There are three fundamental principles of bookkeeping:

1.  Profit and Loss Statement
2.  Cash flow Statement
3.  Balance Sheet

#1. Profit and Loss Statement

Income statement popularly stated as profit and loss statement can be defined as a summary of the expenses and income a business has made in a given period of time. While working on this statement there are certain essential things to look after:

• Design the profit and loss statement for analysing the expenses and income across different categories of the business

• Go for a monthly statement to have proper understanding about what the costs and income of the business are

• Focus on the areas that require better analysis, and immediately take the right action, as small problems could transform into major instantly

• An accountant and a bookkeeper are slightly different, although both of them work for debit, credit and ledger accounts.

#2. Cash Flow Statement

The cash flow statement in bookkeeping summarizes capital that comes and goes out of the business in a particular period of tiresome of the common types of cash flow statement are:

• Cash flow from daily operational activities- selling or buying of services and goods so the statement should include payment for employees & expenses, receipts of income, funding to suppliers, stock movements and funding to debtors.

• Cash flow acquired from various investing activities- selling or buying fixed assets that must have payment of the property, equipment or plant, proceeds of selling a particular investment and payment of a new financial asset.

• Cash flow and their warning signals- hopeful signals so as to avoid complications in the future. The statement must indicate negative cash flow, receipts or income is less than payment and you should also calculate the overall tax on the profit. Generally, you can hire an individual bookkeeper or get a bookkeeping agency to do the same.

#3. Balance Sheet

The last and perhaps the most essential principles of bookkeeping is the balance sheet. It is regarded to be a general overview of your company’s financial health. When done with the profit and loss statement along with the cash flow statement, the next comes your balance sheet that contains:

• Assets of the business such as stock, buildings, land, equipment’s and capital that other entities owe the company

• You should know that if you hire a bookkeeper, he or she should be aware of the latest trends in bookkeeping and also help you in making the best tax benefits possible

• Liabilities of the business such as the money that the business owe to the tax department or suppliers, credit card debt or loans

• Net worth of the business that is achieved after deducting the liabilities of the company- called as the equity or equation of balance sheet.

There you have it, these are the vital principles of bookkeeping that can help any small business flourish to their maximum potential.  

Author Bio:

I am Mack Aurther, a qualified blogger. Here you can see my skills which give you small ideas on understanding all the concepts with different themes. I love to write a blog on different topics, like a Business, Health, Fitness, Home Improvement, Kitchen, Furniture, Gardening, Automotive etc. here, I have written on what are the basic principles of bookkeeping will help you to know how to choose perfect  bookkeeping for your business.