How to prepare accounts for a small business?

[Jenniferrichard]

Preparing accounts for a small business, often referred to as "doing the books," is a critical process that moves beyond simple Bookkeeping Services in Knoxville to generate the financial statements needed for management, tax, and compliance purposes. While the scale is smaller than a large corporation, the principles remain the same.

Here is a step-by-step guide on how a small business can prepare its accounts effectively.


1. Set Up Your System (The Foundation)
Before you can prepare accounts, you need a reliable method for recording data.

Choose a System: Select an appropriate accounting software package (as discussed previously—QuickBooks Online, Xero, FreshBooks, etc.). This is far superior to spreadsheets for accuracy and automation.

Establish the Chart of Accounts (COA): This is a complete list of all the financial accounts used by your business (e.g., Cash, Accounts Receivable, Inventory, Sales Revenue, Rent Expense, Owners' Equity). A good accounting package will provide a standard COA based on your industry, which you can then customize.

Segregate Finances: Crucially, use a separate business bank account and credit card for all business transactions. Commingling personal and business funds makes accounting nearly impossible and jeopardizes legal protections (like the corporate veil).


2. The Daily/Weekly Bookkeeping Process
This is the ongoing work of collecting and recording the raw data.

A. Record Transactions
Log every financial event accurately:

Sales/Income: Record all invoices sent, payments received, and cash sales.

Purchases/Expenses: Record all bills, receipts, and cash payments. Use digital scanning tools or the accounting software's app to capture and categorize receipts immediately.

B. Bank Reconciliation
Perform this at least monthly. This involves comparing the transactions recorded in your accounting software with the transactions shown on your bank and credit card statements.

Goal: Ensure every transaction is accounted for and that the balance in your books matches the balance in the bank. This is a key control for catching errors or fraudulent activity.

C. Manage A/R and A/P
Accounts Receivable (A/R): Track which customers owe you money and how old those debts are. Follow up on overdue invoices promptly.

Accounts Payable (A/P): Record all bills you owe, due dates, and schedule payments to manage your cash flow effectively.


3. The Monthly/Quarterly Adjustment and Review
After the raw data is recorded, the bookkeeper or accountant performs adjustments to ensure the accounts truly reflect the business's financial status.

A. Run a Trial Balance
Your accounting software will automatically run this. The Trial Balance is an internal report that confirms that the total of all Debit balances equals the total of all Credit balances. If they don't match, you have an error in your double-entry system that must be found and corrected.

B. Make Adjusting Entries
These entries are vital for accurate accounting, especially if you use the accrual basis:

Depreciation: Record the gradual expense of long-term assets (like equipment or vehicles) over their useful lives.

Accruals: Record revenues earned but not yet invoiced, or expenses incurred but not yet paid (e.g., utility costs).

Prepayments: Adjust accounts for expenses paid in advance (like insurance or rent) to recognize the expense only as it is used.

Inventory Count: If you hold inventory, perform a physical count and adjust the Inventory and Cost of Goods Sold (COGS) accounts to match.

C. Review and Categorize
Review the main expense categories to ensure everything is properly classified (e.g., a software subscription wasn't accidentally labeled as 'Travel'). This step is crucial for minimizing tax liability.


4. Prepare the Financial Statements (The Output)

Once the books are reconciled and adjusted, you can generate the formal financial statements. These are the main "accounts" prepared for external users (tax authorities, banks) and internal review.

A. The Income Statement (Profit & Loss/P&L)
What it shows: Your business's financial performance over a specific period (e.g., a month or quarter).

Key components: Revenue, Cost of Goods Sold (COGS), Gross Profit, Operating Expenses, and Net Income (Profit).

B. The Balance Sheet
What it shows: Your business's financial health and position at a single point in time (e.g., December 31st).

Key components: It adheres to the fundamental equation: $Assets = Liabilities + Equity$.

C. The Statement of Cash Flows

What it shows: How cash moved in and out of your business over a period, broken down into three activities: Operating, Investing, and Financing.


5. File and Retain Records
File Taxes: Use the P&L and Balance Sheet data to complete your required tax filings (e.g., income tax, sales tax).

Secure Storage: Store all underlying documentation (receipts, invoices, bank statements) digitally and securely. Tax authorities typically require Accounting Services in Knoxville for several years (check your local regulations).