As a business owner, you’re probably a master of doing what it is your business does. Most small business owners and startups are. But being able to deliver an amazing service and run a team aren’t the only elements to running a business. In fact, you could be a fantastic business owner, but still flunk basic bookkeeping. But if you, the business owner, don’t understand the different types of ‘accounts’ used to organise your finances, then measuring the success or failure of your business is almost impossible. Even if you outsource your bookkeeping to someone else, you still need to understand a few basics to stay on top of things. After all, as a director it’s your legal duty to understand the state of your business, and to provide oversight to ensure things are being done correctly. So without further ado, here are the basics of the 10 most common types of bookkeeping accounts for a small business that you should know.
It doesn’t get more basic than this. All of your business transactions will pass through your bank accounts – sometimes shown in the accounts as ‘Cash at bank and in Hand’. This account is very important. We ensure that each bank is kept as a separate account in the bookkeeping software, including one for Petty Cash and if necessary one for Till Receipts. all are reconciled to ensure the accounts are always in line with the bank statements or till reports.
If your company sells products or services that aren’t paid for immediately, you have ‘receivables’ that you need to track. Accounts receivable is basically all the money you are owed by customers, which makes keeping it up to date crucial for chasing overdue payments and sending accurate invoices.
Products you have in stock to sell are like money sitting on a shelf and must be carefully accounted for and tracked. The numbers you have in your books should be periodically updated by doing physical counts & valuation of inventory on hand. This will help you notice right away if something isn’t right and keep everything balanced.
No one likes to send money out of the business, but it’s much worse if you have no idea where it’s going and what you have left. But it’s less painful if you have a clear view of everything, which is what your accounts payable is for. Good bookkeeping helps ensure that you make timely payments, and more importantly that you don’t end up paying early. Having a good grasp on this could also mean you qualify for discounts with your suppliers for paying early, so it’s worth knowing about!
If you borrowed money to buy equipment, vehicles or pay bills, then this account tracks that loan, including interest payments and due dates. This is usually more important for startups to follow, though established businesses looking to grow may also need to take out and monitor loans.
The Sales account is where you track all incoming revenue from what you sell. Recording sales in a timely and accurate manner is critical to knowing where your business stands.
Your purchases accounts are where you track anything you buy for the business, such as raw materials or finished goods for sale. This is also where you would include any costs of outsourcing that was essential for a sale, or is part of your service offering. This account is used to calculate the ‘cost of sale’, which in turn impacts your bottom, line, so it’s important that it’s accurate and up to date.
Overheads & Expenses
This is the catch all term for the other costs of running a business that are directly related to the sale so don’t fit into the ‘cost of sales’ category. This includes things like your rent, bills, and any fees for professional services fees you might use. If you aren’t sure if an expense falls into the cost of sales category, it probably belongs in here.
This is the biggest cost of all for many businesses. No matter how much you beg, few people want to work for nothing. Keeping this account accurate and up to date is essential for meeting tax and other government reporting requirements. Shirking those responsibilities will put you in serious hot water.
The Retained Earnings account tracks any of your company’s profits that are kept in the business and are not paid out to the owners as Dividends. Retained earnings are cumulative, which means they appear as a running total of money that has been retained since the company started. Managing this account doesn’t take a lot of time, but it is important to investors and lenders who want to track how well the company has done over time.
Many business owners think of bookkeeping as an unwelcome chore. But if you understand and make effective use of the data your bookkeeper collects, bookkeeping can be your best friend, helping you run your business more effectively. At Rosemary Bookkeeping, we specialise in providing outsourced support for small business owners, tailored to whatever they need. Whether that’s some training and one-off help on using the right software, ongoing support or even a fully outsourced service. If you would like to find out more about how we can help you, please just get in touch today.