What are the methods of small business accounting?
In a small business, accounting plays an important role in determining the business success. To administer a small business, it is extremely crucial to know the proper ways of accounting. Accounting for a small business is the practice of ensuring that all revenue is received, debts are paid. There are two methods of maintaining the books of accounts in small business – one is cash method and the other is accrual method.
In cash method of accounting, only those transactions are entered in which cash has been actually received or paid. The cash method of accounting is suitable for recording small transactions but for long term accounting purposes this method can be misleading. For example, if you follow cash method of accounting, and you have received payments from customers for products and services, you make an entry for each transaction and this will show a cash surplus scenario which is incorrect, because you have no provision to make entries for payments you need to make.
The other method is called accrual method and in this all the transactions are taken into account. If a product is sold to a customer and the bills for the same has been submitted the income from that transaction is recorded in the books of account as accrued income. In this method of accounting the debit component is also recorded. For example if the business uses credit to order a service from the vendor the cost of that service is immediately entered in the general ledger. Most of the small businesses use inventory to maintain accrual method of accounting.
In addition to choosing accrual or cash method, a small business should also decide whether to maintain the records manually or with the use of the computerized software. Manual maintenance may incur less cost initially but would always require manual intervention. The computerized system of accounting will ensure accurate and flawless accounting reports with higher initial investment.