You don't need to be an accountant to run a small business. However, a basic understanding of the principles of understanding figures, bookkeeping and finance will go along way in helping your business to be successful.
What is bookkeeping?
Bookkeeping is essentially the art of keeping track of income and expenditure throughout the business in order to prepare financial accounts at the end of the period.
Bookkeeping involves recording in chronological order transactions that have been received or paid through a variety of sources and allocating them to a specific nominal code (category) and within a specific group e.g. assets, liabilities, income or expenditure.
Why is it important?
Keeping ordered records is a legal requirement within the UK and can be inspected by HMRC for "good (or bad) bookkeeping techniques" at any time. However, bookkeeping, at a business owners point of view, will allow the owner to make proper financial decisions based upon past, current and future financial reports.
Staying in control of the finances by operating good bookkeeping techniques will enable a business owner to grasp a basic, but important understanding of the business.
How to do it?
There are various ways to complete the bookkeeping - from manual records to complex accounting systems. All of them have advantages (and disadvantages). However, the most important aspect is to use a method that works for you, is understandable and most importantly, you will stick at.
Manual a manual system still has its place in this technologically advanced world. However, it is time-consuming and many tasks need to be manually done - such as simply adding columns, or calculating VAT.
Excel an excel spreadsheet method of bookkeeping is a great start, especially for a small business with relatively few transactions. Typically it takes no time to set up and managing and updating the spreadsheet is relative hassle-free. However, once the number of transactions increases, or when the business starts using payment terms, excel spreadsheets can become confusing and overly complicated.
Accounting package definitely the best approach when a business has more transactions and keeping track using other methods are becoming time-consuming. Accounting systems, whether installed or online, can automate many tasks such as generating management accounts, vat returns and balance sheets.
Double Entry Bookkeeping
The double-entry accounting method was predominantly used when manual bookkeeping was the norm. Today, this system is largely automated due to advances in technology. However, the basic principles of double-entry are still something that should be known.
The definition for double-entry bookkeeping is: for every credit entry there must be an equal and opposite debit entry. This equal and opposite technique ensures that the books always "balance" - hence the term "balancing the books"
Take an example of paying for a bank charge. The bank charge expense code is debited with the amount, say £25.00. The opposite side of the transaction is credited to the bank account (note bank accounts operate in the opposite way within accounting).