Bookkeeping & Accounting 101: How Does it Work for Small Businesses?

Running a business in Nigeria, especially in 2023 can come with a lot of gbas gbos, and it helps to know how to handle the issues you might face. One of them is bookkeeping and accounting. It can sound very complicated, but as a small business owner, staying on top of your finances is essential. That means getting to grips with your bookkeeping and accounting.

In this article, we'll be simplifying bookkeeping and accounting, the differences between the two and everything small business owners need to know to stay on top of their finance!

Here are simple definitions of bookkeeping and accounting...

Bookkeeping involves recording and tracking your financial data, including income and expenses. Accounting consists in analysing that data to assess your company’s financial health and plan for the future.

Together, they help you:

• Set a realistic budget.

• Comply with tax regulations.

• Track expenditure and growth.

• Create accurate forecasts to share with potential investors and lenders.

Importance of bookkeeping and accounting for small businesses

Anyone needs to practice good bookkeeping and accounting. For small businesses, the main reasons are that they:

• Provide up-to-date financial information.

• Help create and manage budgets.

• Assist in evaluating business performance.

Provide up-to-date financial information

By tracking every transaction, you can see how much you’re spending and what’s owed to you at any one time. This helps you make better financial decisions.

With the latest financial data, you can create accurate reports and forecasts for potential investors. They’ll have more confidence in your business, helping you secure funding to expand. Plus, you’ll be able to calculate exactly how much tax you owe, ensuring you stay compliant with the FIRS (Federal Inland Revenue Service.)

Help create and manage budgets

To create an accurate budget, you need to know your operating costs (fixed and variable) and income. By keeping up with your bookkeeping and accounting, you’ll have this information to hand whenever you need it.

You can also track your spending and better manage your budget. For instance, you may see that you’re spending more money than you expected in one area and less in another. You can then adjust your budget accordingly.

In addition, an accurate record shows if you need to increase or decrease your budget for the next year or allocate about the same.

Source: Clutch

Assist in evaluating business performance

If you're looking at how to expand your small business, it's vital to get your bookkeeping and accounting right. That way, you’ll have a clear view of your financial health and year-on-year performance. Then, you can set realistic goals and make informed decisions about your business’s future.

Also, by tracking your financial KPIs, you can compare your performance to your competitors. If you're falling behind, you can look at why. You can also look at how to improve your efficiency and cost-effectiveness.

For instance, you may find you’re spending money on software you rarely use. Cancelling your subscription could then save you money.

How to do bookkeeping and accounting for a small business

For the rest of the guide, we’ll give you tips on how to do bookkeeping and accounting for a small business.  To start with, you can probably do this with a physical ledger or Excel spreadsheet. As you start to grow, though, it’s worth investing in an accounting software for small businesses. Accounting software comes with a range of features to help manage your finances, such as:

• Invoicing and payroll.

• Automatic bank reconciliation.  

• Cash Flow forecasting.

• Reporting and analytics.

• Automated data capture. 

• Calculating and submitting VAT.

• Managing inventory. 

• Multi-currency banking.

Whichever method you choose, below are the steps to effectively complete your bookkeeping and accounting.

1. Set up a chart of accounts

First, you need to set up a chart of accounts (COA), which is an index of all your financial accounts. There are four main types of accounts:

• Asset accounts: the resources your business owns, such as savings, inventory, and equipment.

• Liability accounts: your financial obligations and debts, such as rent, salaries, and software subscriptions.

• Income accounts: the money your business earns, for instance through sales.

• Equity accounts: the interests held in the business, such as stock shares.

Source: Sage To make it easier to find and record information, each account needs a name, description, and identification code.

If you use accounting software, it usually comes with a chart of accounts that you can edit to suit your business. But you must make sure it conforms to any guidelines set out by the Financial Reporting Council (FRC) of Nigeria.

2. Maintain a record of financial transactions

Once you’ve set up your COA, you can start recording your financial transactions (such as purchases, salaries, and customer payments).

You must record the date of every transaction, and each one should have its own line in your ledger or accounting software. You should also include how much each transaction was worth and what it was for. For example:

It’s a good idea to keep a copy of your receipts for at least six years, especially if you want to claim any expenses back on your taxes.

3. Prepare financial statements

At the end of each month, you’ll need to prepare financial statements based on your transactions. The most important statements are:

• Balance sheet: shows your total assets and liabilities for the month.

• Income statement: shows if your business is making a profit or a loss. It’s usually divided into two sections: operating items and non-operating items.

• Cash flow statement: shows your income and where it’s from so you know how much you have to spend each month. 

You need these statements to check your company’s financial health and share insights with stakeholders. If you use accounting software, you can create them in a few clicks, or even automatically in real-time.

4. Reconcile bank statements

Another vital part of managing your small business finances is bank reconciliation. This involves comparing the debits and credits in your books with those on your bank statements to check if they match. If they don’t, you can investigate why.

For example, a payment may not have gone out of your account yet, or you may have accidentally made the same purchase twice. You may also notice unexplained spending that could suggest your account has been compromised.

Most businesses reconcile their accounts monthly. But at the very least, you need to reconcile them before submitting your tax returns.

With accounting software, bank reconciliation happens automatically. This saves time and makes sure that your records are always accurate and up-to-date.

5. Manage accounts payable and receivable

Managing accounts payable and receivable are two of the most important tasks for small businesses. Accounts payable (AP) is the money you owe, for instance to suppliers, while accounts receivable (AR) is the money you’re due from customers. AP falls under liabilities, while AR is assets.

To manage AP, you need to review the invoice, make the payment, and record the transaction. AR is slightly more complicated; it involves:

• Sending and tracking invoices.

• Setting reminders for customers to make payments.

• Receiving payments.

• Updating your records.

The easiest way to manage AP and AR is with an accounts payable system for small business owners. The system brings together your financial information in one place, so it's easy to manage your accounts and spending. Know what you’re due and what you owe and never miss a payment again.

Plus, the software automates many time-consuming tasks, including data entry. This gives you more time to spend on growing your business.

6. Implement budgeting and financial planning

As we said earlier, good bookkeeping and accounting are essential for budgeting and financial planning. A financial plan provides a framework for tracking your financial health and forecasting your future cash flow. It should include your:

• Goals and objectives (usually for the next three to five years)

• Balance sheets

• Income statements

• Current net worth

• Investment strategy

• Risk analysis

• Emergency fund

• Debt management plan (if applicable)

Meanwhile, your budget details how you’ll carry out your plan in the coming financial year. To set a realistic budget, you need to know your projected income and costs. You also need to include a contingency for any unexpected expenses.

Accounting software includes detailed cash flow forecasts based on your past performance一helping you set an accurate budget. Make sure you review your budget regularly, though, in case you need to adjust it.

Source: Sage

7. Ensure tax compliance

Finally, you must make sure that you comply with the tax laws in Nigeria and any other country you operate in. It’s a good idea to research which federal, state, and local taxes you’re liable for. For instance, as a small business in Nigeria, you may have to pay taxes such as:

• Companies Income Tax (CIT)

• Value-Added Tax (VAT)

• Personal Income Tax

• Stamp duty

Make a note of the filing and payment deadlines for each tax and the information you’ll need to submit. You can also use accounting or tax filing software, which calculates tax automatically and guarantees you follow all relevant legislation. 

Conclusion

As a small business owner, you have a lot of obligations, from managing online orders to ordering inventory. But you must also make sure your finances are accurate and up-to-date. That means learning how to do bookkeeping and accounting. In this guide, we gave you tips on how to do exactly that.

Bookkeeping and accounting may seem like A LOT, but the more you do it, the easier it will get. There’s also a range of software available to help you manage your accounts and make better business decisions.

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