There are different methods to record business transactions in books of accounts, which can be difficult for a small business owner who doesn’t have any accounting knowledge to understand. According to a Business Insider article, small businesses fail for the following reasons: cash flow issues and mismanagement, not having enough demand for the product or service introduced in the market, a cash crunch situation, the wrong team of professionals employed and an inability to compete in the market.
Source : Business Insider
Small businesses fail for these five reasons, the most common of which is poor cash flow management.
So, you might be thinking of addressing this issue and you will see that the most prominent is to have a proper accounting system in place that helps you give real-time updates of your cash flows and other issues. In this article, you will see the different methods and challenges of recording accounting transactions and why outsourcing this work to a bookkeeping firm is more helpful in dealing with accounting challenges.
Accounting Transactions Recording
There are different rules for the recording of debit and credit parts of a transaction in various financial statements such as a journal, ledger, cash books, bank reconciliation statement, trial balance, profit and loss statement and then finally the cash flow statement and balance sheet.
1. To begin, you encountered the following transactions in your business:
Sales:
You sell the goods or services and record the entry of either the cash received or the credit sale.
Purchases:
You purchase the goods or services or do any other capital expenditures, record the entry of either the cash paid or the credit purchase.
Payments and Receipts:
You purchase the goods or services or do any other capital expenditures, record the entry of either the cash paid or the credit purchase.: Pay for the opex and capex and receive the receipts.
Salary and Payroll:
Pay salaries to employees.
Loans:
Either borrow money or repay the loans.
Drawings:
Owners withdraw cash or any material from the business.
Capital:
Owners contribute capital to their businesses either with their own money or by share capital.
2. Follow these golden rules of accounting to record the accounting transactions in a journal in three accounts: real, personal and nominal accounts. For example, if you purchase the materials, then two accounts will be affected following the double-entry system, which are the Purchases account and the cash account or vendor account in the case of a credit purchase.
| Real Account | Personal Account | Nominal Account | |
|---|---|---|---|
| Debit | What comes in | The Receiver | All Expenses and Losses |
| Credit | What goes out | The Giver | All Income and Gains |
| Applicable to | All Assets of the business (Purchase and Sale):
| Natural, artificial and representative persons:
| Expenses/losses and Incomes/gains:
|
3. Transfer these entries to ledger and sub ledgers which are cash book, purchases or sales account, etc.
4. Prepare trial balance and financial statements, which are the P&L account, balance sheet and cash flow statement on a quarterly and yearly basis by following these general rules of accounting.
General Rules of Accounting
Accounting challenges and how outsourcing this work to a bookkeeping firm can be more helpful
So, after going through the rules of all the recording of debit and credit parts of a transaction, you may be highly confused about how to do this work by yourself in a small business. You may be thinking of hiring an in-house bookkeeper for your small business, but this comes with a lot of cost, time constraints, managing the team internally and overseeing the work. So, here is the solution to the accounting and bookkeeping challenges you may face and how hiring an outsourcing firm can do this more easily for you.
1. Cash flow management
When it comes to small business cash flow management, the prevailing issue is that approximately 82% of them struggle with mismanaging their cash flow. The major problem is that many small business owners might think of net profit as the way to measure cash flow in a specific period.
Profit and cash are two different things, and both of the accounting transactions are recorded differently in books of accounts, which can be easily managed and reported to you by the outsourced service provider. Also, you can get information on your break-even point for the business, where profits equal the amount of cash flow, by monitoring the cash flow in real-time.
2. Record all small business transactions
You may be thinking that small transactions cannot have an impact on your books of accounts, such as rent paid, stationery purchased or any small equipment. But this is not true? Every transaction from your business will surely have an impact on any one of the accounts, which can be a real, personal, or nominal account. This work can be tedious for you to record, and an outsourced firm can easily record all of this on a daily basis using cloud and online accounting software.
3. Recording of Accounts Receivables and Payables
Another significant challenge for small businesses is deciding which account to record credit sales and purchases in and whether to add them to the cash account, assuming that they will be received or paid in the future.
But it is not true, as there are some receivables and purchases for which you will not get or be paid because of bad debts or defects. Therefore, there are different rules to record these accounting transactions, which can be easily distinguished by an outsourced team of professionals. They also send reminders to your debtors to pay the same on time and they will inform you to pay your credits on time as well.
4. Reconciliation of books of accounts
It is the process of checking your internal records with your bank accounts through a double entry system, which all together has different rules for recording and analyzing. This can be a daunting task at the end of the fiscal year, but it can be easily accomplished with the help of automated software and experienced professionals from the outsourced firm.
Source : Clutch
45% of small businesses don’t have any accountants or bookkeepers in their firm.
5. Tax Management
Do you know that 45% of small business owners don’t have in-house accountants and bookkeepers, which can help small businesses complete their legal and regulatory compliance? The main reason for that is the lack of money for these business owners, so they outsource this work at the end of their financial year, which is a cumbersome and confusing task to manage by giving all the details to them.
As a result, you can easily solve this problem by hiring outsourced bookkeeper/tax accountant that can manage your accounting work from start to finish, file tax requirements with the authorities on their own and is also up to date on the latest rules and regulations for recording accounting transactions and taxation. They can also advise you on the tax rebates you can get from the government as a result of running a small business.
6. Reducing Accounting Fraud
The accounting frauds are the internal frauds that a small business owner, an in-house employee or an accountant commit to hamper the financial statements to reduce the tax liabilities of the owner or some of the cash larceny, inventory theft, etc., committed by the employees.
Hiring an outsourced firm can easily solve this problem, as they are backed by a high reputation and have professionals dealing with your accounts, thereby checking every single entry through the automated system in order to avoid any accounting fraud.
Why do you choose IBN Tech for all the accounting challenges?
IBN Tech can be your outsourced partner for your small business accounting and bookkeeping needs because we can solve all of your problems with recording accounting transactions with our 120+ certified bookkeepers, offer multiple accounting software expertise and deliver work with 99.99% accuracy.
We help with the cash flow management work and provide virtual CFO services. We use a web-based application designed and developed by Sage, now known as Abrigo, that analyzes financial statements and compares them to real-time industry data to evaluate market trends through ratios and graphs to understand businesses’ true standing.
We can also assist you with the preparation and submission of online tax returns and tax filing in the US and provide expert advice in areas of capital gains tax, gift tax and tax planning. We also have 22 years of experience handling payroll services for US and UK firms.
Conclusion
The small business owner needs to carefully record and check all of the accounting transactions, which seems like a challenge to them and know all the rules for the recording of debit and credit parts of a transaction in one go.
Therefore, to solve this problem, they can easily outsource the work to a firm that is an expert in recording every single transaction, doing reconciliation and tax preparation work and preventing fraud in a timely and cost-effective manner. You will be able to focus and redirect your efforts on the core operations of the business and grow your small business into a large firm by outsourcing this difficult job of accounting, as well as improving the efficiency of your accounting and bookkeeping work.
FAQs
1. What are the methods of recording business transactions?
The methods of recording transactions in the books of the original entry or in the journal for these three accounts are:
Real Account:
Debit what comes in and credit what goes out of the business.
Personal Account:
Debit the receiver of the business and credit the giver of the business.
Nominal Account:
Debit all expenses or losses and credit all income or gains.
2. What are the four steps to recording business transactions?
The four steps to record transactions in the books of accounts are:
Identify each transaction and see which accounts will be affected.
Recording the transactions in the journal.
Transferring these entries to ledgers.
Preparation of the trial balance, adjusted entries and other financial statements.
3. What are the two methods of recording transactions?
The two methods of recording accounting transactions are the cash method and the accrual method, in which one records the revenues or expenses when they are received or paid and the other records them when they are earned or incurred. Cash basis follows the single-entry bookkeeping system, whereas accrual basis follows the double entry bookkeeping system.
