Given the looming economic crisis and global recession, SMEs are facing tough times, especially those that do not maintain proper books of accounting for their finances.
This article aims to enlighten our readers, most especially entrepreneurs, about various financial tools needed to properly run their SMEs.
The EU defines SMEs (EC, 2003) as independent micro, small, and medium-sized enterprises, which may or may not be incorporated. SMEs represent a very heterogeneous segment—ranging from single unincorporated entrepreneurs to medium-sized joint stock companies listed on a stock exchange. The definition of SMEs varies by country. Definitions could be based on certain size criteria (e.g. by revenue or by employees).
Since SMEs are not publicly accountable and have limited stakeholders, the financial information tools required are not rigorous. Accounting for this type of business simply requires the owners to record all financial transactions accurately either on a cash or accrual basis.
Things to Take Seriously
- Open a bank account: Preferably 2 or 3 where sales transactions and expenses transactions are separately recorded.
- Record transactions judiciously: Many online accounting platforms can assist with this. They include QuickBooks, Xero, etc.
- Set up a Payroll system: For keeping track of employees and wages of those employees.
- Maintain an inventory bin card or an efficient inventory record keeping document for better inventory control.
- Create and maintain a customer’s list and supplier schedule for keeping track of amount to be received (from customer list) and amount to be paid (suppliers schedule).
- Get abreast with the important tax obligations you are exposed to.
- Clearly define how and when you will get paid. Check out FINANCIAL HABITS HURTING MY BUSINESS, which talks about this.
Accounting for SMEs
The business needs to implement a system of record keeping to analyze, summarize and report all financial transactions or activities. Employing an accountant for your business would relieve you a whole lot.
The Basic accounting tools include:
- Transactions: The first basic involves the analyzing recording of financial transactions related to the entity. All financial activities relating to the business are called transactions. Making use of source documents like receipts and invoices helps.
- Journals Entry: Following double entry, business transactions are recorded using journals (Book of original entry). Journal entries should include two accounts; the debited account and the credited account.
- Ledger: All information recorded in journals is posted into the general ledger. The general ledger consists of several accounts with closing balances which are then summarized in the Trial Balance. The general ledger is known as the Book of final entry.
- Trial Balance: This includes a list of all accounts in the general ledger with the closing balances. Following the double entry principle, the summation of all balances in the TB should be zero.
- Adjusting Entries & Trial Balance: At the end of an accounting period, accountants would take into consideration all deferrals and accruals (e.g. earned or unearned income recognition) that affect the final balance in the general ledger. The idea is to ensure reporting the financial statement is consistent with the business’s financial position. The culmination of this would result in an adjusted trial balance.
- Financial Statements: The adjusted trial balance would then be used to prepare the financial statements which include the income statement, statement of changes in equity, balance sheet, statement of cash flow, and notes.
We hope that we have been able to improve your understanding of the topic. Entrepreneurs can now be sure of reporting consistent records of their business finances.
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FreshBooks. (2022, July 13). How to Do Accounting for Small Business: Basics of Accounting. https://www.freshbooks.com/hub/accounting/do-accounting-small-business
What Is Basic Accounting? (2020, February 4). Indeed Career Guide. https://www.indeed.com/career-advice/career-development/basic-acccounting#:%7E:text=Basic%20accounting%20refers%20to%20the,agencies%20and%20tax%20collection%20entities.
European Commission (EC). 2003. “Commission Recommendation of 6 May 2003 Concerning the Definition of Micro, Small and Medium-sized Enterprises” (2003/361/EC). http://eurlex.europa.eu/legal-content/EN/AUTO/?uri=uriserv:OJ.L_.2003.124.01.0036.01.ENG