Business Accounting and its Importance for SMEs

Business Accounting and its Importance for SMEs

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Rashmi
Rashmi Karan
Manager - Content
Updated on Dec 27, 2022 16:59 IST

Learn what business accounting is, its types, how to maintain business accounting for SMEs, and its importance for SMEs.

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Business accounting systematically records, analyzes, interprets, and presents financial information. Accounting can be done by one person in a small business or by different teams in a large organization.

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Business accounting seeks to:

  • Establish an orderly and systematic accounting system.
  • Record all economic and financial movements of an organization
  • Provide accurate financial information
  • Facilitate the consultation of any transaction or movement.
  • Analyze the effectiveness of the financial movements and strategies of a business.
  • Classify financial and economical operations and movements.
  • Make predictive estimates on monetary flow or stagnation.

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Business Accounting Classification

The classifications of business accounting is as follows –

1. Financial Accounting

It is used to obtain quantitative financial information in a structured way through the balance sheet and the balance sheet of profit and loss. With this, we can keep a history of the economic life of our company.

Financial Accounting is valuable when you have to present financial statements in a standardized way to investors, public entities, or other interested organizations. 

With financial accounting, data can be obtained in monetary units of interest at a financial level, such as solvency, liquidity, leverage, solidity, economic profitability, or cash cycle, among others.

2. Tax Accounting

Tax Accounting is based on the fiscal criteria established by law. It regulates the way of making records and reports for the declaration and payment of taxes. 

3. Management Accounting

It is similar to financial accounting, but management accounting is for internal use. Management accounting allows the company to control and fulfill its strategic objectives. It also allows an analysis of the company’s evolution since it can include results from previous years. Thus, management accounting is a fundamental tool for optimal business management planning.

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4. Managerial Accounting

Also called administrative accounting, managerial accounting is a tool that allows for evaluating, identifying, and providing information on the company’s economic activity. Its use is exclusively internal since it adapts the accounting information to the needs of the company’s administration. Managerial accounting is almost always expressed in monetary units.

5. Cost Accounting

Cost accounting classifies, distributes, and collects information about the costs that the company generates, in addition to managing anticipated future costs. This type of accounting encompasses –

  • Design and operation of cost procedures
  • Determination of costs by departments, functions, responsibilities, activities, products, territories, periods, and other units
  • Cost comparison of different periods with the estimated, budgeted, or standard costs.
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How To Do Business Accounting for SMEs?

These are the primary tasks involved in effective small business accounting.

Record Financial Transactions

The first, and probably the most important, is to record all financial transactions of the business. This may include loans, expenses, income, and other related business documents prepared for the business, which will be entered into the accounting system.

Record Journal Entries

An accountant or business owner will record business transactions in a journal or original entry book in chronological order. Journal entries typically include debit and credit accounts in a double-entry accounting system. Transactions not included in this journal are posted to the general ledger.

Maintain General Ledger

The general ledger or final entry book is a journal of past accounts and transactions and a journal of current balances in various accounts related to the business.

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Make Trial Balance Reports

A trial balance ensures that the total debit equals the total credit. Financial accounts are pulled from the general ledger and reported to see if the columns match. If the columns do not balance, there is an error in the general ledger or account.

Adjust Input

Accountants prepare to adjust entries to update accounts in prior financial statements. These entries are adjusted at the end of the accounting period for income, expenses, deferrals, prepayments, etc.

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Prepare an Adjustment Worksheet

After preparing the adjusting entries, make an adjusted trial balance. This is the second round of trial balance reports to test whether the debits and credits are the same after adjusting entries.

Create Financial Statements

The end product of an accounting system is a financial statement consisting of a profit and loss statement, a balance sheet, a cash flow statement, and other notes.

Close Input

Finally, the system prepares for the next accounting cycle by closing all non-permanent or recurring accounts, such as income and expense withdrawal accounts. Perpetual balance accounts remain open for the next accounting cycle.

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Why is Business Accounting Crucial for SMEs?

Below are some of the ways that make business accounting so important for SMEs:

1. Organize records

Regardless of what happens in your company, the organization of your financial records is essential. When it comes to budgeting, applying for loans or grants, or seeing if you’re making a profit, accounting allows you to quickly find the information you need. 

Basic small business accounting allows you to organize information in one place. Without accounting, financial data is scattered and cannot form a clear picture of your business finances. Accounting brings all that information together in one easy-to-read system. 

Plus, organized financial information can help you plan for bill payments. Knowing when invoices are due in advance allows you to organize expenses in the obligations calendar. 

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2. Facilitates Decision-Making

Business owners need to make many decisions, like whether or not to:

  • Apply for loans.
  • Submit funding requests.
  • Hire employees.

The list goes on. Business owners and their accountants can use accounting to evaluate data to make informed decisions. For example, can new staff be recruited? Look through factual information to determine if your company can afford to add talent to the payroll. 

3. Create Accurate Financial Records

Organized information leads to accurate financial records and planning your business spending ahead of time.

For example – if you want to know your last year’s expenditures in office supplies, you could gather all your receipts and invoices and keep track of every detail. You can also record each transaction in your ledgers or electronic accounting software and quickly extract the data when needed. 

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4. Tax Returns

If you are a business owner, you would need to file taxes. You can seek the services of a professional accountant to settle and file your taxes, with the help of timely maintained and detailed accounting records, or let them access your accounting software. 

Prepare for a tax audit. Accurate accounting records can be a great help, making the audit process hassle-free and time-saving.

5. Budgeting

Did you have a good year in sales? Did your suppliers increase costs and impact your cost of goods sold during the year? All of these things influence how you plan for the coming year. 

Business accounting records for SMEs help in financial planning and budgeting. You can use the past data to devise a plan for proceeding. 

Regarding budget, you need an accurate picture of your business’s performance. Excessive spending during the year appears in the accounting records. Your accounting records will tell if you are going above the budget or you are under budget. 

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6. Attract Investors

Businesses need financing to be successful. That funding can come from owner capital, program support for entrepreneurs, business loans, and investors. But investors should have a good idea of ​​your business before investing. 

With accounting records, investors can determine the success or failure of your company. They need up-to-date and accurate information. And that information should be easily accessible. If you don’t use accounting, data may not be at your fingertips when you need it most. 

Hope you have got a better idea of ​​what accounting entails in the business world, but let’s recap some of the main aspects.

  • Business accounting encompasses the systematic recording, analysis, interpretation, and presentation of a company’s financial information.
  • Accounting responsibilities may be handled by one person in a small business or by different teams in larger organizations.
  • Accounting is the way a business keeps track of its financial operations.
  • Accountants analyze the business’s financials so that the owner and stakeholders can make better-informed decisions.
  • Accounting helps business owners meet their obligations.

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About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio