5 Accounting Best Practices to Apply to Your Business
Best practices in accounting enable businesses to maintain financial stability and improve profitability. Bookkeeping and accounting are essential for every business, no matter the size, including small and mid-sized businesses. Though you may not have to abide by generally accepted accounting principles (GAAP) yet, effective bookkeeping and accounting practices make financial reporting and modeling successful. Best accounting practices lead to efficiency and cost reduction. Also, applying these practices helps you attract investors, prepare tax returns, and apply for loans. The following are five key accounting best practices that can help streamline your finances for success:
1. Keep organized financial statements and records
Accurate and consistent accounting records involve tracking invoices, receipts, and bank statements. Monitoring cash flow provides clarity over the company and its growth as it shows earnings inflows and expense outflows. Organized financial statements and records are crucial for budgeting and forecasting. Consider recording, categorizing, and labeling transactions properly. Also, keep personal expenses separate. The three main financial statements to keep include:
- Income statement: It shows sources of revenue and profit over a given period in detail.
- Cash flow statement: It records all cash transactions over a given period, letting you know the amount of cash you have in that period.
- Balance sheet: It gives you a picture of the business’s net worth, including assets, liabilities, and shareholder equity, at that particular point in time.
Manual ledgers are a great option if you are starting and lack capital for accounting software. It is straightforward as it involves keeping physical records of financial transactions, i.e., you record the transactions manually in physical ledgers or journals. You can also use cloud-based storage systems to organize and store your financial records. Spreadsheets like Excel and Google Sheets allow you to create complex financial models and track business performance. Cloud-based storage systems ensure backup for your records. You can access and update them from anywhere and share them with others. You can use Google Drive, Dropbox, and OneDrive.
2. Choose an accounting method
The main accounting methods are cash and accruals. Cash-based accounting is ideal for businesses dealing strictly with cash payments, as it involves recording all cash transactions. The accrual basis method is suitable for invoicing customers, as it requires you to record all expenses and revenues when they occur, even if you receive cash later. It uses the matching principle and can provide more detail on expected future income. This method is ideal when you adopt GAAP and requires compliance with set rules and procedures.
Adopt International Financial Reporting Standards (IFRS) if you intend to expand your business internationally. A modified cash basis allows you to operate between cash and accrual. This means your business operates on a cash basis but maintains accounts payable and accounts receivable accounts.
3. Establish internal controls
Internal controls are essential in bookkeeping policies and procedures as they minimize the risk of fraud. Fraud includes failure to record transactions and overstating revenue, which can be costly in the long run. You can implement dual control for processes, including a system of checks and balances to prevent one person from controlling the entire accounting process, an authorization process, and performing reconciliation between bookkeeping and bank and credit card statements.
4. Hire in-house or outsource accounting professionals
In-house or outsourced accountants and auditors can ensure you keep and analyze accurate accounting records. Auditors inspect accounting or bookkeeping records to identify potential fraud. This is essential when records are inconsistent or show unrealistic numbers, as auditors double-check records for accuracy and compliance. Accountants help set achievable goals and provide advice that results in making strategic decisions for growth.
Outsourced accounting and bookkeeping involve hiring a third party or external source to complete finance functions for your business. Most outsourced individuals and companies provide finance-related services, such as accounts receivable, payroll, financial reports, and record management. Others may include tasks in human resources. Consider your needs and budget when hiring in-house accountants or outsourcing accounting services.
5. Use accounting software
Automating the accounting process using accounting software helps speed the logging process, minimizes costly errors by keeping records accurate and up-to-date, reduces staffing costs, simplifies tax filing, and can generate actionable insights using powerful analytical tools. Accounting and bookkeeping software can help you manage several aspects of business operations. It can help you track and manage expenses, generate invoices and financial reports, and develop budgets. Most of the accounting software solutions integrate easily with other systems. You can use QuickBooks, Xero, NetSuite, or Sage Intacct, depending on your business needs. If you have limited capital, use free accounting software for a start and upgrade later as revenue and accounting needs increase.
Conclusion
Every business should have the best accounting practices in place to succeed. This is because they enable you to track performance and comply with legal and tax requirements. Good accounting practices are necessary for making informed decision-making and growth; you can reduce costs and attract investors. Keep financial statements and records organized, choose an accounting method, and establish internal controls. Accounting professionals ensure your financial records are accurate and updated. Accounting automation using software streamlines and increases efficiency in financial processes. Whether you record transactions manually or use accounting software, adopt good accounting and bookkeeping practices for success.
