Accounting, both internal and external, is becoming an increasingly significant source of information for the owners and managers of small businesses, as well as the stakeholders in such businesses. This is because accounting may help determine whether or not a business is profitable.

It is of the utmost importance that the accounting systems that are utilized by small businesses be adequate for their requirements. This means that they must provide the essential information while preventing an excessive amount of administrative labor from being required. In this article, we will discuss the importance of SME accounting.

What is an SME?

Small and medium-sized enterprises or SMEs refer to businesses whose employee numbers and yearly income are both smaller than a certain level that has been established by the government of your country. The level has been determined by your country’s government.

There is no universally accepted definition of what constitutes an SME. Every country has the authority to adopt its own definition and may also decide to put specific limitations on specific spheres of endeavor. For instance, the definition of an SME varies between the European Union (EU) and the United States (US). An SME can have up to 1,200 employees in the US but must have less than 250 in the EU. Nevertheless, one of the main goals of attempting to define what makes an SME is to distinguish small and medium-sized businesses from huge corporations.

SMEs make up the vast majority of businesses in most countries. In 2018, the Small Business Administration (SBA) designated 99.9% of businesses operating in the United States as small enterprises. According to the SBA, small businesses contributed over 44% of the nation’s GDP. (the latest year for which data was available). SMEs continue to be a crucial part of economic growth, innovation, and diversity even though this implies a fall in GDP share during the 1990s.

SME Accounting

Accounting for small businesses requires maintaining thorough records of all of the company’s income and spending as well as carefully extracting monetary data from the different transactions that take place within the organization. This is done in order to comply with regulatory requirements.

This is a critical responsibility that helps owners of small businesses keep better track of their finances and manage their money more effectively, and it is especially important during the early stages of the company. Accounting for small businesses not only provides assistance with the generation of invoices and the processing of payroll, but it also helps business owners keep informed about the historical and current performance of their enterprises.

Bookkeeping for an SME

Analyzing Financial Transactions

Reviewing the financial transactions is the first phase in the SME accounting process, which is followed by entering into the accounting system only those financial transactions that are relevant to the corporate entity being accounted for. For instance, business paperwork does not include details concerning personal loans obtained for reasons unrelated to the company’s operations.

The first step in the accounting procedure is the production of the various source documents that will be used in the process. When a transaction is being recorded, a source document, which is sometimes referred to as a business document, serves as the basis for the recording of the transaction.

Journal Entries

The double-entry accounting system mandates that every single transaction pertaining to a company be documented in a journal, which is frequently referred to as Books of Original Entry, in the exact chronological order in which the events in question took place. The entries that are made in the journal are relevant to two distinct accounts, namely debit and credit.

The process of recording repetitive transactions like purchases, sales, cash receipts, and so on is meant to be simplified and sped up when accountants utilize a specialized diary to do so. This journal is used for the purpose of making the process more efficient. Transactions that do not satisfy the requirements to be recorded in one of the specialized journals are instead incorporated into the general journal.

Ledger

The general ledger is a collection of accounts that not only details the changes that were made to each account as a result of prior transactions but also the current balances that are kept in each account. It is also known as the Books of Final Entry in certain communities and organizations.

Unadjusted Trial Balance

A trial balance is created to check whether all of the debits and credits balance out. The accounts are pulled out of the ledger and arranged in the report’s order of appearance. There should be no difference in the balances of the debit and credit columns.

If this is not the case, then there will be errors in the trial balance that need to be found and fixed using corrective inputs. It is crucial to remember that the ledger may contain errors even if the credits and debits are balanced. These mistakes can be the consequence of duplicate submissions or entry omissions.

Adjusting Entries

The accountant is in charge of creating the adjusting entries required to update the accounts that are summarized in the financial statements at the end of the accounting period. Consider incoming revenue that isn’t recorded on the books, for example.

Adjusting entries are necessary for a variety of circumstances, including the accrual of income and expenses, allowances, depreciation, deferrals, and prepayments.

Adjusted Trial Balance

It is important to construct an adjusted trial balance after the adjusting entries have been made. This is done to verify that the debits and credits agree with one another once the adjusting entries have been made. This is the final step that needs to be finished before starting the compilation of the company’s financial statements.

Financial Statement

The final products of the accounting system are the financial statements, which consist of the income statement, balance sheet, statement of changes to equity, statement of cash flow, and notes. These five documents make up the financial statements. The financial statements are comprised of these five different documents.

Closing Entries

Before the next accounting is completed, all of the temporary accounts that are measured periodically, such as the income, expenditure, and withdrawal accounts, are closed. This allows the system to be prepared for the next accounting to be performed. It is common practice to refer to the accounts that make up the balance sheet as permanent accounts. These accounts are the ones that are left open for the succeeding accounting cycle.

After all of the closing entries have been recorded, the very last step of the accounting cycle is to build a post-close trial balance in order to check that the sums of the debits and credits are the same. This is done in order to ensure that the accounting cycle has been completed successfully. This trial balance only includes actual accounts because the temporary accounts were cleared out during the course of this accounting cycle and were therefore removed from the ledger.

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Do You Need an Accountant for an SME?

If you own an SME, it is in your best interest to make the financial and time commitment necessary to retain the services of an accountant. Doing so can wind up saving you a significant amount of both time and money. Accountants are able to provide owners of small businesses with assistance with a range of tasks, including the following items on this list:

• Drafting a business plan during the process of forming your company;
• Advising on the business’s entity structure;
• Assisting in acquiring the appropriate licenses, such as business licenses, permits for collecting sales taxes, and employment accounts;
• Setting up accounting software and chart of accounts;
• Taking care of compliance and difficult problems related to sales tax;
• Dealing with complicated labor expenditures, such as wage and labor compliance difficulties, which may bring down even the most profitable enterprises, requires careful planning and execution;
• Assisting in satisfying the standards imposed by lenders or licensing authorities;
• Keeping records of the inventory according to the dates on which it was purchased, the stock numbers, the purchase prices, the dates on which it was sold, and the sale prices.

Simply keeping the books is not enough to effectively manage the financial side of a small business; there are other steps involved in SME accounting. You will be in a better position to prepare for the future of your company and to satisfy the standards that have been established by the law if you make use of professional accounting practices.

If a small business owner does not have the financial means to hire an accountant, they may want to investigate the possibility of automating their accounting processes by utilizing one of the many cloud-based accounting software tools that are currently on the market. This is something that should be given some thought by the owner of the small business.

The majority of these systems are designed to manage the foundations of accounting, such as payroll, payments, and invoices. With the assistance of this software, generating fundamental financial statements and maintaining detailed records will be much simpler for you to accomplish.

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