by Jeremy Bradley
Small businesses often do not have the luxury of a separate accounting office; the accounting and finance functions are typically handled by the business owner or by the general manager. Nonetheless, some best practices for accounting procedures in small offices are worth knowing. These best practices provide guidelines on keeping your financial house in order.
Keep the General Ledger Current
The general ledger is the basic building block of accounting. Every company has a general ledger, even if you aren't accustomed to calling it that. The general ledger lists your various accounts and the balance of each account. In this context, "accounts" doesn't refer to your separate bank accounts but instead to the classes of finance that a company can conceivably have. These are assets, liabilities, equity, revenue and expenses. Under each of these accounts, you may have subaccounts or individual lines for various inflows and outflows of money. Each time a transaction happens -- say when you make a sale or pay a bill -- you should record it in the general ledger in the correct account and then balance the accounts accordingly. The general ledger then becomes a reference document. If you keep it continually updated, you have a constant idea of how much money you have.
Generate Financial Statements
Financial statements are the official reports of a company's financial well-being. There are three types of financial statements -- the income statement, balance sheet and statement of cash flow; some companies also produce a statement of owner's equity. The statements are produced at a minimum on a quarterly and annual basis, although you may want to produce them monthly to track changes in income and expenses. The income statement details the revenue and expenses and lists the net profit or loss for that specific period. The balance sheet lists the company's physical assets, its liabilities and its equity on the day the report is generated. The cash flow statement charts how the company's physical cash on hand has changed over time, and the statement of owner's equity shows the balance in the amount of ownership each partner in the business has. Financial statements are typically submitted with your annual tax return and are useful tools for board members and managers to monitor how well the company is doing.
Perform a Self-Audit
At the end of each quarter or year, it is a good idea to perform a self-audit. This is sometimes called "closing the books," and it involves adjusting any entries to the general ledger to account for mistakes or oversights. The self-audit also requires that you close the accounts that have temporary balances. For instance, if a customer owes you for a transaction, it must be accounted for in the accounts. You can decide which balances to carry over to the next period and use the self-audit to get a snapshot of changes in expenses and revenue.