Accounting for Small Companies

When a small company starts up, one of the first decisions they need to make is how they will handle accounting. This includes choosing between a cash basis and an accrual basis, as well as establishing how they will handle tax obligations. Choosing the correct accounting system is essential to ensuring that you get the most out of your business.

Accounts receivable

Managing accounts receivable is a key part of running a small business. It can help you build strong customer relationships and increase your overall sales. But it’s important to remember that failing to track outstanding payments can cause major cash flow problems.

To avoid this, consider the industry practices and find a way to record accounts receivable. You can do this by using spreadsheets, internal accounting software, or other tools.

For example, in the construction industry, you may want to work with an accountant to find the best option. They can recommend the best method for tracking accounts receivable. Then you can send an email or make a phone call to customers when their invoices are due.

Accounts receivable information also helps you set up repayment plans and initiate practical collection procedures. These records can be used in arbitration and mediation. Having a comprehensive account receivable process will also allow you to improve your SMB’s cash flow.

When you use your business’s accounts receivable to offer credit, you are taking advantage of a flexible credit option that your customers will appreciate. However, offering credit to your customers is not a guarantee that they will pay on time.

If you are unable to collect from your customers, you will be left with a bad debt. This is a serious problem for many small businesses. In some cases, you will have to write off these debts as uncollectible.

Cash basis vs. accrual basis

Most small companies can choose between cash basis and accrual basis accounting. Each one has its benefits, but it’s important to know which one is right for your business.

Using the right accounting method is vital, especially if you want to make tax time easy. The IRS is quite lenient when it comes to choosing the best method for your company. In fact, you can use a hybrid of the two methods, depending on your specific needs. However, you should consult an accountant or tax professional before making a decision.

Cash basis is often used by sole proprietors or small businesses that are not looking to go public. It can be a good way to keep track of cash flow, but it isn’t for every company.

Accrual accounting is a much better option. It’s easier to track, and it helps you avoid overspending. You’ll need to be more meticulous, but it gives you a more comprehensive picture of your company’s financial health.

Using the correct accounting method is also vital for understanding your cash flow. If you’re using the wrong method, you might not be able to detect problems in real time. For example, you might not realize that you have a challenging short-term cash shortage.

Tax obligations

If you are the owner of a small company, you know that you have to pay federal, state, and local tax obligations. It is important to understand the different types of taxes and how they are imposed. In addition, it is necessary to keep accurate records.

One type of small company tax obligation is pay-roll taxes. Payroll taxes are a way to fund government assistance programs. Generally, employers and employees share the payroll tax liability. However, in some cases, the employer will be liable for the full payroll tax.

Another type of small company tax obligation is purchases taxes. These are taxes billed against the purchase of tangible items. They differ from state to state, but most states impose sales taxes.

Small businesses may also need to pay real estate taxes. Real estate tax is based on the market value of the building. When the market value of the building increases, the tax rises. The IRS allows a partial deduction of some property taxes from federal tax liabilities.

Business owners must also make estimated payments on the 15th day of each month. Businesses that employ employees must also contribute to Social Security and Medicare taxes.

Some companies may also need to file various forms annually. This includes filing a Schedule C, which reports business income.