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How to Set Up Accounting Processes for your Small Business

How To Set Up Accounting Processes for Small Businesses

In this post, I am going to talk about how to set up accounting processes for your small business, what are the benefits of accounting digital transformation, and a guide in implementing digital accounting software.

An accounting system for a small business is a typical challenge for entrepreneurs especially when they are just starting. Many business owners focus on selling and delivering their services than the back-office accounting process. I remember when I was first starting in business, I used a notebook to record the checks I wrote and then personally go to the bank to deposit them. I read an entire book about financial accounting for one whole day and taught myself how to use Quickbooks while we develop our own online accounting software as our first-ever product as a software company. It took me a long time before learning the actual best practice and I hope this article shortens that time for you.

The first thing that comes to mind when we set up accounting processes for your small business is buying and implementing an accounting software solution to solve their accounting problem but it is the common mistake small businesses make.

So here’s the basic idea in structuring your accounting process.

defining accounting process small business infographic

1. Define your ledgers 

A ledger is a book or a record of your various business accounts. One example is your purchase ledger, bank account ledger, accounts payable ledger, or a sales ledger. We call this chart of accounts in accounting and it just shows the increase and decrease of the account value and its running balance on a certain period.

2. Define the accountabilities and transaction preparation process

Hire or assign the right people who will take care of each ledger. The core ledgers to control and monitor are the purchase ledger/accounts payables, sales/accounts receivables, and cash. Ideally, these individual ledgers are assigned to a different person or employee. There’s an A/R personnel for your accounts receivable. They are the ones assigned to prepare sales invoices and credit memos. A/P clerk for your accounts payables to prepare vouchers from supplier invoices. And a cashier or a treasury staff to record your sales collection and disbursement. If your operations process a large volume of sales or purchases, then it is ideal that you assign a checker or approver of each transaction to avoid errors and to establish more control. (Below is a diagram of a typical accounting transaction processing.)

3. Define your forms.

Another step in trying to set up accounting processes for your small business is to define your forms. These are accountability forms such as a sales invoice/sales receipts for your sales, a voucher for your A/P, and disbursements. It is important to define them and layout important information such as transaction date, document numbering, transaction description, accounting entries, and accountable persons.

4. Define your reports

Here are the basic reports you need for your accounting system:

  • Purchase book
  • Sales book
  • Cash Collection book
  • Cash Disbursement book
  • Payroll
  • Accounts Receivable Aging
  • Accounts Payable Aging
  • Tax Schedules
  • Balance Sheet
  • Income Statement
  • Cash Flow

5. Form your Reconciliation and Audit Team 

This is an important action to take when defining any type of system. There must be a separate person or team to reconcile each ledger and perform a random audit. That person can be the owner themselves. The typical account that we reconcile is the bank account, just to make sure that the balances in your record tally with the official bank statements. This is to ensure that there’s no unaccounted record that goes in or out. Lastly, don’t forget to pay your taxes and comply with government filing and reporting. You may consult your friendly CPAs for details.

So now that you have formed your accounting process or system, then the next step is digitizing it. So what are the benefits of a digital accounting system?

  1. Printing of forms.  Accounting software normally has a printing feature to print your sales invoices, checks, and receipts. This is an immediate benefit because you can significantly reduce the time in preparing your transactions in real-time.
  2. Automatic posting to ledgers.  So every time you print or prepare a transaction, an accounting software automatically posts them to your ledger to update your balances in real-time. So another major benefit is you can see your accounts receivables, sales, and income daily to analyze the financial performance of your business.
  3. Stricter controls. One fancy feature of online accounting software is its capability to execute a workflow. So if you have defined a process where there’s a maker of transactions and an approver, then this can easily be implemented in online accounting software. On top of that, then, it has an audit trail of who prepared and approved transactions including dates and timestamps when.
  4. Tax Reporting.  Instead of manually digesting the schedule of your tax payable, accounting software can automate this especially if the product has a local tax feature that you can utilize.
  5. Increase in productivity and lower overhead.  An efficient process equates to cost efficiency and an increase in productivity. If you manually prepare reports before, then you will not have to do it this time except for the reconciliation.

Implementing accounting software these days is already a necessity than a nice-to-have. With a growing number of free or low-cost solutions in the cloud, then you won’t worry about the cost of implementing your accounting software.

Here’s a guide on successfully implementing accounting software:

  1. Accounting Software Setup – this is the most important step in setting up your whole accounting system. Here is the checklist of data you need to set them up
    1. chart of accounts
    2. supplier listing
    3. customer listing
    4. bank accounts
    5. tax codes for sales and purchase tax/VAT
    6. expanded withholding tax codes
    7. accountability forms
    8. default accounting entry/journal entry per transaction or form
    9. reporting requirements
  2. Users and Control – this is where you set up employees who can access accounting data and also a consideration on who’s going to make and approve certain transactions.
  3. Transaction Processing.  After the initial setup, the next step is to define how you will process your transactions such as sales invoicing, collection, supplier payables, and disbursements. You can either implement an automatic posting process, or with an approval workflow. It is important that you identify these workflows to help you decide later on which accounting solution to use as some software does not support the posting process and/or approval workflow.   
  4. Reconciliation and Reports.  Reports are the end-result of any business software. But reconciliations should come first to make sure there are no unaccounted transactions or no errors in transaction processing.  
  5. Financial Management.  The ultimate purpose of digitizing your accounting is to come up with a real-time financial position of your company. By having this information, it will be convenient for small business owners to decide which expense to optimize, sales to focus on and receivables to push collection. It is important also to have the mobility feature of your accounting software to be able to access these reports anytime and anywhere.

About the Author

Dennis Hilario is the Founder & Chief Software Architect of Hilsoft, a fast-growing digital transformation & software company in the Philippines.

He has delivered over 300 digital transformation projects, local & international in the past 20 years with notable clients such as Dept. of Trade & Industry, Philippine Seven Corporation (7 Eleven), and Landbank of the Philippines.

If you want to learn the most comprehensive digital course in accounting for small business owners, you can enroll in Dennis’s program here. It’s currently discounted at 50% off as of writing so you better act fast!

But wait, there’s more! Taxumo blog readers also get an additional 10% off when you use the code DennisHilario. Enroll now!

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