One, at home; that is, most of the business’ work is carried out at home. An example is a dressmaker who does all the work at home with clients coming to pick their fittings there.
The other circumstance is when the business is carried out from home. This kind of business does not rent or own any premises other than the owner’s home.
Accounting for a home based business
Accounting helps the business owner to keep track of the business and plan on how to improve its performance. Is the business making a profit? Is he collecting debts quickly and efficiently? Are bills settled on time? Most importantly, is the cash flow improving or deteriorating? There are various aspects of business that enable the business owner to do effective accounting. These include the following:
- Cashbook – a separate bank account should be opened for the home based business. The business owner will then need a system for recording all transactions; that is, receipts (money in) and payments (money out). This forms his or her cashbook. A cheque account and savings account can also be opened. A cash book can either be manual (a 16 column A4 book from a stationer) or a spreadsheet such as Excel. A spreadsheet has many advantages over a manual cashbook. Calculations on it are simpler and more accurate, entries that could have been forgotten can be added later and it does not require a lot of storage space. It is also less tedious and it allows the user to design the book in any desired style.
- Computerised accounting systems – these are available online at varying prices, with most of them being database systems that prompt the accountant for entries and offers a choice of different reports to be printed from the data entered.
Cashflow Manager Cloud is an example of an online accounting system used for small to medium-sized businesses. It is a powerful tool but simple to use. Since it is online, the owner of the home-based business does not have to install any software on his computer.
- Record keeping – the home-based business owner should keep supporting documentation to the summary of amounts in and out of the business provided by the cashbook. These records can be kept electronically to save on space. The documentation includes:
– Receipts of all payments
– Copies of tax returns
– Bank statements
– Other documents relating to the business
Why is accounting for a home based business very important?
Through accounting, the home based business owner is able to record the business’ performance in financial terms. It translates all business activities into numbers that are then organized into different reporting formats – such as business financial statements.
Every real activity of the business is ‘accounted for’. A lot can be told about the business by reading these statements and forecasts about the future of the business can be made.
In summary, accounting helps the business owner to monitor the performance of the home based business. When he uses accounting to record all the business activities, then turn the records into the correct formats, it is possible to get very useful information about the business. It is important to remember that accounting knowledge is often needed to benefit fully from accounting. Such information is ubiquitous in the internet in unlimited amounts. But working with an accounting professional is also a great way to make the most of managing your business.