Accounting Basics for Small Businesses in Saudi Arabia
Accounting is very important for small businesses. It helps the business owners, partners, stakeholders, investors, and even the managers and employees. With accounting, these people are able to evaluate the performance of the business in terms of financial parameters.
What is accounting for?
Accounting enables important information to be understood, these include profits, liabilities, equities, gains, losses, costs, and earnings of the business.
Accounting is mainly used for the recording of all the financial transactions of the person, company, or business. These financial transactions are placed in the books of accounts or an Accounting Software like Xero. They will then be used to identify, measure, and communicate data. These data will be analysed to produce tangible or concrete information about the business’ or company’s finances or economy.
Accounting is also a requirement for VAT and GAZT reporting. The government ministries and almost all private and public agencies would require your business to have accounting. It would also be a requirement for all businesses to keep some books for their credits and debits. This would transparently track the business’ or company’s spendings and incomes.
What are the steps in doing accounting and bookkeeping for small businesses?
Analysis of Financial Accounts
The first step would be to analyse all the financial accounts of the company or business. Those that are connected to the business should be added to the accounting systems of the business. The transactions that are personal or not at all related to the business are disregarded.
After doing this, or even while doing this, the team would have to prepare the source documents. These documents will be the reference or source for taking note of every transaction
Input of Journal Entries
All the business financial transactions are recorded in a journal or a book. This is better known as the Books of Original Entry, wherein the entire bookkeeping system is placed.
The business transactions will be recorded in the Books of Original Entry in chronological order. The double entry bookkeeping system is now almost always used by businesses worldwide. The information included in the book are of two accounts, which is the debit one and the credit one.
For ease of use and compliance, accountants and bookkeepers usually have a second book. This book is for special transactions, which are usually recurring or repeating transactions. Examples of these transactions are cash receipts, sales, purchases, and other repetitive entries. Those that are not eligible to be added to the special book will be placed in the general book.
Use of the General Ledger
The general ledger is a group of accounts that show the changes done to each account or entity based on the past transactions. The current balances of each account is also shown. This ledger is sometimes known as the Books of Final Entry.
Recovery of the Unadjusted Trial Balance
The unadjusted trial balance is done so that the company can test out if the total debits are equal to the total credits.
Since the general ledger contains the grouped accounts, this will be the basis of the creation of the unadjusted trial balance. The specific information would be extracted from the general ledger, which would then be arranged to create a comprehensive report.
When the report is made, the column for the balances of debit should be the same with the column for the balances of credit.
If they are not the same, then something must be wrong about the report. The entries for the debit and credit balances should be re-evaluated to see where the error may be.
Even if the balances of debit would be the same with the balances of credit, the whole thing should still be re-checked. There could be doubling or deleting of accounts or other factors.
Adjustment of the Entries
After the end of the accounting period and after doing all the tasks above, there will be an adjustment period. This period is for tweaking the entries to accurately update the accounts that are found in the financial statements. An example of this would be some of the income earned but are still not found in the general or special books.
The adjustments being made are for the new income, new expenses, accrual of allowances, prepayments, and even some deferrals.
Computation of the Adjusted Trial Balance
After the adjustment period, the adjusted trial balance can then be initiated.
Since the correct adjustments have already been made, the adjusted trial balance should already be an accurate representation of the business’ latest financial statements.
The adjusted trial balance is made to see if the adjusted credits would correctly correspond to the adjusted debits. If not, then something probably went wrong in the process. Before proceeding, this should be corrected, checked, and rechecked to make sure there are no mistakes.
Once the adjusted credits correspond to the adjusted debits and they have already been rechecked, the process can now proceed to the creation of financial statements
Production of Financial Statements
In creating financial statements, the following should be present: the balance sheet, the income statement, the statement of changes and equities, the statement of cash flow, and additional notes. These are what are needed as the end products of the accounting system. These financial statements are then the basis of creating an audit report for the government ministries and for calculating the Zakat due.
Set up of the Closing Entries
With all the processes done, the business or company must then prepare for the next accounting and bookkeeping cycle. The temporary accounts that are managed regularly should be closed for the meantime. These include accounts for withdrawal, expenses, and income.
The accounts that are permanent are kept open and should be prepared for the next accounting period. These permanent accounts are also called the balance sheet accounts.
A post closing trial balance is then created. This is now the last step of the accounting period. This is done to check the equality of credits and debits after the closing entries. Take note that only the permanent accounts are included since temporary accounts have already been closed.
DISCLAIMER
This article is written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.
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