The Sole Proprietor's Guide To Basic Accounting For Small Businesses

The Sole Proprietor’s Guide To Basic Accounting For Small Businesses


Aside from lower start up costs, one of the main advantages of a Sole Proprietorship compared to a Sdn Bhd is the relatively relaxed financial reporting standards.

However, relaxed financial reporting is not the same as disorganised reporting!

improperly done accounting for small business owners that result in confusion
The annual tax season receipt hunt begins.

This is especially since creating a simple accounting system for a small business is not at all difficult, and in this guide, we’ll walk you through how to do it, step-by-step.

Here’s how we’ll break it down:

  • We’ll begin with some key accounting terms all business owners should know
  • We’ll share the three steps to creating a basic accounting system (with examples)
  • We’ll leave you with four SME accounting best practices

Let’s begin!

Key accounting terminology 

In case you think this is a long list, you should have seen our first draft!

Spend some time going through this list as they will be important to understand the following sections.

Accounts payableThe amount owed to suppliers or vendors for goods or services received but not yet paid for.
Accounts receivableThe amount customers owe for products or services sold and delivered but payment has not been received yet.
AssetsResources owned by the business that can generate income such as cash, machinery, and inventory.
LiabilitiesAmounts owed to others, including loans, unpaid bills, and wages.
AccrualsRevenues earned or expenses incurred that impact a business’s net income on the income statement, although cash has not yet changed hands.
Balance sheetA financial statement that provides a snapshot of business assets, liabilities, and shareholder’s equity at a specific time.
Cash flow statementA report showing how changes in balance sheet accounts and income affect cash.
Chart of accountsA structured list of all the accounts used by an organisation to categorise and record its financial transactions.
RevenueTotal income generated by the sale of goods or services.
Income statementOutlines revenues, costs, and expenses over a period to present net profit or loss.

All good?

Alright then, let’s get to the main part of this guide – setting up your accounting.

3 steps to a small business accounting system

Setting up a reliable accounting system is crucial for the success of any SME, and thankfully can be done in three simple steps:

  1. Choose and accounting method
  2. Compile a Chart of Accounts
  3. Keep proper records!

Let’s get into each step in more detail.

Step 1. Choose an accounting method

Time to choose between cash-basis and accrual basis accounting methods. Each method has its merits and suitability depending on the nature and size of your business operations.

Accrual basis

Accrual based accounting records revenue and expenses as and when transactions occur, even if money has not yet been received or paid out.

credit card reciept showing payment not received and accrual accounting method is not so simple and better for bigger businesses
IF your business involves this, go accrual.

For example, if a service or product has been delivered to a customer, the revenue is recognised in your accounts receivable even if payment has not yet been received.

This method offers a more detailed view of the business’s financial performance, making it the preferred option for larger businesses, especially those with large, complex, or drawn out payment cycles. 

Cash basis

This method records transactions only when cash  enters or leaves your bank account.

Using the above example, no entries will be made until the customer has actually paid and the money is sitting in your business bank account.

It is mainly used by smaller businesses that deal in lower-value cash transactions, since accrual based accounting would likely be overkill.

Step 2. Compile a Chart of Accounts

Exapanding upon our table above, a Chart of Accounts includes various categories of accounts used by a busienss, namely:

  • assets
  • liabilities
  • equity
  • revenue, and
  • expenses

Each account should be assigned a unique code / number for easy identification.

Sample Chart of Accounts

Here’s an example of a Chart of Accounts for a fictional F&B outlet in Malaysia. 

a cafe or fb outlet as an example of typical use case for basic accounting for small business
The beautiful decor tells you the coffee sucks.
CategoryAccount NumberAccount Name
 1010Cash on Hand
 1020Checking Account
 1030Petty Cash
 1040Inventory (Food)
 1060Furniture and Fixtures
 2010Accounts Payable
 2020Loans Payable
 2030Credit Card Payable
 3010Owner’s Capital
 3020Owner’s Drawings
 4010Sales – Food
 4020Sales – Beverages
 4030Catering Services
 4040Other Income
Cost of Goods Sold (COGS)  
 5010Cost of Food Sold
 5020Cost of Beverage Sold
 6010Rent Expense
 6020Utilities Expense
 6030Payroll Expense
 6040Supplies Expense
 6050Marketing and Advertising Expense
 6060Insurance Expense
 6070Repairs and Maintenance Expense
 6080Depreciation Expense
 6090Bank Fees
 6100Professional Fees (e.g., accountant)
 6110Taxes (e.g., sales tax, income tax)

The main takeaway is that tying codes to account categories helps internal and external stakeholders easily identify accounts, facilitating financial reporting and analysis. 

Naturally, your Chart of Accounts should reflect your specific business needs.

Step 3. Keep proper records!

Now that you have a systematic Chart of Accounts and know when transactions should get recorded, all that’s left is to enforce timely record keeping. 

In practice, this requires the establishment of clear procedures for recording financial transactions across the organisation, ensuring promptness, organised filing, and compliance with SSM recordkeeping demands.

In fact, we highly recommend including it in your employee handbook

Using records to generate balance sheets

As mentioned, a balance sheet is a snapshot of the assets, liabilities, and owner equity of a business at a particular moment. It lets you to assess your business’ financial situation by knowing what’s:

  • owned
  • owed, and
  • invested

All at a glance!

Let’s continue our F&B outlet example from above and see what its balance sheet might look like, and what we could learn from it if we were the owner.

Current Assets:RM 126,000
Cash on HandRM 21,000
Checking AccountRM 42,000
Petty CashRM 8,400
Inventory (Food)RM 54,600
Total Current AssetsRM 126,000
Fixed Assets:RM 105,000
EquipmentRM 63,000
Furniture and FixturesRM 42,000
Total Fixed AssetsRM 105,000
Liabilities:RM 42,000
Accounts PayableRM 21,000
Loans PayableRM 8,400
Credit Card PayableRM 12,600
Total LiabilitiesRM 42,000
Equity:RM 189,000
Owner’s CapitalRM 189,000
Owner’s DrawingsRM 0
Total EquityRM 189,000

Here’s what we can tell about our F&B outlet’s financial standing based on the balance sheet above:

  • The outlet has total assets worth RM 231,000 
  • The outlet has total liabilities amounting to RM 42,000
  • The outlet’s equity stands at RM 189,000
  • The outlet has good liquidity as its current assets to current liabilities ratio is 3:1
  • 45.45% of our outlet’s assets are fixed assets
  • Our outlet has a good debt-to-equity ratio as the value of equity far exceeds the amount of debt

If this were real life, this balance statement tells us the business is in a financially stable and can withstand short-term emergencies.

Of course, having a reliable and accurate balance sheet depends on your team taking recordkeeping seriously, which brings us to our SME accounting best practices.

4 SME accounting best practices 

To ensure smooth financial management, here are a few best practices that every SME should follow: 

1. Establish a business expense policy

Creating a clear and comprehensive expense policy is crucial for SMEs to maintain financial discipline and transparency. This policy should outline guidelines for

  • permissible expenses
  • approval processes
  • documentation requirements, and
  • consequences for policy violations

2. Subscribe to a Malaysian accounting SaaS

Utilising specialised software designed for Malaysian payroll and accounting can streamline financial operations for SMEs.

We especially recommend choosing a local provider over international options as the former usually offers features tailored to local Malaysian tax regulations, compliance requirements, and reporting standards. 

For more on this, check out our guide to key features of payroll SaaS for Malaysian SMEs.

3. Practice double-entry bookkeeping

Although single entry bookkeeping is simpler, double-entry bookkeeping is much more condusive for maintaining accurate and reliable financial records. This accounting method requires recording each transaction with both a debit and a credit entry, ensuring that assets, liabilities, equity, income, and expenses are properly accounted for. 

4. Outsource to professionals when ready

As SMEs grow, they routinely encounter more complex financial tasks that require specialised expertise such as withholding tax obligations. Outsourcing accounting, tax preparation, or financial advisory services to professional firms or consultants can provide access to specialized knowledge and resources without the need to hire full-time staff. 

Plus, it’s really not as expensive as you expect – just ask us!

Let MISHU manage your accounting

Co sec Manager Fenny

The MISHU team is here to help Sole Proprietorship and Enterprise owners looking to self-manage or outsource their business accounting and bookkeeping needs. Get in touch!

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