Introduction
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!
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.
| Term | Definition |
|---|---|
| Accounts payable | The amount owed to suppliers or vendors for goods or services received but not yet paid for. |
| Accounts receivable | The amount customers owe for products or services sold and delivered but payment has not been received yet. |
| Assets | Resources owned by the business that can generate income such as cash, machinery, and inventory. |
| Liabilities | Amounts owed to others, including loans, unpaid bills, and wages. |
| Accruals | Revenues earned or expenses incurred that impact a business’s net income on the income statement, although cash has not yet changed hands. |
| Balance sheet | A financial statement that provides a snapshot of business assets, liabilities, and shareholder’s equity at a specific time. |
| Cash flow statement | A report showing how changes in balance sheet accounts and income affect cash. |
| Chart of accounts | A structured list of all the accounts used by an organisation to categorise and record its financial transactions. |
| Revenue | Total income generated by the sale of goods or services. |
| Income statement | Outlines 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:
- Choose and accounting method
- Compile a Chart of Accounts
- 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.
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.
| Category | Account Number | Account Name |
|---|---|---|
| Assets | ||
| 1010 | Cash on Hand | |
| 1020 | Checking Account | |
| 1030 | Petty Cash | |
| 1040 | Inventory (Food) | |
| 1050 | Equipment | |
| 1060 | Furniture and Fixtures | |
| Liabilities | ||
| 2010 | Accounts Payable | |
| 2020 | Loans Payable | |
| 2030 | Credit Card Payable | |
| Equity | ||
| 3010 | Owner’s Capital | |
| 3020 | Owner’s Drawings | |
| Income | ||
| 4010 | Sales – Food | |
| 4020 | Sales – Beverages | |
| 4030 | Catering Services | |
| 4040 | Other Income | |
| Cost of Goods Sold (COGS) | ||
| 5010 | Cost of Food Sold | |
| 5020 | Cost of Beverage Sold | |
| Expenses | ||
| 6010 | Rent Expense | |
| 6020 | Utilities Expense | |
| 6030 | Payroll Expense | |
| 6040 | Supplies Expense | |
| 6050 | Marketing and Advertising Expense | |
| 6060 | Insurance Expense | |
| 6070 | Repairs and Maintenance Expense | |
| 6080 | Depreciation Expense | |
| 6090 | Bank Fees | |
| 6100 | Professional Fees (e.g., accountant) | |
| 6110 | Taxes (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.
| ASSETS | |
|---|---|
| Current Assets: | RM 126,000 |
| Cash on Hand | RM 21,000 |
| Checking Account | RM 42,000 |
| Petty Cash | RM 8,400 |
| Inventory (Food) | RM 54,600 |
| Total Current Assets | RM 126,000 |
| Fixed Assets: | RM 105,000 |
| Equipment | RM 63,000 |
| Furniture and Fixtures | RM 42,000 |
| Total Fixed Assets | RM 105,000 |
| TOTAL ASSETS | RM 231,000 |
| LIABILITIES AND EQUITY | |
| Liabilities: | RM 42,000 |
| Accounts Payable | RM 21,000 |
| Loans Payable | RM 8,400 |
| Credit Card Payable | RM 12,600 |
| Total Liabilities | RM 42,000 |
| Equity: | RM 189,000 |
| Owner’s Capital | RM 189,000 |
| Owner’s Drawings | RM 0 |
| Total Equity | RM 189,000 |
| TOTAL LIABILITIES AND EQUITY | RM 231,000 |
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
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!