A small business is a completely different type of entity than a medium or large business. Even if two differently sized businesses cater to the same customers in the same industry, they operate different internally, do not have the same requirements, and can even follow different accounting rules.
An obvious difference between a small business and a larger company is the volume of activity. A smaller business generally has less paper invoices and electronic accounting documents to handle. It normally deals with less vendors, distributes to less customers, and has a smaller general ledger chart of accounts. From an accounting standpoint, this requires less expertise and maintenance. The financial statements are simpler to compile, read, and explain. The general ledger is cleaner and requires less-professional accounting help as a smaller business is less complex.
Cash vs. Accrual
A major difference in the accounting of a small business and larger business is the accounting method. Larger companies, including all companies listed on public stock exchanges, are required to use the accrual method of accounting. A small business has the option to implement the accrual method or cash method. The accrual method is more technical, requires ongoing education to understand, and has substantially more rules to follow. Therefore, a small business using the cash method has the ability to perform more accounting functions without the need for professional help. It also spends less on ongoing education and takes less time performing bookkeeping functions.
Financial Reporting Requirements
The main reason the two different methods of accounting exist is for reporting purposes. The accrual method theoretically provides better information to external parties regarding a company. However, the information gathered from the cash method is fine for a small business because it has less reporting requirements. Your small business will likely deal with a fewer number of financial institutions and external investors. Public exchanges and government agencies also impose lower reporting requirements. The income tax reporting is not as intricate and involved, meaning a small business can utilize tax preparation software not compatible with larger companies. Although data and information is required to be maintained, the level of reporting is lower, making the management of requirements easier without the help of an external party.
A small company runs into more challenges establishing internal controls over financial information than a large company. Internal controls include the delegation and separation of duties so individuals have less opportunity to commit fraud or accounting errors. In a larger business with more employees, key duties can easily be separated because there is the personnel available. For a small business, one individual may be required to handle multiple processes that would be delegated if more people were available. For example, an employee may be able to authorize charges and record the accounting entries, two functions that should be handled by different people. This simply means more of the accounting duties are condensed to a few individuals, and business owners should be involved in ensuring processes are effective.