One size doesn’t fit all when it comes to accounting. The way a small business handles its books may look completely different than the bookkeeping processes of a medium or large business. Two businesses operating in the same industry and with the same target audience may have different internal operations, different accounting requirements, and different accounting rules, all because of each company’s size. Comparing large and small business accounting can help you know what to expect as your small business grows.
Volume of Accounting Activity
An obvious difference between a small business and a larger company is the volume of activity. A smaller business does less business, which generally means fewer paper invoices and electronic accounting documents to handle. If you’re still in the beginning stages of your business, you probably have fewer vendors, smaller numbers of customer accounts, and a smaller general ledger chart of accounts. From an accounting standpoint, the smaller volume generally means you need less expertise and maintenance to handle the books. Your financial statements are simpler to compile, read, and explain. Your general ledger is cleaner, and you may be able to get by without professional accounting help.
As your business grows and your volume increases, things get a little more complex. You may find it takes a lot more time to keep up with the increased number of invoices and documentation. You’re managing more vendors and customer accounts, which adds up to more paperwork and potentially complex accounting situations. Bringing in an accountant or bookkeeper when business starts to pick up can help you stay on top of your books. Your accountant can also help you understand the complexities that often come with more business.
Cash vs. Accrual Accounting Method
Businesses use one of two accounting methods: cash or accrual. Cash-basis accounting uses fewer rules and offers an easier approach to keeping your books. This method allows you to record transactions as cash changes hands, which is fairly straightforward. Accrual accounting requires you to record transactions as soon as you recognize them, regardless of cash flow. For example, you must record a sale as revenue even if you haven’t received payment. Smaller businesses have the option of using cash accounting for simplicity or can instead opt for accrual accounting.
Larger companies, including all companies listed on public stock exchanges, must use the accrual method of accounting. The accrual method involves more rules that are technical in nature and may require ongoing education to fully understand. If you’re a small business owner, you might opt for the cash method so you can handle accounting functions yourself without hiring an accountant. Your accounting generally takes less time without the need for ongoing education just to keep up with all of the rules and regulations.
Small Business vs. Large Business Financial Reporting Requirements
The main reason the two different methods of accounting exist is for reporting purposes. The accrual method provides better information to external parties about your company. But the information gathered from the cash method works for your small business because you have relaxed reporting requirements. Your small business typically deals with a smaller number of financial institutions and external investors than larger businesses. Public exchanges and government agencies also impose lower reporting requirements. The income tax reporting isn’t as intricate and involved, which simplifies tax preparation. Your small business has more options for tax preparation software that might not work for larger companies that require customizations to accommodate their specific businesses and industries. You still need to record and store financial data for your small business, but the lower reporting requirements make the job easier to manage without professional help.
Big Company vs. Small Company Internal Controls
A small company runs into more challenges establishing internal controls over financial information than a large company. Internal controls include delegating and separating duties to cut down on the risk of fraud or accounting errors. Larger businesses with more employees have more opportunities for separating key duties of the larger number of personnel available. For a small business, one individual may handle multiple processes that normally go through multiple people because of the limited number of people on staff. For example, a single employee in a small company may be able to authorize charges and record the accounting entries, functions that larger companies typically separate. Because of the overlap in duties, owners of small businesses may need to take a more active role to look out for fraud, errors, or inefficient accounting practices.
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