How is accounting done for small scale businesses in Latvia?

Bookkeeping for Small Business in Latvia

Small scale enterprises must handle accounting works according to existing regulations while running a business. Any mistake or irregularity, even not on purpose, at this point may cause severe penalties in the future. So, while accounting procedures are handled in small scale enterprises, professional assistance must be received or it must be ensured that all these are handled by professionals. You can find detailed information about this topic in our article. How is accounting done for small scale businesses? Why is it so important to find a local accountant? All details are in our article.

An Overview to Accounting

Recording and editing financial transactions as well as related bookkeeping for a small business fall under accounting. All accounting transactions mentioned here are handled by an accountant.

Accounting is the simplest and easiest way of exhibiting a business’s profitability situation. Accounting has high importance to see incomes and outcomes clearly, realize any potential financial problem proactively, take necessary precautions and solve crisis.[1]

An accountant, who is in charge of accounting works, handles the following processes in general:

  • >>> Registering all transactions, bookkeeping
  • >>> Making payments
  • >>> Issuing invoices
  • >>> Managing accounts
  • >>> Preparing financial statements

Bookkeeping for small business and accounting processes are generally confused at this point. Yes, these concepts are similar, but bookkeeping is the fundamental one for accounting. Data collected via bookkeeping is analyzed in detail with all transactions of accounting and deductions are made about the process.

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How Is Accounting Made for Small Businesses?

There are some steps to be followed while accounting is being handled for small scale businesses. When these steps are followed, it can be said that accounting can be made flawlessly and duly. These steps can be listed as below:

Bookkeeping for Small Business in Latvia

1) Collect Information about Business Accounts

Bookkeeping for small business is not all about recording money coming to a bank account and going out from a bank account. It can be expressed as recording some particular financial transactions (sales, payrolls etc.) about a business.

There are 5 types of business accounts:

  • Assets: Cash and other resources owned by a business (debts etc.)
  • Liabilities: Liabilities that business must fulfill and money that business must pay
  • Incomes: Money earned by a business through selling
  • Expenses: Money leaving a business so that some services are received (salaries, public services etc.)
  • Equity: Value left after liabilities are deducted from assests, share of business owner (undistributed shares, stock etc.)

During bookkeeping for small business, a transaction must be recorded to a suitable account. To do so, accounts must be adjusted. There are some account types commonly used in accounting transactions for small businesses.

2) Determine How You Will Keep Your Accounts

For small scale businesses, recording accounting plans in accounting procedures is very important. In the past, account plans were registered to a physical notebook called general ledger (GL). Yet, in today’s technologically developed world, physical notebook use is almost disappeared and instead, different software is nowadays used.

There are 3 main methods to create a GL. These are:

  • >>> Desktop bookkeeping software
  • >>> Cloud based accounting software
  • >>> Electronic table software

In order to use desktop bookkeeping software, a down payment must be made. After this down payment, you own the related software and you can start using it freely. In Cloud based software, monthly payment will be necessary. In spite of that, it can be said that related cost would be lower compared to desktop software.

The cheapest method in bookkeeping is electronic table software. E-tables provided by Google can be used without paying any money. Yet, don’t forget the fact that creating your general ledger in electronic table method may cause a disaster for you.

Besides the methods mentioned here, you can make an agreement with an accountant and let him/her keep your accounts. This way, you won’t struggle with technical topics and prevent any potential risk.

3) Determine the Accounting Method You Will Use

If you want to handle your accounting processes instead of getting an external support, firstly you have to make a choice. Will you use single entry bookkeeping method or double entry bookkeeping method?

Single entry bookkeeping is where each and every transaction is entered once. It is a method in which it is sufficient for you to enter a payment you received from one of your customers into assets column. Being a very simple method, single entry bookkeeping can be preferred if you don’t own any inventory to present or you don’t enter cash transactions into the related area that much frequently.

Bookkeeping for Small Business in Latvia

Double entry bookkeeping is about entering a transaction as well as its consequence. Developed based on Newton’s “cause and effect” principle, this method requires two entries for each transaction. Debts and payables.

Double entry bookkeeping is more difficult than single entry one. But, don’t let this situation intimidate you. Because, with double entry bookkeeping, your accounts become balanced and you can realize potential changes in advance. Besides, many accounting software directs you towards using double entry bookkeeping. With software used in bookkeeping for small businesses, you can apply this method.

4) Record Every Transaction

After bookkeeping is implemented, every transaction must be recorded to the correct account. If necessary attention is not paid on this topic, mistakes may occur in accounts and balances may not be compatible with each other. This means not being able to be closed.

To record transactions, firstly select the accounts where debts and payables will exist. Then, record the transactions into these accounts.

For example, let’s assume that you made cash payment for a system worth 1.000$. This transaction affects both your asset account and cash account. Since it decreases the value of your cash account and increases your asset value, entries must be done accordingly.

5) Balance the Book and Close It

The last step for small businesses in accounting is balancing and closing the book. In general, quarterly or annually sums of debt and credit calculations should match. Matching means that these accounts are in balance.

If you have 3.000€ debt (increase) and 5.000€ credit (decrease) in your account in a month, cash sum is adjusted as 2.000# decrease. With this transaction, you get “adjusted account balance” at the end. Adjusted balances must follow the equation below:

Assets = Equity + Debts

If your accounts follow this equation, your transactions are problem-free. If not, you must review book records. You must keep reviewing and correcting until your accounts are balanced and then you must close your accounts.

6) Create Financial Report

When you balance and close your books, you have to create financial reports in order to understand what your results mean. With financial reports, you summarize your business’s cash flow and can see your financial status closely. This way, you can take required decisions regarding your company faster. Common financial reports for small scale enterprises are below:

Bookkeeping for Small Business in Latvia

  • Profit-Loss Statement (P&L): Also named as income statement, this report makes it possible to distinguish between a business’s income, expense and costs. With profit-loss statement, you can compare your expenses and make different financial estimations.
  • Financial Statement: With this report, you can summarize your business’s equity, assets and liabilities in one period. Your assets value must be equal to equity value plus debts value. Financial statements makes it possible for you to understand if your business has the ability to expand and if it is necessary to reserve some cash or not.
  • Cash Flow Statement: This is similar with P&L statement but this one does not include items other than cash like amortization. With this statement, you can see where your business made money, to where money spent and your business’s ability to pay invoices.

With software to be used in accounting processes for small scale businesses, these reports can be prepared in real time. This way, in case of an urgent financial decision is required, you can benefit from these reports.

7) Transactions According to a Plan

At least once a week, record incoming invoices, related payments, purchasing items and sales into your book. Additionally, get into the habit of balancing books and closing them on a regular basis. Don’t forget that you better do these things not at midnight but in the morning when you are awake and energetic.

8) Keep the Records

Keep your transactions, definitely. So, you won’t lose time chasing last month’s invoices. Additionally, you can also prevent getting into trouble due to not following legal requirements. This topic about accounting for small scale businesses is very important.

Why Is Small Scale Business Accounting Important?

Taxpayer Registration for LLC in Latvia

Bookkeeping for small businesses ensure that you see all incomes and expenses of a business closely, understand your business’s financial status clearly and take more accurate decisions.

Bookkeeping for small business helps you understand your past transactions and prevent potential problems in the future. For example, in case of a conflict with one of your clients or an audit by government officers, you can benefit from your book and prevent potential tax penalties.

Accounting also save your time on top of handling your financial recording. Many transaction from invoice payments to payroll processes can be completed in a simpler and faster way with bookkeeping.

Read Also: Things You Have To Pay Attention While Investing in Latvia

Find a Local Accountant

With the information shared until this point, you had an idea about accounting. In Latvia, there are many expert and experienced accountants to keep financial records and handle other accounting processes. You can contact one of the accountants suitable for you and providing service in the same region with your business and start working with him/her. About this, we are ready to help you as “Invest Latvia” with our expert accountant team.

Accounting is a serious business and all transactions must be completed according to existing rules and regulations. Thus, pay sufficient attention while choosing an accountant. Furthermore, learn about the software and methods that are used by the potential accountant. Make your decision after evaluating all these.[2]

Tax Declaration

Seasonal tax refunds are one of the most important expectations of any small scale business. Accounting for small businesses makes financial transactions more proper and faster and it also makes it possible to benefit from tax refund. At this point, it is very crucial that tax declaration is submitted by a professional accountant. Except an important advantage like being able to benefit from tax refund opportunity, potential risks can also be prevented in this way.

How Should Accounting Services for Small Businesses Be?

Bookkeeping for Small Business in Latvia

There are multiple software and options to be used in accounting services for small businesses. In order to understand which method is the right one for you, the following things must be evaluated and considered:

  • >>> For which transactions do you need accounting services? Do you request any extra service rather than bookkeeping? Do you need tax services? Or, do you just need monthly or weekly settlement?
  • >>> You need to allocate some budget for accounting services. At this point, you have to determine your budget, consider the fact that accounting service fee may vary and estimate how all these will affect your business.[3]

Our experts, who have serious level of experience in this field, can handle very complex accounting transactions on behalf of you in a professional way. On top of that, you won’t experience any surprise cost. Regular reports regarding transactions are shared with you and it is ensured that you have up-to-date information about accounting transactions of your business on a regular basis. You, on the other hand, get the chance to run your business with peace in mind in a more transparent way.

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Our company, which provides accounting services for small businesses, professionally handles accounting processes of many foreign companies running business in Latvia. With our professional services, you will understand your financial status better and accordingly, you will make more accurate and right financial decisions. You will stay away from additional costs that may occur as a result of a mistake and you will receive correct information regarding the potential of your business. In order to benefit from our expertise and experience, contact us.

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Igors Krumins

Igors Krumins continues his activities as a commercial and international lawyer within the body of “Jurmala Invest”. He has more than 10 years of experience, especially in the investment sector, and has provided consultancy services to numerous companies with his legal expertise. He successfully completed his undergraduate studies at Baltic International Academy and graduate studies at Latvijas Universitate. Apart from his native Latvian language, he can also speak Russian and English fluently.