With the increase of non-English speakers arriving in English-speaking countries, there is a growing need for language schools. So, setting up a school can be a lucrative business. But before you take the plunge, you must understand accounting basics.
Open a Business Bank Account
Once you have formed a legal entity by creating a business structure and registering for taxes, you need to open a business bank account. That will separate your personal assets from the assets of your company. By having a business account, you will protect your personal assets. It also makes bookkeeping and tax filing much more straightforward.
Record All of Your Expenses and Income
It’s vital you record all of your expenses and sources of income once your language school is operating. That allows you to understand the financial performance of your business. Keeping detailed and accurate accounts also makes annual tax filing much simpler. Many business expenses are tax-deductible, so ensure you keep receipts too.
Develop a Bookkeeping System
Although bookkeeping is part of the accounting process of any business, it does differ from accounting itself. While bookkeeping is the daily process of recording your transactions, categorising them, and reconciling bank statements, accounting is a high-level process that looks at the progress of your business by making sense of the bookkeeping data.
When your language school becomes big enough, it is best to hire an in-house bookkeeper or accountant to handle your school’s accounts and financial data. The bigger your business grows, the more it will be helpful to employ a high-level accountant like a CPA. Certified Public Accountants are some of the most highly-qualified accountants available. They will have studied CPA exam study materials to pass the rigorous CPA examination, and they are required to continually keep up-to-date with all the latest laws, rules, and processes of accounting.
There are two bookkeeping methods you can use for your language school business. These are:
- The Cash Method: With this method, you record revenues and expenses at the time they are received.
- The Accrual Method: With this method, revenues and expenses become recognised when transactions occur, even if the cash is not actually in or out of your bank account. The accrual method requires the tracking of receivables and payables.
Familiarise Yourself with Basic Accounting Documents
Even if you hire an accountant to handle your language school’s finances, you must understand basic accounting principles so you can be on top of your business’s performance and financial health. Become familiar with essential documents like:
- Income Statement: This shows your profitability and tells you how much money your company has made or lost.
- Balance Sheet: This shows your business’s financial standing at a specific moment in time, and your business’s retained earnings.
- Cash Flow Statement: This shows how and where you are receiving and spending money.
- Bank Reconciliation: This compares your cash expenditures with your overall bank statements to help you keep your records consistent.
Set up a Payroll System
Unless you’re running a one-man-band language school, you will be hiring employees. So, you need to set up a payroll system to ensure your employees get paid on time, and the necessary deductions become made. For instance, you will need to deduct payroll taxes. It would help if you also created a payroll schedule. Various accounting software packages can help you to organise your payroll system. Alternatively, you can hire an accountant to handle payroll for you. If your language school employs lots of people, it is best to get a professional to deal with the payroll aspect of your business.