Small Business Accounting 101

When You’re New to the Basics of How Money Works

Small business owners have to wear many hats, and accounting is a big one. This small business accounting guide shows you the basics of — and beginner steps — accounting for your business in straightforward terms so you can keep your financial stuff organized, make better decisions about money, and stay out of trouble with the tax man.

Why accounting matters

It is the language of your business. It lets you know if you are profitable, how much cash you have available and where money is going. These records will assist in planning, pricing, cost management, as well as help to establish credibility with financiers or partners. If you are a new owner, basic accounting knowledge prevent surprises and help you be more confident when looking at numbers or talking with an accountant.

Basic principles that any beginner needs to know

• Revenue and expenses: The revenue is the money you take in from sales or other services rendered. Expenses are what you lay out to run the business. Both are tracked in order to determine profit.
• Assets and liabilities: An asset is something you own (cash, equipment, inventory). Liabilities are the debts you owe (your loans, unpaid bills). Owner equity is the balance of assets after subtracting liabilities.
• Cash basis vs. accrual basis: The cash basis of accounting records income and expenses when cash is exchanged; the accrual method, which I prefer for municipalities, reflects them when they are earned or incurred. Accrual basis of accounting recognizes income when earned and expenses when incurred. Select the option that applies to your business size and reporting requirements.
• Chart of accounts: A categorized list of accounts used to track income, expenses, assets, liabilities and owner’s equity. A transparent chart of accounts forms the basis for sound bookkeeping.

Setting up your system

If you stick to a straightforward, consistent system, even that can work. Begin with a chart of accounts that is tailored to your business — categories for sales, cost of goods sold, payroll, rent and utilities are good starting points. Choose whether you will use a cash or accrual method of accounting, and then stick to it in order to keep things consistent.

Open a business bank account and if it makes sense, get a business credit card to keep your personal and business purchases separate. This can prevent mistakes from your reconciling accounts and generating reports to be used by others.

Daily and monthly bookkeeping tasks

Good habits help to keep the books from becoming backlogged and inaccurate. Keep track of sales, invoice entry and receipt capture daily or weekly. Scan or take pictures of receipts and link them to records. On a monthly basis, compare bank statements and credit card statements to your books to find missing or duplicate transactions. Go through your unpaid invoices, prompt for overdue payments. Regular bookkeeping helps to keep your ledgers up-to-date and it lowers the stress level when tax season comes.

Managing invoices and expenses

Create and send professional invoices, to find out what you are due when. Post incoming payments in a timely manner and on the appropriate invoices. To keep track of expenses, classify purchases and retain supporting records. Use basic bookkeeping practices: describe it well, to the right vendor, in the right account. These habits increase the accuracy of reporting and simplify the process for determining what expenses are deductible.

Understanding financial statements

Three important financial statements provide a complete view of the health of your business:

• Income statement (profit and loss): Displays revenue, expenses and profit for a period of time. Use it to know profitability, trends.
• Balance sheet: A view of assets, liabilities and equity at a specific date. It reveals liquidity and solvency.
• Cash flow statement: Monitors cash coming in and going out. Without positive cash flow, even companies that are profitable can run into problems.

Reviewing these statements on a regular basis enables you to identify trouble early — eroding margins, growing expenses or cash shortfalls — and make better decisions about hiring, inventory or investing.

Taxes and compliance basics

Keep great records for ease of tax filing and minimal risk of audit. Keep track of income, payroll, sales tax collected and deductible expenses. Get a handle on deadlines for estimated tax payments, if applicable, and payroll tax deposits if you have employees. It’s much easier to file accurate tax returns and collaborate seamlessly with a professional tax preparer or an accountant if you have organized books all year long.

Most common mistakes and how to avoid them

Co-mingling personal and business money: This leads to confusion and tax headaches. Keep accounts separate.

• Procrastinating with the bookkeeping: Playing catch-up for months of missed transactions is an invitation to mistakes. Schedule regular bookkeeping time.
• Bad records: Lost receipts can remove deductions and raise doubts. Scan and store receipts promptly.
• Neglecting cash flow management: Profitability is not synonymous with liquidity. Instead forecast cash needs and keep a cushion.
• Handle these errors swiftly with straightforward procedures: A consistent bookkeeping schedule, labeled folders for receipts and monthly financial check-ins.

When to get professional help

There’s more to it as your business expands. If you need assistance with payroll setup, tax planning, complicated compliance issues or strategic financial forecasting, consider hiring a pro. An accountant could help establish scalable accounting systems and offer guidance for structuring finances to be tax-efficient and grow efficiently.

Practical next steps for beginners

1. Develop a simple chart of accounts that is tailored to your business activities.
2. Establish a routine: or weekly for its transactions, monthly to reconcile, monthly to review financial statements.
3. Separate business and personal accounts.
4. Save scanned versions of receipts and documents.
5. Follow money flows and save up a little for your yet unborn children.

Conclusion

Here is a small business accounting guide with basic accounting and beginner accounting practices that you can do as a small business owner. Through regular bookkeeping, a clean chart of accounts and consistent reviews of financial statements, you can even create an accurate picture of your business’s finances. These habits help you reduce stress, make better decisions and protect your business at tax time. “Start small, do it and be consistent at it and you will see your accounting system grow with your business.