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The beginner's guide to small business accounting

a guide to small business accounting

As a new small business owner, you’ll certainly be faced with a plethora of tasks. Whether you create a website, market to your customers or manage your accounting—the last task might be the most daunting of them all. It’s easy to imagine why when you think of all of the responsibilities that come with it. I’m here to show you there’s no need to fear. The following guide makes small business accounting easy to understand, regardless of your prior knowledge (or lack thereof).

Below, I will walk through the basics of accounting, from opening up a bank account to keeping track of your earnings and expenses to staying organized and more. And even if you do decide to hire an accountant to manage all of this for you, it’s still crucial that you understand the basics yourself. Doing so will allow you to determine how your company can grow and prosper, starting today.

What is small business accounting?

But first, what is accounting? Accounting is one of the most important elements to running a successful business - on top of being a legal obligation. It can be defined as the process of tracking, measuring, and analyzing your financial information in order to understand the ins and outs of your business - from where your money is going to who has control over it, and other pertinent materials.

How to do accounting for your small business

01. Open up a business bank account

After legally registering your business with an official name, this is the next important step. (And if you don't have a business name yet, it's time to set one in place. Consider using the Wix Business Name Generator to help you create yours.)

LLCs, partnerships, and corporations are legally required to have a separate bank account for business. On the contrary, sole proprietors are not, but it’s definitely recommended.

When you start a business, it’s a smart idea to separate your personal life from your business life. Doing so will allow you to easily keep track of your expenses and income, which will make filing taxes and your other records a clean and easy feat. Following this procedure also enables you to get a business credit card as well as put away money for your tax withholding (more on this below).

Before you open a bank account, make sure to do some research about all of the different options. Compare fee structures, savings opportunities, and other factors specific to your type of business. Then finally, check with your most advantageous bank option which documents you’ll be required to present at your initial account opening appointment. This could be anything from your registration documents, to license, business name, and more.

02. Keep track of every transaction

In order to keep track of your finances, having a daily record of your transactions is crucial. This is done through a process known as bookkeeping, which is recording your purchases, sales, receipts and payments on a day-to-day basis. While doing so, categorize each transaction into related buckets that are part of the overall income statement and balance sheet for the month.

For American-based businesses, the time to record each transaction depends on which accounting method you use: cash or accrual.

  • If you use the cash method, record revenues at the time cash is received and expenses when cash is paid.

  • If you use the accrual method, record revenues when they are earned (even if the cash has yet to be received), and expenses concurrently.

Another outcome of bookkeeping is being able to perform a monthly bank reconciliation. This is the process of making sure that everything you’ve recorded in your records as cash in a given month matches your bank statement, and that the total is the same. If not, you will need to adjust them accordingly. Many software solutions are available to help you speed up and partially automate the bookkeeping process, such as Intuit Quickbooks, Expensify, and Xero.

Zoom in on your expenses: Out of all the transactions, expenses need specific attention. This is because the IRS requires that you keep a record of your receipts for anything over $75 - although it’s strongly recommended that you hold onto all of your receipts. Applications and websites like Shoeboxed and Wave allow you to organize all of this electronically. When organizing your expenses, place them into particular categories in order to receive the best benefit on tax write-offs and credits. These include meals, entertainment, travel, vehicle, and gifts. Another category is home office, as in if you use a portion of your home as an office, you’ll be able to benefit personally by saving money on utilities, bills and transportation.

how to track business expenses when doing small business accounting

03. Create the proper financial statements

Bookkeeping will allow you to track your revenues and expenses daily, but it’s only a small part of the entire accounting process. Accounting also involves interpreting those numbers in order to receive investments, grow your business, and have better knowledge of how you’re spending your money. Brace yourself, because you’ll need to prepare financial statements.

Financial statements include your balance sheet, income statement (also known as your profit and loss statement), and statement of cash flows:

Balance sheet: A balance sheet includes your companies balances at a specific time for assets (ex. patents and machinery), liabilities (ex. loans), and equity (ex. stocks). As you’ll add to each of these components, it’s important that this statement always balances (hence, the name) according to the following equation:

Assets - Liabilities = Equity

Income statement: This is a summary of your income and losses recorded over a period of time (monthly, quarterly, or annually). It’s commonly presented in two categories: Profit (revenues and gains), and losses (expenses and losses). When you subtract your losses from your profit, you’ll end up with a net income/loss.

From this statement, you’ll be able to easily calculate your gross margin, which will enable you to see how much you’re earning after your biggest expenses per product or service. In the equation below, cost of goods sold includes all the expenses directly related to getting your product or service ready for market:

Gross Margin = (Total Earnings - Cost of Goods Sold) / Total Earnings

Statement of cash flows: Many small businesses run out of cash because they do not properly track it. A cash flow statement enables you to have more control and knowledge over your cash coming in and out by showing how changes from the previous two financial statements affect your cash. In order to create one, you’ll need to split your cash into three buckets: Operating, investing, and financing. It will also need to factor in things such as sunk costs.

04. Set up payroll services

If you plan on hiring employees and/or independent contractors (freelancers), you’ll need to establish a plan for paying them a salary, benefits, and withholding the proper taxes. And this is also the case for running a one-person show, as you’ll be the sole independent contractor. To do so, set up a schedule of when payroll will go out, how much you’re paying each person (including yourself), and make sure to file the correct paperwork. In the U.S., for example, most freelancers file form ‘1099s.’

05. Understand taxes

Taxes are financial charges that businesses and individuals must pay to the government to fund public expenditures. A breakdown of some of the most important small business taxes will help you understand this better:

Income taxes: For most small businesses, you’ll claim taxes on your personal tax return. This is the case in the U.S. unless you file as a corporation. Corporations are the only business structures which are taxed separately from their owners. So, if you aren’t a corporation, it’s very important for legal reasons that you withhold taxes from your income in order to be able to pay them when required (typically on a quarterly basis).

Sales tax: For each item or services you sell, it’s your responsibility to charge your customers the appropriate percent of sales tax based on your place of establishment. Then, you’ll need to keep track of those collections and submit them to the IRS in a timely manner.

Import taxes: These are what you will pay if you’re selling goods purchased from other countries. Here’s a helpful tool to calculate import taxes.

Overall, tax obligations are highly specific to your business and are a very complex process. To make sure that you’re doing it properly, you can begin by reading up on the many IRS tax topics for small businesses here. Afterwards, you may either file yourself or decide that it’s more beneficial for your time and current tax knowledge to hire a tax accountant to prepare your tax returns for you.

how to manage your taxes when doing small business accounting

06. Evaluate your business’ success over time

With the knowledge of these financial statements and processes relating to your company, you'll be able to have a much more fluid understanding of every component that goes into your business’ performance.

While noticing patterns and spikes, you’ll be able to make informed decisions about where you’ll spend your money in the future. For example, if you manage your own online store, a small choice you might make is switching vendors to a less expensive one after seeing how much you’ve been overpaying. A bigger choice is to create financial projections, then base your investments and use of resources like retained earnings off of those goals. All in all, keeping a close eye on your business’ wallet will allow you to lead your organization more efficiently.

07. Consider hiring a professional

By getting your feet wet here, you may also decide that you don’t want to go for a fully immersive swim. It could be that your business is growing and doing your own accounting isn’t the most efficient use of your time. Instead, you could hire someone else to do it for you, such as an accountant, bookkeeper, or CPA.

A CPA is a certified public accountant who has passed rigorous exams to prove their knowledge of financial statements, taxes, and advisory services. Hiring a helping hand can do wonders for you, from saving you money and time doing taxes, to helping improve your chances of receiving funding and loans from investors and banks. It’s possible to hire someone part time, such as during tax season, or full time to work across all of your needs (chief financial officer, accountant and bookkeeper). Depending on your budget and the complexity of your business, costs and necessities of these will vary.

08. Be organized and updated

Whether you decide to hire outside help or not, it’s important that you understand your part in this big responsibility. Even with a hired accountant, you’ll still need to organize your time and resources appropriately. Provide the proper receipts and go over your books regularly. Do so by setting aside an allocated amount of time to tend to this every week or month in order to make it a priority.

Also, you’ll need to decide on how you’ll get paid by customers. Do you accept cash, credit cards, or something else? And will you require a payment deadline of two weeks or 30 days, etc.? Stick to an agreement and follow-up on invoices to ensure that payments will be received.

Small business accounting software

To make your life easier, Wix allows you to create both invoices and price quotes from your website's dashboard so that you can collect payments from your customers in just one click. Alternatively, you can create invoices using Wix’s free invoice generator. These tools will help you keep your finances organized and make it easier when it comes to tax reports and other accounting needs.

On top of doing the work, stay updated on the constantly evolving financial trends and laws that will affect your business. You can check authorized, government websites like the IRS for this information.

Overall, with these steps you’ll certainly be prepared to take ownership over your accounting needs. After all, you’ve already set up your own business, which means that you are both motivated and capable of doing so much more.

By Jennifer Kaplan

Community Writer

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