How to Do Accounting for a Small Business: Your Quick-Start Guide Bench Accounting

There are different ways to organize files, depending on what you need to store. While you could handle accounting for your small business on your own, you may consider outsourcing it to an accounting professional. If you’re using tax filing software, you may have the option to organize and store receipts electronically. To learn more, check out this guide to finding and working with an accountant. If you are self-employed, you will need to pay federal self-employment tax. This is essentially FICA and Medicare, only your payment covers both a withholding from your wage and the matching contribution from your company.

• In addition, if your business owes more than $1,000 in taxes during the year, you are expected to make estimated tax payments four times annually.
• Bookkeepers, accountants, and CPAs all bring something different to the table.
• If you’re using tax filing software, you may have the option to organize and store receipts electronically.
• There are different ways to organize files, depending on what you need to store.
• In simple terms, accounting helps you steer your business in the right direction.

Transaction Recording

• In double-entry bookkeeping, every transaction must at least affect two accounts.
• That means determining whether you’ll be accepting payments online, through a POS system, or in person.
• Using accounting software can allow you to save time when managing the books for your business.
• Since the goal of a business is to earn revenue and profit, controlling costs are important because they determine net profit.
• Business transactions are recorded in a journal (also known as Books of Original Entry) in a chronological order using the double-entry bookkeeping system.
• Small businesses may also want to consider hiring professional accountants or automating their finances with accounting software.

Experts agree that small businesses commonly fail when cash flow runs dry. Your business should implement efficient record-keeping policies and a sound financial strategy to avoid this situation. The inventory turnover ratio for a given period is calculated by dividing a business’s cost of goods sold by its average inventory. Here, the average inventory is calculated as the average of its beginning inventory balance and ending inventory balance for a given period.

Yes, many small business owners handle their own bookkeeping, especially in the early stages. However, as the business grows, the complexity of financial transactions might necessitate professional assistance. You can go with a simple bookkeeping spreadsheet that will allow you to quickly record bank and credit card transactions. This is an inexpensive method, but will be limited in financial reporting, invoicing and its ability to integrate with other systems. Technically, we would label this step as part of “bookkeeping,” but bookkeeping is an integral component of accounting for small businesses. It all starts with recording and documenting every financial transaction, from sales to expenses and asset purchases, in a clear and organized manner.

Income Statement (Profit and Loss Statement)

If you’re just looking for a place to store digital receipts, you have a wealth of options to choose from in the cloud. Box, Google Drive, Evernote, and OneDrive all allow you to store large volumes of data securely online. The IRS makes tracking expenses easier by requiring only that you keep records of bills valued at $75 or more. However, to make things simple, we recommend you get into the habit of keeping every document. Doing so will prevent you from accidentally shredding the wrong piece of paper.

Accounting Methods

Examples of assets include real estate, inventory, cash, and accounts receivable. Balance sheets list assets in order of liquidity — how easily they can be sold, small business accounting 101 consumed, or turned into cash. Your business’ debt-to-equity ratio is calculated by dividing your business’ total liabilities by its total equity. It essentially gives you a sense of how much of your business’ cash and other asset balances are debt-funded and how much is from owners’ capital infusions or business profits. Rather than keeping a running list of transactions (single-entry accounting), double-entry accounting maintains that every transaction must affect at least two financial accounts. Every transaction recorded in your company’s books has a “debit side” and a “credit side,” and debits and credits affect different kinds of accounts differently.

Basic Bookkeeping for Small Businesses

Consider using one of the best bookkeeping services to make managing your books a breeze. Essentially, the statement of owner’s equity reconciles the beginning balance sheet, P&L statement, and ending balance sheet. This less expensive option still delivers high-level accounting expertise. Accounting firms generally charge by the hour, though some analytic functions cost more than others. If you are unsure, weigh the initial costs against what a firm can save your company over time.

Cost Accounting

Proper accounting for small businesses encompasses important tasks, which we explore in more detail below. The cash basis is easier to use, but the accrual method of recording transactions gives you a clearer picture of actual revenue and expenses during a particular period. Most small businesses that don’t carry inventory choose the cash basis. Large and inventory-heavy businesses may need to use the accrual method. At the end of every pay period, the bookkeeper will accumulate employee payroll details that include hours worked and rates. From there, the total pay is determined with the applicable taxes and withholdings.

However, working with a CPA offers many benefits for LLCs and corporations. CPAs can analyze bookkeeping records, help with payroll and taxes, offer financial consulting, and represent you during IRS audits. For most small businesses, bookkeeping is a relatively straightforward task. Most of the work consists of categorizing the transactions your accounting software downloads from your bank and making sure that no transactions are missed or double-counted.