Accounting & Financial Management
Few topics in small business are as confusing as accounting, especially to the new business owner (also known as “bookkeeping” or “doing the books”). This section is dedicated to helping the small business owner understand accounting and provides some helpful resources.
What is Accounting?
The dictionary lists accounting as “A precise list or enumeration of financial transactions.” For the most part, that’s all that accounting is, a list of financial transactions in your small business. It’s a method for you to track the money coming into your business and the money going out.
Why is Accounting Important?
Obviously, accounting is important because you want to know if your business is making a profit. Also, the small business owner wants to be able to look at sources of income and expenses and make decisions based on that information. Using accounting software, the business owner can generate reports on “profit and loss”, “cash flow”, the “balance sheet” and dozens of other reports that can help him/her get an overall picture of how the business is doing now or in the past.
Also, many Federal and State forms require tracking of money for sales taxes, payroll, and income tax purposes. In fact, a good accounting system can make the filing of these government forms much easier and less time-consuming.
How do I Setup My First Accounting System?
NOTE: If you are not financially-inclined, we sometimes recommend you speak to an accountant or bookkeeper, especially when initially setting up your accounting system. This way, they can help you setup your accounting system properly the first time so you don’t make mistakes that will need to be corrected later in the year when filing taxes or other government forms. Our Recommended Resources section below includes resources for finding an accountant nationwide. However, with QuickBooks, the setup is usually pretty painless.
Pick An Accounting Method
The first decision to be made is which type of accounting method to choose, there are 2 choices:
The Cash Method (or Cash Basis) – this means that you count income when you actually receive it (either as cash, credit card charges or check) and your expenses are counted when you actually pay them. This is the most common method for small businesses, especially those that take immediate payment for a product or service (credit card, check, cash, etc.)
The Accrual Method (or Accrual Basis) – this means that you count income when a sale is made (regardless if you actually receive the money for it) and expenses are counted when you actually receive the good or service (instead of paying for it immediately). This method is common for larger businesses or small businesses that utilize “invoicing” and frequently deliver a product or service before being paid for it.
Choosing a Method
You are free to pick either method provided you have less than $5 million in annual sales OR you maintain inventory (in that case, then you must use the accrual method).
The accrual method is generally considered to give you a more accurate picture of your company’s financial situation but requires you to take extra steps like maintaining accounts receivable and accounts payable records. The cash method is generally easier to maintain and is the preferred method for small businesses.
Choose a Method for Recording Transactions
After you’ve decided on an accounting method, the next step is to decide how you are going to record transactions. You have basically 2 choices:
Hand-Recording Transactions — you actually hand-write each transaction in a ledger.
Software — you enter transactions in a software program which then automates many routine tasks.
By far the most popular method is software. There are dozens of accounting software packages and most of them will help you maintain your books as well as automate things like payroll and reports.
Recommended Software
- View our blog post: The Top Small Business Accounting Software
- QuickBooks Online — same features as the desktop software but available online – includes a payroll option. (QuickBooks Online Edition – Free Trial
)
- FreshBooks
Setup Your “Chart of Accounts”
After choosing a method for recording transactions, it’s time to set up your “chart of accounts”. A “chart of accounts” is simply a listing of all the various accounts in your accounting system. There are income accounts, expense accounts, asset accounts, etc.
As noted above, an accountant can be of great assistance in setting up your initial chart of accounts. Also, QuickBooks Pro and some other software programs include a “wizard” that will customize a “chart of accounts” for your business.
Learning and Maintaining Your Accounting System
Once you’ve chosen your accounting system, the next step is learning and maintaining your accounting system. Learning the system will obviously depend on what solution you’ve adopted, but maintaining the system is accomplished primarily by 2 things:
- You Have to Use the System — once you’ve taken the time and energy to setup an accounting system, you have to actually utilize it properly. This means entering every transaction, check, bill, charge or refund.
- Reconcile Your Bank Statement — the best way to maintain your accounting system is by reconciling your bank statement with your accounting system every month. This means that you compare each transaction from your bank account or accounts with your accounting system and make sure that they balance. This process alone will force you to properly account for the company’s money.
Recommended Resources
We hope we’ve given you a good overview of accounting and accounting systems; below we’ve listed some additional resources that may be helpful to you.
- Small Business Accounting — an online course from MyOwnBusiness.org.
- Recommended Book — The Accounting Game: Basic Accounting (amazon.com)
- CPADirectory.com — find an accountant nationwide