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Taxes

Best Small-Business Bookkeeping and Accounting

12 Minute Read

Sales leader, manager and customer service representative are just some of the hats you wear as a small-business owner. Now add bookkeeper and accountant to that list!

Unless you’re actually running an accounting or bookkeeping business, keeping the records for your business can seem overwhelming. Everything from paying your taxes to planning for the future rides on having accurate numbers.

No one article can tell you everything you need to know about business accounting, but we put together 10 tips to help keep it as simple as possible!

10 Tips to Small-Business Bookkeeping and Accounting

Whether you’re just starting a small business or you’ve had one a few years, these easy tips will help you stay organized.

1. Know the basic bookkeeping and accounting lingo.

When you decided to start your business, you were just hoping to make more money than you put in. Now it’s time to get up to speed on common bookkeeping and accounting terms. Don’t be embarrassed if you aren’t familiar with all the technical definitions. This is the time to learn!

What is a sale? A sale is a transaction you receive cash for, also known as "money in."

What is an expense? Also called "money out," an expense is something you pay for, like supplies or rent.

Business taxes can be confusing. Get the help you need.

What is a liability? A lot of people confuse liability with expenses. But actually, a liability is something you owe money on, such as a small-business loan.

What is an asset? An asset is an item your business owns, like a printer.

What is revenue? Revenue is income your company makes on a sale. To determine your profit, subtract your expenses from your revenue.

What are accounts receivable? Accounts receivable refer to the money your customers owe you when you send them an invoice.

2. Create the three must-have documents for financial success.

Now that you know some of the key terms, you need to put them to use! There are three basic documents that will help you answer critical questions about your business. These will help you determine where to commit funds in the future and how to create your business plan. They tell you the story of what is really going on in your business.

Balance Sheet: How much is your business worth?

Your balance sheet shows the assets, liabilities and owner’s equity for your business. It’s basically a breakdown of what you owe versus what you own. Remember, assets are items owned by your company, and liabilities are things you owe on. Equity is the value of your business assets minus the liabilities; it’s basically the value you’d place on your company if you had to put a price tag on it today.

Profit and Loss Statement: Is your business profitable?

Your profit and loss statement is a summary of your revenue minus expenses for a period of time, usually a quarter of the year at a time. It shows your profits or losses at a glance for that chunk of time.

Cash Flow Statement: Where is your business’s cash going?

This statement categorizes cash flow into three types of activities:

  • Operating: How much does your business make day-to-day?

  • Investing: Are the assets you’ve purchased for your business paying off?

  • Financing: How much cash have you invested in your business? This can also reflect how much money you’ve borrowed—but we believe it’s best to operate your business debt-free. When you’re not making debt payments, you actually get to keep your profits to pay yourself!

Don’t know how to get started creating these documents? You can find free templates online, but as your business gets more profitable—or more complicated—you’ll need to consider working with a professional to manage these documents.

3. Separate business and personal expenses.

One of the most important—and often most difficult—rules to follow when running a small business is keeping your business and personal expenses separate.

That line is especially blurry when you first start out, so set up a separate bank account for your business right off the bat!

4. Track every business expense.

Since you’ll have a separate business account, use it to track every expense with receipts and a dedicated business debit card. This may seem simple but it’s super important to keep up with activity for tax purposes and profit monitoring.

5. Save important bookkeeping records.

It’s smart to keep these types of documents—like payroll and inventory management—for tax and other business purposes. A good rule of thumb to help you avoid getting caught without an important document is, if you’re in doubt, scan and save it!

  • Bank Statements
  • Credit Card Statements (But we recommend you run your business without debt!)
  • Cancelled Checks
  • Receipts
  • Bills
  • Customer Invoices
  • Customer Payments
  • Sales Receipts
  • Deposit Slips
  • Tax Returns
  • 1099 Forms
  • Payroll Documentation

Making digital copies of bookkeeping records and storing them in a designated, password-protected file on your computer is an efficient way to keep them organized and easily accessible. Or you could get an old-school file box and keep it on hand in your office. Either way, just make sure your storage system is secure and safe from the elements. (Old receipts fade over time.)

6. Keep accounting statements up-to-date.

Sending an invoice isn’t the same thing as money in your hand. That’s why accurate cash flow statements are so important. Depending on your customers, product(s), and payment system, you may be waiting on accounts receivable longer than you’d like. Without that payment from your customer, you may not have the cash you need to cover bills and other upcoming expenses. (This is a great reason to keep an emergency fund for your business!)

Keep an eye on payments coming in and regularly check for invoices that have not been paid. You may need to send out some past due notices!

7. Be prepared for major expenses.

Even with your carefully maintained balance sheet and cash flow reports, it’s hard to predict what will happen in the future. That’s why it’s always a good idea to plan for significant or surprise—or significantly surprising—expenses with a cushion of savings.

Keep a separate emergency fund for your business. Save separate emergency funds for your business and personal life. Both should give you enough cash to cover your expenses for three to six months. For your business, that extra cash can help you cover unplanned large expenses that can’t wait. For example, if you own a copy shop, what would happen if your printer broke down and you had to wait until you saved enough for a new one? Imagine all the business you would lose! But if you had the cash on hand, you could replace the printer and be back to normal in no time.

Don’t go into debt for your business—always pay cash! You’ll have less risk and your business will be profitable faster when you operate without debt. Put whatever you make back in the business, especially in the beginning, and live lean in both your business and personal life. A future without debt is worth it!

8. Get the right accounting method.

The accounting method your business uses will have rules about when and how to document revenue and expenses in your own records and in reports to the IRS. It will affect how you track everything from your balance sheets to your cash flow statements.

There are typically two types of accounting methods most businesses use:

Cash basis accounting method: This is the simplest method. Income is recorded when you receive the cash, and expenses are recorded after the bill is paid. This method gives you a real-time view of cash flow in your business.

For example, say Jane uses the cash basis accounting method and sells a shirt on Wednesday. The payment is due in 30 days, so she will record her sale in 30 days when the cash is collected. If Jane buys inventory on Wednesday and her bill is due in 30 days, she’ll record the expense when she pays her bill in 30 days.

Accrual accounting method: The IRS requires this method for businesses that deal with inventory and manufacturing. Revenue is matched with expenses regardless of when the cash is actually collected. This method can be useful for businesses with lengthy business cycles. If it takes long periods of time to collect money from a customer, the accrual method will help you see the money coming in down the road.

Let’s go back to Jane; this time, she’s using the accrual accounting method. If Jane sells a shirt on Wednesday and the payment is due after 30 days, she’ll record her sale on Wednesday—not when the cash is collected. Similarly, if Jane buys inventory on Wednesday and her bill is due in 30 days, she will record the expense on Wednesday rather than waiting until she pays her bill in 30 days.

The cash basis method is usually the best choice for most businesses. However, if you deal with inventory and manufacturing, the accrual method could be right or even required for you. Ultimately, you and your tax pro can make the decision about which method you prefer.

9. Prepare for personal and business taxes.

This is where things can get really hairy for a small business. Don’t wait until the last minute to prepare your small-business taxes. Avoid surprises and errors by preparing throughout the year for these major taxes:

Income tax: You’re required to pay income taxes based on your business structure. In some cases, taxes are paid as business income, and for others, they’re paid as personal income.

Depending on the way you’ve structured your business legally, you’ll have different tax consequences. For example, if you have a sole proprietorship, your business taxes are paid as part of your personal income tax known as "pass through" taxes. But if you have a Limited Liability Company, you’ll pay self-employment taxes and no corporate taxes. Again, this all depends on how you structured your business.

Find out what business structure is best for your small business and what the tax implications are for that setup.

Payroll tax: If you have employees, there are several steps required to file payroll tax returns. You’ll need a Federal Employer Identification Number (FEIN) and you’ll need a State Identification Number for each state your business operates in.

These taxes must be deposited either semiweekly or monthly and reported quarterly. Most new businesses deposit monthly.

Sales tax: If your business sells products, you need to collect sales tax from each one of your customers. Sales taxes vary by state, county and city. Yikes! This gets even trickier if your company sells products in multiple locations or online.

Since the bottom line with small-business tax prep is to be diligent, thorough, and in the loop at all times, talk to a tax pro to get help collecting sales tax correctly.

10. Consider hiring an accounting or bookkeeping professional—at least temporarily.

The world has become electronic and internet-based, and this is especially true for accounting and bookkeeping support. But if you use software on your own to manage your books, you don’t have an experienced set of eyes reviewing your work. This leaves a lot of room for user error and increased risk. What if you input your revenue wrong? Without a pro taking a look at your work, there’s a big chance your mistake will go unnoticed.

Sure, most accounting software platforms come with some form of support, but it’s generally technical support for troubleshooting software-specific programs. You need help of another kind. You want a solution backed not only by technical experts but also by real-world accounting and bookkeeping professionals to help ensure your books are accurate at all times.

That’s why working with a real person who can help you make smart decisions with your business pays off.

Which professionals can help you with your small business and accounting needs?

  • Certified Public Accountant (CPA): Think of them as your external chief financial officer. CPAs undergo extensive training and testing and must meet ethical and continuing education requirements as well. Many specialize in business tax preparation and planning. The more complicated your taxes are, the more beneficial a CPA’s help can be.

  • Enrolled Agent: An enrolled agent must pass a comprehensive examination that covers individual and business tax laws. They must also meet continuing education requirements to maintain their licenses, and they can represent you before the IRS if you’re audited.

  • Bookkeeper: Bookkeepers can handle a range of activities for your business, from bill payments to business activity to financial responsibilities.

You don’t have to hire a full-time bookkeeper or accountant to keep your finances organized. Outsource specific financial tasks to a tax professional who is experienced in handling business accounts.

Need more bookkeeping and accounting help?

This is a lot to keep up with! Accounting and bookkeeping for a small business is more work than most average Joes or Janes can—or want—to manage on their own. The majority of small-business owners devote anywhere from 21 to 120 hours a year to keeping up the books and taxes!(1) That’s a lot of time that could be better spent brainstorming new ideas, managing your team, and just enjoying life!

The right pro should be dedicated to saving you time and money on your taxes.

Don’t know where to start? We can put you in touch with one of our recommended Endorsed Local Providers (ELPs). Find a licensed, top-notch tax pro in your area today!

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