In business, you must keep records of your transactions in your books. Your accounting books provide a place for you to review your business’s income and expenses and see where you stand financially. By keeping your books organized and up-to-date, you can take control of your finances and make smart business decisions. But before you can do any of that, you need to learn how to set up accounting books for small business.
The thought of recording all of your business transactions may seem daunting. But, recording transactions doesn’t have to be a difficult task. The more you prepare your books, the easier recordkeeping will be.
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To help ensure your recordkeeping goes smoothly and your books are in shipshape, follow these seven steps for setting up accounting books for small business.
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First order of business when setting up your books is to choose an accounting method. Here are the accounting methods you can choose from:
Cash-basis accounting does not require extensive accounting knowledge. With this method, record the transaction when money changes hands. That means you record income when you receive payment. The cash-basis method only uses cash accounts (e.g., expense, income, etc.).
Accrual accounting requires the most accounting knowledge and is more time consuming for small business owners. With accrual, you must record income when your transaction takes place, with or without the transfer of money. And, record expenses when you’re billed. The accrual method uses more advanced accounts and allows you to record long-term liabilities.
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Modified cash-basis, or hybrid accounting, is a mixture of accrual and cash-basis accounting. Like the cash-basis method, you record income when you receive it, and record an expense when you make a payment. Modified cash-basis accounting uses both cash and accrual accounts.
Manually recording transactions by hand is the most time-consuming option for recording transactions. However, it is the cheapest solution for small business owners. When you record transactions by hand, manually account for each transaction and calculate totals.
Hiring an accountant frees you from managing your own books and making common accounting errors. It is the least time-consuming option but also the most expensive. If you hire an accountant, they will compile financial statements and calculate totals for you.
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Accounting software is the best of both worlds when it comes to difficulty and cost. Accounting software is a good option if you want to streamline accounting processes and save time without having to pay the price of having an accountant do everything for you. Not to mention, you don’t have to worry about calculating totals yourself since the software handles it for you.
Your chart of accounts, or COA, lists all of the accounts in your financial statements and breaks your money down into certain categories. A COA shows you all of the money going into your business as well as all of the money going out.
To break down accounts even further, you can use sub-accounts (e.g., Product Sales) to organize transactions. As your business grows, you can add other sub-accounts to your COA.
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Mixing personal and business funds is a huge no-no. To steer clear of accounting blunders, inaccurate tax filings, and overspending, open a separate bank account for business.
Opening a business bank account not only helps you keep your records organized, but it also can create a clear audit trail for your company.
Your business can’t grow if your customers don’t pay you. To ensure you get paid for your products or services, establish a clear customer payment policy.
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If you sell to customers on credit, you’ll need to send out invoices at a later date after providing your goods or services. And, determine invoice payment terms, such as forms of acceptable payment, when payments are due, where to send the payment, and late fees.
Tracking expenses is a crucial part of accounting. It helps you keep your books in order. Plus, you’ll thank yourself for keeping track of expenses come tax time.
The last thing you want to do is put off recording transactions in your books. Letting transactions pile up can lead to disorganized records, mistakes, and a whole lot of unnecessary stress.
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To simplify your bookkeeping responsibilities, create and stick to a schedule or accounting cycle. Your schedule begins with your starting account balances and ends when you close your books.
Write out the steps to your schedule or cycle and set time aside each week, month, etc. to go through them and update your records. To take things a step further, consider setting reminders for yourself so you know when you need to go through your cycle and update your books.
Looking for an even bigger guide to setting up your small business’s books? We have just what you need. Check out our FREE guide, Setting up Your Accounting Books for the First Time, to help take the stress out of getting your books in order.
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Get up and running with free payroll setup, and enjoy free expert support. Try our payroll software in a free, no-obligation 30-day trial.The good news is that when you learn how to keep books for small business, it makes important decisions easier and minimizes preventable financial mistakes.
Good bookkeeping—that is, the record keeping of your business’s financial information—organizes your data, files, routines, and workspaces (which, depending on what you do, can take you anywhere). The benefits are major:
Sound like things you want? Then you’re ready to learn how to keep books for small business. Start by implementing these 13 bookkeeping and accounting fundamentals.
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First, you’ll have to expand your definition of the word “accounts.” In bookkeeping, accounts are categories like income, expenses, assets, liabilities, or equity. Accounts also are called journals. In this article, we’ll continue to use the term accounts for simplicity.
Another concept to familiarize yourself with is the idea of double-entry bookkeeping. Double-entry bookkeeping is the discipline of recording every transaction twice—once for where the value came from and again for where it went. (We cover double-entry bookkeeping in more detail further down in this article, so hang tight.)
Most businesses use double-entry bookkeeping because it provides a second layer of verification and documentation. This gives you a second trail to follow when eyeballing discrepancies, looking for trends, and thwarting fraud.
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For even more helpful context, read our spiffy glossary of bookkeeping and accounting terms, which goes more in depth about common words and processes that you may use as you start to dive into the financial side of running your business.
Experts at the U.S. Small Business Administration (SBA) say that using a business bank account gives your company personal liability protection, some seriously next-level professionalism, preparedness in the form of credit, and purchasing power. It’s also important to keep your personal expenses separate from your business expenses for reporting and liability reasons.
To find the best bank account for your business, look for more benefits than just low fees (as tempting as that may be, because who likes fees?). Find an account that gives you relevant, immediately applicable perks that map straight to your goals. For example, monthly minimum fees may be best for businesses with high volumes of transactions but not those in a retainer-based business with few clients.
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Next up? Deciding how you’ll organize your records, the way you’ll keep track of new daily transactions, and a routine (on a cadence that you can realistically stick to) to help you stay on top of your business’s money.
So…you may notice spreadsheets aren’t listed as a viable choice. Spreadsheets are simple, free, and seem like a reasonable choice for a new business or adventure into the gig economy, right?
Well, not quite. Spreadsheets may be an okay choice as a temporary fix for having absolutely nothing (if that’s you, we see you—you can use the templates that we created for your invoices, income statement, and balance sheet), however:
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If you’re still using Google Sheets or Excel and are feeling like you don’t know what the heck is going on with your business’s finances, it may be time to upgrade to software that gives you relevant, actionable information.
Whatever bookkeeping software you choose, it’s super important that it automates repetitive, soul-sucking bookkeeping tasks like data entry and transaction-record matching (because starting or running a business is hard enough—you’re gonna want time to recuperate doing something fun).
Automation, ultimately, is linked with business growth. Salesforce research reveals that “…growing SMBs [small and medium-sized businesses] are 1.6x as likely as their stagnant/declining counterparts to say they’re using technology to automate business processes.”
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For example, , our own bookkeeping app for small businesses, automates bookkeeping tasks and stores transaction data in a tidy, secure, cloud-based system that you can access on your laptop or phone.
With today’s mobile, intuitive tools, you don’t need to have an accountant’s knowledge—or hire a professional bookkeeper—to log, categorize, and match transactions. Apps like Books free up time that you can dedicate to other tasks (like selling more of your products/services or finally watching that gerbil video your friend texted you four days ago).
As payments start coming in and expenditures begin adding up, you’ll see you need to do more than just record them—you’ll have to sort them into their own categories. If you categorize your transactions, then at the end of a month or year, you’ll be
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