Small Business Accounting: A Guide to Setup and Keeping Up

As your small business grows, so do your sales transactions. You’ll spend an increasing amount of time tracking and recording your finances. Fortunately, small business accounting systems can save time and improve financial reporting.

Accounting systems help you monitor your business’s financial health and analyze trends. Accounting also supports accurate financial reporting and tax compliance.

This article will explain best practices for setting up your small business accounting. You’ll learn how bookkeeping can support your accounting process and help you monitor your financial health. We’ll also offer tips for lowering your business taxes.

Setting up Your Small Business Accounting

How do you set up your small business accounting? 

First, decide which type of accounting system to implement. Consider the following options: 

  • Create your own spreadsheets and templates: You can use free tools or low-cost, standardized templates to track your financials. DIY solutions often work well for sole proprietors with simple operations.
  • Implement small business accounting software: Numerous service providers offer online accounting solutions for small business owners. Options range from free, limited-functionality solutions to sophisticated tracking and financial reporting systems with high monthly fees.
  • Outsource accounting services to professionals: You can hire a certified public accountant (CPA) or a team of accounting experts. You’ll get dedicated, hands-on help and relief from overwhelming Excel spreadsheets.

    • Regardless of which accounting solution you choose, we recommend a few additional steps to facilitate your financial tracking. Keep reading to learn other crucial steps in your small business accounting setup.

    Open a Business Bank Account

    Opening a business bank account can save you hours each month. You’ll also dramatically improve your return prep at tax time. 

    Maintain a separate checking account for your business income and expenses. You’ll be able to monitor earnings and spending easily, and you won’t need to dig through receipts during tax season. 

    Depending on your business structure, you may need an Employer identification number (EIN) before opening a business bank account. 1-800Accountant offers a budget-friendly EIN service to save you time on paperwork. 

    Choose an Accounting Method

    An accounting method is a set of rules that affects the timing of revenue and expense recognition. Your accounting method impacts your financial reporting and business tax returns.

    Business owners generally choose between the following two accounting methods:

  • Cash basis accounting: Record income and expenses when cash changes hands. For example, record an internet expense when paying your bill, not when you receive it. Cash-based accounting is best for small businesses with few or no employees.
  • Accrual basis accounting: Record income and expenses when the transaction occurs. For example, record revenue when you perform a service, even if your customer hasn't paid their bill. Accrual method accounting is best for large businesses with complex operations.

    • Establish Your Chart of Accounts

    A chart of accounts is a list of the accounts in your accounting system. For example, your chart of accounts could include the following: 

  • Cash
  • Accounts Receivable
  • Office Furniture
  • Credit Card Payable
  • Equity
  • Sales Revenue
  • Supplies Expense Internet Expense

    • Your chart of accounts will help your accounting system accurately record financial transactions and track balances. 

    When you partner with CPAs at 1-800Accountant, industry professionals can help you determine the accounts to include.

    Maintain Timely Bookkeeping

    Timely and accurate bookkeeping is critical to your small business accounting. Keep reading to learn about your options for implementing bookkeeping in your small business. 

    Bookkeeping for Small Businesses Owners

    Once you set up your accounting system, make your life easier year-round with timely and accurate bookkeeping.

    Bookkeeping supports your small business accounting process and helps with smooth financial reporting. Bookkeeping activities include recording transactions and reconciling account balances. 

    Your bookkeeping options include online solutions like FreshBooks, QuickBooks, or Xero. For business owners with low bandwidth, we recommend outsourcing your bookkeeping to professionals. 1-800Accountant has done-for-you bookkeeping services and offers industry expertise.

    Whether you implement an online solution or outsource to professionals, your bookkeeping function will help your small business with the following activities.

    Generating Financial Statements

    Financial statements detail your business assets, liabilities, and equity at a specific date. Additionally, financials summarize total income and expenses during the reporting period. Financial reporting generally includes a balance sheet, income statement, and statement of cash flows. 

    Accountants use financial information to analyze trends and risks for your business, and bookkeeping helps your business generate financial statements at any time.

    Balance Sheet

    Your balance sheet summarizes your business’s asset, liability, and equity balances at the reporting date.

    Assets include cash, investments, and furniture. Liabilities represent amounts your business owes, such as credit cards and loans. Equity refers to the total investment in your company.

    Profit and Loss Statement

    Your profit and loss statement, or income statement, totals your business revenue and expenses for a given period. 

    For example, your 2024 profit and loss statement should total the income your business earned and the amount your business spent during the year.

    Cash Flow Statement

    The cash flow statement reports the cash movement into and out of your business during the reporting period. 

    For example, the statement of cash flows should detail customer payments and any financing from banks. The statement will also report cash payments for office equipment, interest, payroll, and other expenses.

    Categorizing Transactions

    Bookkeeping solutions categorize all income and expense transactions. Timely and accurate classification helps your business maintain a clear financial picture. 

    For example, imagine a business that sells t-shirts and magnets. Accurate bookkeeping should track t-shirt and magnet sales separately so the business owners can understand each product’s profitability. 

    Tracking Expenses

    Similarly, your bookkeeping should categorize your business expenses into appropriate categories. 

    Consider the same business mentioned above. The bookkeeping solution helps the business owners monitor the cost of each product, as well as business overhead and administrative expenses.

    When you outsource your bookkeeping to the professionals at 1-800Accountant, you can cross tedious responsibilities off your to-do list. 1-800Accountant offers budget-friendly, on-demand financial accounting and bookkeeping services to small business owners in all industries.

    Small Business Tax Strategy & Compliance

    Your accounting system supports your business tax filing process. You’ll be able to generate accurate financial statements and avoid scrambling at tax time. 

    Tax Types for Small Businesses

  • Income tax: Every business must file an annual income tax return with the IRS. Your tax form depends on your business structure.
  • Sales tax: Your sales tax obligations depend on your business operations and location. Most states impose sales taxes on the sale of physical products, and a growing number of jurisdictions tax services.
  • Employment taxes: Small business owners should consider payroll taxes before hiring employees. Employers must withhold and pay taxes on employee wages.

    • Depending on your operations, your business could be subject to additional taxes. Consult with tax professionals for help with your tax obligations.

    Estimated Quarterly Income Taxes

    Most businesses must make quarterly income tax payments. To calculate each payment, estimate your business income for the entire year. Your estimated tax payment represents a percentage of your full-year tax liability.

    Quarterly estimates can be complex, but 1-800Accountant can help your business calculate its estimated tax payments. 

    Income Tax Deductions

    Your small business accounting function can help you lower your tax bill. Accurate expense tracking helps you document your business expenses and maximize income tax deductions. 

    1-800Accountant’s small business tax advisory services can support your business year-round. We’ll help you maximize tax deductions, determine which forms to file, and monitor deadlines.

    Small Business Accounting Best Practices

    As you implement your small business accounting system, consider the following expert-advised best practices.

    Maintain Accurate Bookkeeping and Financial Reporting

    Accurate and timely bookkeeping supports your accounting function year-round. Up-to-date bookkeeping lets you enjoy on-demand financial reporting. You can generate financial statements anytime, knowing you’ll get an accurate financial picture.

    Separate Personal and Business Finances

    Open a business bank account and save yourself valuable time. Use a separate credit card for all business purchases. You can also link your business bank account to your bookkeeping solution so your business transactions automatically upload. 

    Review Financial Statements

    Your accounting function helps you monitor your business’s financial health. Business owners should periodically review financial statements to identify trends and help with forecasting. 

    Your financial statement analysis can also help you understand how to increase profits. For example, an annual review can highlight cost increases and seasonal revenue trends.

    Outsource Accounting Services to Professionals

    Accounting software can be costly. Online solutions often don’t consider the nuances of your small business.

    If you purchase standard accounting software, you risk wasting valuable time trying to learn a new system. Instead, outsource your accounting function to industry experts. You’ll enjoy personalized, hands-on services and gain confidence in your financial reporting.

    1-800Accountant can take the accounting responsibilities off your to-do list so you can focus on growing your business. 

    Let 1-800Accountant Guide Your Small Business to Accounting Success

    The professionals at 1-800Accountant can guide you through your accounting system setup. Whether you’re an experienced entrepreneur or a new startup founder, you can benefit from expert accounting guidance. 

    1-800Accountant offers accounting, bookkeeping, and tax services to support your business year-round. With budget-friendly pricing, we’ll help you save money on professional fees. Enjoy maximizing your tax deductions and meeting tax filing deadlines. 

    Schedule a free call with 1-800Accountant to learn how your small business can benefit from professional accounting services. 

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.