Starting a small business can provide you with a wealth of opportunities. Even though accounting and bookkeeping may seem similar, there are notable differences between the two. Here is how accounting and bookkeeping can help you as you start your small business.

Why Is Accounting Important for Small Businesses?

Accounting is essential for small businesses for several reasons. First, accounting can help your small business determine: 

  • How much you owe (money to vendors) 
  • How much you own (money from customers)
  • Maintenance and operational costs 
  • Remaining cash 
  • Your sales in a predetermined period

Second, accounting is vital for small businesses to organize their business operations. As your company develops, you’ll hire more employees and assign them duties. Accounting allows you to log the payments that your employees receive and record your company’s financial trajectory. 

Third, accounting allows small business owners to examine their company’s finances. Over time, your company will undergo changes that will affect its profits or losses. Keeping track of your profits and losses will allow you to change your strategies for your small business’s best results.

Finally, accounting is crucial for small businesses that will want to invest. Stakeholders are less likely to provide investment opportunities for unprofitable companies. Accounting can help you measure the amount of income your company is accruing so investors and shareholders can review the numbers with you.

How to Manage Bookkeeping and Accounting for a New Small Business

Accounting and bookkeeping are different strategies you can use to prevent small business problems. You can use both to manage your small business. 

Accounting is a broader way of looking at your company’s financial health and financial trajectory. .There are two accounting types:

  • Accrual basis accounting
  • Cash-based accounting

If you have an inventory in your small business, you must use accrual-basis accounting. Otherwise, you can choose from both accounting types.

Cash-based accounting requires you to record your revenue upon receiving it. It also requires you to record payments when you make them. 

The accrual basis of accounting requires you to record revenue when it happens. This can create problems for smaller businesses. Small business owners must record the revenue even if the payment arrives after a transaction.

Bookkeeping is a more focused way of tracking your financial information. There are multiple things that a bookkeeper must record, which includes:

  • Accounts payable
  • Accounts receivable
  • Cash
  • Inventory
  • Loans payable
  • Owner’s Draw
  • Payroll Expenses
  • Purchases
  • Sales

Open a Business Bank Account

As a new small business owner, one of the most important things you can do is open a business bank account. 

Business bank accounts will help your small business gain credibility from banks. Before opening a business bank account, you must already have an EIN. If you don’t have one, you can apply for one online

After receiving your EIN, you’ll need the following documents to open your business bank account:

  • Business formation documents 
  • Business license 
  • Employer Identification Number (EIN) or Social Security Number 
  • Ownership agreements

Choose a Bookkeeping System

As a small business owner, you’ll have to decide which bookkeeping system you want to use. There are four options available for you to choose from: 

  • Bookkeeping Software
  • Double-Entry Bookkeeping System
  • Single-Entry Bookkeeping System
  • Virtual Bookkeeping

Depending on your bookkeeping needs, each of the four bookkeeping systems has advantages. 

Bookkeeping software allows you to track your bookkeeping transactions through programs. This will allow you to add your transactions as needed instead of collecting transaction information over an extended period. 

Bookkeeping software also offers small business owners flexibility. You can use software programs on a computer or laptop with no problems. Some bookkeeping software programs are also cloud-based, meaning that you can still monitor your financial transactions no matter what device you use. 

Double-entry bookkeeping is another option for you to consider. This is the most detailed bookkeeping option as there are several items to track, including: 

  • Assets 
  • Liabilities 
  • Equities  
  • Revenue 
  • Expenses 
  • Gains 
  • Losses

Single-entry bookkeeping is a third option that you can use. This may be the most common bookkeeping option for new and small businesses. 

If you choose this option for bookkeeping, remember that single-entry bookkeeping excludes expenses and revenue. If you need to track your expenses and revenue, consider using double-entry bookkeeping. 

Virtual bookkeeping is the fourth option that you may consider. This option allows a virtual bookkeeper to do the work for you. Virtual bookkeepers will accept your financial transactions, journals, and ledgers and e-mail you copies of your reports.

Look Into Tax Obligations

You will also want to determine the taxes your small business will pay. Depending on the business you operate, you may have to pay one of or a combination of the following taxes: 

  • Employment Taxes
  • Estimated Taxes
  • Excise Tax
  • Income Tax
  • Self-Employment Tax

Track Expenses

Whether you use accrual-based accounting or cash-based accounting, tracking your expenses will be useful. There are software programs available for you to track your expenses more efficiently.

Work with the Pros

Starting a small business is an exciting development, but it can also be very stressful. Work with the pros at 1-800Accountant for your bookkeeping needs. 

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Written by Mike Savage

Mike Savage, CEO and Founder of 1-800Accountant, has revolutionized the tax service industry. After working as an accountant for PwC, Mike r...