Of all the hats you wear as a business owner, finance and accounting expert can be the most difficult to get right. Even if you are starting a solo venture (hey, freelancers and consultants!) there’s still accounting that must done. And you want to make sure you do it right. 

So whether you’re a newbie looking to learn the basics or need a quick refresher course, let’s look at what elements go into successful accounting for small businesses. 

What is accounting?

Accounting for small businesses is the documenting, tracking, and evaluation of the financial health of a business. This includes recording all cash in and out of a company, in the form of expenses and revenue. Proper accounting can prepare a business for tax season, growth opportunities, and help navigate external and internal factors that could affect a business’s profitability.  

The Difference Between Accounting and Bookkeeping

Accounting is often used to be an all-inclusive term that refers to the overall financial management of your small business. However, if you need to hire a bookkeeper or an accountant, it’s important to understand the difference between the two so you can get the help you need. 

Bookkeeping is the systematic recording and organization of financial transactions, including income and expenses, in a structured manner. It involves the day-to-day tasks of recording financial data in ledgers or accounting software. The goal of bookkeeping is to have accurate information for an accountant or business owner to determine the financial health of the business. 

Accounting goes beyond bookkeeping and involves interpreting, analyzing, and summarizing the financial data provided by the bookkeeping system. It includes more in-depth financial analysis and reporting, creating budgets, and making strategic decisions based on data. The goal of accounting is to provide insights into the financial health of a business to drive business decisions. 

Important Accounting Words to Know

As you start learning about small business accounting, there’s a fair amount of new terminology. These ten terms are just the starting point for understanding the finances that drive your business. 

Revenue

The total income generated by your business from sales or services provided to clients or customers. 

Expense

The costs incurred by your business–such as rent, utilities, subscriptions, supplies, and salaries. 

Profit

Total revenue – total expenses = profit. This is what is left after covering all your costs for running your business.  

Assets

Valuable resources owned by your business. This can include cash, inventory, equipment, and accounts receivable. 

Liabilities

Debts or obligations your business owes to others. Including loans, debt, accounts payable, and other expenses. 

Equity

Also referred to as owner’s equity or shareholders’ equity. Represents the owner’s claim to the assets of the business. You can calculate your equity by: assets – liabilities= equity. This is essentially the net worth of your business. 

Income Statement

Also referred to as a profit and loss statement. This shows your business’s revenue, expenses, and net profit or loss over a specific period of time. (Typically a month, quarter, or year)

Balance Sheet

A balance sheet gives you a snapshot of your financial position at a specific point in time. It lists assets, liabilities, and equity to show the overall health of your business. 

Cash Flow

This is the movement of money in and out of your business. If it is positive, then you have more money coming in than you have going out. If it’s negative, then you are paying more than you are earning. 

Accounts Payable & Accounts Receivable

Accounts payable is the amount of money your business owes to other businesses, suppliers, or vendors. Accounts Receivable are amounts of money that customers and clients owe you for products or services they’ve purchased. 

First Steps for a Great Small Business Accounting Experience

Setting yourself up for success with bookkeeping and accounting for your small business can save you from major headaches. You’ll be better able to make crucial decisions, sail through tax season, and reduce stress when it comes to managing your business. 

1. Get a business bank account

Separating your personal and professional money is especially important as a small business owner. The first step in doing that is getting a business bank account. Business bank accounts are almost always free and have functions that you won’t find in a personal bank account. They’ll issue you a debit card for your account so you can start making purchases for your small business right away.

 2. Choose a bookkeeping software

In the case of an exceptionally small business, you may be able to get away with doing your bookkeeping on an old-school spreadsheet, but you’ll be missing out on the many features and reporting abilities that come with using bookkeeping software. 

As you look for a bookkeeping software solution, be mindful of your budget and what functions might be most important to you. A simplified bookkeeping software like Less Accounting is perfect for a small business owner who wants to avoid the costs and over-complexity of bookkeeping software like QuickBooks. 

3. Determine what type of accounting you’ll do

There are two types of accounting to choose from: cash basis and accrual. Your bookkeeping software may help you determine which one is right for you. 

Cash Basis Accounting:

• Records transactions when cash is received or paid
• Recognizes revenue when it’s received and expenses when they are paid
• Simpler and more straightforward
• Common among small businesses with simpler financial structures
• May not provide an accurate picture of long-term financial health

Accrual Accounting:

• Records transactions when they occur, regardless of when the cash is exchanged
• Recognizes revenue when it’s earned and expenses when they are incurred
• Provides a more accurate view of a company’s financial position
• Common among larger businesses and required for some industries
• Better for matching revenue and expenses over time

When to Choose Each:

• Cash Basis: Choose cash basis accounting if you have simple financial transactions, want a straightforward approach, and don’t have any need to comply with specific accounting requirements. Also a great choice for businesses that deal mainly in cash with minimal inventory. 

• Accrual Accounting: Small businesses should opt for accrual if they want a more accurate representation of their financial performance, especially when they have significant accounts receivable or accounts payable, deal with credit transactions, or need to adhere to regulatory requirements. It’s better for long-term financial planning and analysis. 

Small business owners often start with cash basis just because it’s simpler. You can always transition to accrual accounting as you grow and your financial transactions become more complex. It just depends on your business’s specific needs, size, and financial goals. 

Financial Reports You Need to Know

These three main financial reports to effectively manage your finances and make informed decisions. These reports provide valuable insights into your financial health and performance. Regularly reviewing and understanding these reports can help small businesses maintain financial stability and plan for future growth. 

Income Statement (Profit and Loss Statement)

• Provides a summary of a business’s revenues, expenses, and net profit or loss over a specific period (usually a month, quarter, or year). 
• It can help you track profitability by showing how much money is earned (revenue) and how much is spent (expenses). 
• Key components include revenue, cost of goods sold (COGS), gross profit, operating expenses, and net income (profit) or net loss. 

Balance Sheet

• A snapshot of a company’s financial position at a specific point in time. 
• Has three main sections: assets (what the company owns), liabilities (what the company owes), and equity (the owner’s investment in the business).
• The balance sheet demonstrates the company’s assets’ ability to cover its liabilities and provides information on overall financial stability. 

Balance Sheet

• Tracks the inflow and outflow of cash in a business over a specific period of time. 
• Categorizes cash flows into three main sections: operating activities (day-to-day operations), investing activities (buying or selling assets), and financing activities (raising capital or repaying debt). 
• Small businesses use the cash flow statement to monitor their liquidity and cash management, ensuring they have enough cash on hand to cover operational needs. 

Accounting Tasks and When To Do Them

One of the best tips we can give you to have a positive experience with your small business accounting is to stay consistent. Neglected bookkeeping is one of the biggest ways to tie up or stall your business’s progress. So as you learn what you need to do, be sure to consistently block out time on your calendar to check these tasks off your list. 

Daily/Regular Accounting Tasks

1. Record Transactions: Your business bank account will track all your transactions and import them into your bookkeeping system, but if you use cash or another form of payment, enter that transaction as soon as possible. 
2. Invoice Customers: Always send invoices quickly. This is one of the key steps to making sure your invoices are paid promptly.  

Weekly/Monthly Accounting Tasks

1. Reconcile Bank Accounts: Reconcile your bank statements with your records to identify any discrepancies. 
2. Payroll Process: If you have employees, process payroll and make sure all payroll taxes are withheld and paid. 
3. Expense Tracking: Review and categorize expenses. Make sure your receipts and other financial documentation are organized and up to date. 

Quarterly Accounting Tasks

1. File Sales Tax Returns: Depending on your location and sales volume, you may need to file quarterly sales tax returns. 
2. Estimated Quarterly Tax Payments: Stay ahead of your annual tax payments and avoid penalties by paying your estimated quarterly taxes. 

Annual Accounting Tasks

1. Annual Financial Statements: Review your year-end financial statements: balance sheet, income statement, and cash flow statements. 
2. Tax Prep: Gather everything you need to pay your taxes. This could include income tax returns, payroll tax returns, 1099s, and other applicable tax forms. 
3. Inventory Valuation: If you have inventory, conduct an annual inventory and adjust your financial records accordingly. 

Accounting Tasks to Do Throughout the Year

1. Budgeting and Forecasting: Continue to update and monitor your budget and financial forecasts to track your progress and make informed decisions. 
2. Vendor Payments: Always make your payments on time. 
3. Invoice Management: Follow up with customers and collect payments for past-due invoices. 
4. Store Financial Documents: Stay organized throughout the year with your receipts and other business documents so tax season is easier. 

The exact frequency of when you do these tasks is going to depend on your business’s needs. What’s important is that you keep a regular pulse on the financial health of your business and build consistent habits that help your business grow. 

Small Business Accounting 101

This is just an introduction to successfully managing your small business accounting. If you can stay organized and consistent, you can stay in charge of your business’s bookkeeping. However, if things start slipping through the cracks and tasks pile up, outsourcing your bookkeeping could give you back both time and money to focus on your business. 

Partner with Less Accounting for simplified bookkeeping for busy business owners. You’ll gain the one-on-one customer service you need and a solid understanding of bookkeeping at a price that suits your business.