Small Business Accounting 101

Small Business Accounting

Last Updated July 2, 2024

Starting a small business involves more than just a great idea and hard work; it requires a solid understanding of accounting principles to ensure financial success. This 10-step guide will help you navigate small business accounting according to United States and IRS guidelines, setting you up for long-term success.

Register Your Business

Before you start managing your business finances, you need to register your business with the appropriate authorities. The structure you choose will impact your tax obligations, liability, and accounting methods.

Sole Proprietorship

A sole proprietorship is the simplest business structure. It’s easy to set up and offers complete control to the owner. However, it also means personal liability for business debts and obligations.

Corporation

A corporation is a more complex structure that provides limited liability protection but requires more extensive record-keeping, operational processes, and reporting. Corporations are taxed as separate entities.

Partnership

A partnership involves two or more people who share ownership. It’s important to have a partnership agreement detailing the roles, responsibilities, and share of profits and losses of each partner. Partnerships are relatively simple to establish but can lead to disputes if not properly managed.

Limited Liability Company (LLC)

An LLC offers the liability protection of a corporation with the tax advantages and operational flexibility of a partnership. LLCs are popular for small businesses due to their balance of simplicity, liability protection, and tax benefits.

Open a Business Bank Account

Separating your personal and business finances is crucial for accurate accounting and tax reporting.

Business Checking Account

A business checking account is essential for handling daily transactions, paying suppliers, and receiving customer payments. It helps in maintaining a clear record of business activities.

Business Savings Account

A business savings account can help you set aside money for taxes, future investments, or unexpected expenses, earning interest on your reserves.

Business Credit Card

A business credit card is useful for managing cash flow and building business credit. Ensure to use it responsibly to avoid high-interest debt.

Establish an Accounting System

Choosing the right accounting system is fundamental for tracking your income and expenses accurately.

Cash Accounting

Cash accounting records income when it is received and expenses when they are paid. It’s simpler and ideal for small businesses with straightforward transactions.

Accrual Accounting

Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when the cash is actually received or paid. This method provides a more accurate financial picture and is required for businesses with sales over $25 million.

Develop Your Bookkeeping System

A robust bookkeeping system ensures you maintain accurate financial records, which is essential for decision-making and tax preparation.

DIY Bookkeeping with the Help of Software

Many small businesses use accounting software like QuickBooks or Xero for DIY bookkeeping. These tools automate many tasks and provide real-time financial insights.

Outsource Your Bookkeeping

Outsourcing your bookkeeping to a professional can save time and reduce errors. This is a good option if you lack the time or expertise to manage your books.

Create a Bookkeeping Position

Hiring an in-house bookkeeper may be necessary as your business grows. This ensures continuous management of your financial records and compliance with accounting standards.

Track Your Expenses

Tracking your expenses is crucial for budgeting and tax deductions. Use software or apps to categorize expenses, keep receipts, and monitor spending.

Set Up Your Payroll

Proper payroll management ensures your employees are paid on time and all payroll taxes are accurately calculated and remitted. Consider using payroll software or a payroll service to streamline this process.

Determine How You’ll Receive Payments

Offering multiple payment options can enhance your cash flow and customer satisfaction.

Online Payments

Accepting online payments through platforms like PayPal, Stripe, or Square makes it easy for customers to pay you, boosting sales and cash flow.

Mobile Payments

Mobile payment solutions like Apple Pay or Google Wallet provide convenience for both you and your customers, facilitating quicker transactions.

Automatic Invoices

Automating your invoicing process ensures timely billing and payment reminders, reducing the likelihood of late payments and improving cash flow.

Figure Out Your Tax Obligations

Understanding your tax obligations is essential to avoid penalties and ensure compliance.

Income Tax

You need to file federal and state income taxes based on your business structure. Sole proprietorships, partnerships, and LLCs typically pass income through to personal tax returns, while corporations file separate business tax returns.

Self-Employment Tax

Self-employment tax covers Social Security and Medicare taxes for business owners. This tax is in addition to income tax and must be estimated and paid quarterly.

Employment Tax

If you have employees, you need to withhold federal and state income taxes, Social Security, and Medicare taxes from their wages, and pay your employer’s share of these taxes.

Sales Tax

If you sell taxable goods or services, you must collect sales tax from customers and remit it to the state. Sales tax rates and regulations vary by state, so check your local requirements.

Research Funding Options

Securing funding can help you start, maintain, or grow your business. Consider options like small business loans, grants, angel investors, venture capital, or crowdfunding.

Find Your Accounting Partners

Having the right accounting partners can provide valuable advice and ensure compliance with financial regulations.

Bookkeeper

A bookkeeper manages daily financial transactions, ensuring your records are accurate and up-to-date.

Tax Preparer

A tax preparer helps you file your taxes correctly and on time, maximizing your deductions and ensuring compliance with tax laws.

Accountant

An accountant provides strategic financial advice, helping you plan for growth, manage your finances effectively, and stay compliant with regulations.

Conclusion

By following these steps, you’ll establish a strong accounting foundation for your small business, ensuring financial health and compliance with IRS guidelines. Proper accounting practices not only help in maintaining organized financial records but also provide insights for making informed business decisions and achieving long-term success.