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How to Do Accounting for a Small Business: A Beginner’s Guide

Michael Pignatelli
Last Updated on September 28, 2023

It takes someone with a keen eye and an open mind willing to consume a good amount of knowledge to expand a new business. So, if you’re reading an article like this, you’ve already got that part checked out, which means you’re up for something more challenging: learning how to do accounting for a small business. 

A basic understanding of accounting can help small business owners: 

  • manage their finances more efficiently, 
  • comply with tax code requirements, 
  • make a realistic business plan, 
  • and even invite more investments with proper presentation of financial data. 

Reading up on online business accounting is a great way to catch up on how new businesses do things in the modern world. Luckily, we’ve prepared a quick guide you can breeze through.

Things to Know About Small Business Accounting

an infographic showing the things to know about small business accounting, from bottom left to upper right corner: setting up a bank account, recording financial transactions, knowing your tax obligations, investing in an accounting software. 

Are you a small business owner who struggles with accounting? Do you feel like you’re constantly playing catch-up with your finances? You’re not alone. Many small business owners have a great vision for their ventures, only to meet challenges in bookkeeping and accounting.

Check out these must-know small business accounting basics:

  1. Setting Up a Business Bank Account

Every business needs its own business bank account. It helps establish your small business and separate your personal and business finances, making tracking business expenses and income much easier. 

Before you get a separate bank account for your small business, research and compare different banks and their offerings, such as:

  • Fees
  • Interest rates
  • Account features 
  • Accessibility of the bank’s branches and ATMs
  • Level of customer service they offer 
💡You will be transacting with the bank in the long run, so make sure you choose wisely. 

Besides having separate personal and business bank accounts, you should also get a business credit card. 

Having a good credit score helps small businesses gain access to business assets and capital they wouldn’t have had otherwise. It allows them to make large purchases and take advantage of supplier discounts without paying upfront in cash.

  1. Recording Financial Transactions

When you run a business, there must be accurate expense tracking. This is what “bookkeeping” is for. You’ve probably heard of that word and perhaps seen it being used interchangeably with “accounting,” but understand that these two services are entirely different. 

Bookkeeping vs. Accounting

Bookkeeping involves recording and tracking business transactions. This includes systematically recording financial transactions such as:

  • Purchases
  • Receipts
  • Cash flow statement
  • Payment

Basic bookkeeping aims to provide accurate and up-to-date financial reports of a business’s financial activities.

Accounting is analyzing and interpreting financial information generated from those financial reports to produce business financial statements. These would include income statements and balance sheets, which provide a snapshot of a business’s financial health at a given time.

Accounting Process

This question might have popped up as you read that previous paragraph. Yes, there is a process, and it’s referred to as “the accounting cycle.” 

💡The accounting cycle is the series of steps a business follows to ensure its transactions are recorded, processed, and reported accurately. 

It follows eight significant accounting tasks:

  1. Identifying transactions. Transactions may include sales revenue, purchase of assets, and other business expenses.
  1. Recording transactions. Transactions are recorded systematically in the business’s books of account, such as a general ledger. 
  1. Posting to ledger accounts. After all the journal entries have been completed, they are posted to the appropriate ledger accounts: accounts receivable, accounts payable, and cash.
  1. Preparing an unadjusted trial balance. An unadjusted trial balance is prepared to ensure that the total of the debit balances equals the total of the credit balances.
  1. Analyzing worksheets. Analyzing a worksheet is important in identifying errors and making adjustments.
  1. Adjusting entries. Adjusting entries are made to correct errors or omissions while recording transactions, such as depreciation or accruals.
  1. Creating financial statements. A balance sheet and an income statement are usually prepared from the financial data indicated in the adjusted trial balance.
  1. Closing the books. The books are closed for the accounting period, which involves zeroing out the temporary accounts, such as revenue and expense accounts, so they are ready to start the next period. The next period starts by recording new transactions and repeating the steps of the accounting cycle.
a graph showing the accounting cycle, clockwise: identifying transactions, recording transactions, posting to ledger, preparing unadjusted trial balance, analyzing worksheets, adjusting entries, creating financial statements, closing the books.

Accounting Methods

There are also two methods to record financial transactions that business owners have to decide on: 

  • Cash accounting method. This is an accounting method where transactions are recorded when cash is received or paid out
  • Accrual accounting method. This method records transactions when they occur, regardless of when the cash is received or paid out. 
  1. Filing Tax Returns and Other Tax Obligations

Now that you’ve got a good grasp of what basic accounting for small businesses is, it’s essential to build on that knowledge. Tax and accounting are good examples, as they both deal with a business’s financial information. 

An accounting system involves processing, verifying, and reporting a business’s financial transactions. In contrast, tax involves the payment of things like income taxes to the government based on the information reported by the business.

The data generated by the accounting process is used to calculate a business’s taxable income and tax liability. After which, the data is used to prepare tax returns. 

💡Note that the legal structure of a business will determine its tax obligations. 

For example, small business owners registered as limited liability companies (LLCs) or partnerships may claim business income on their personal tax return.

Accounting and tax professionals may also provide business services in preparing tax returns. This may include advising on tax-efficient strategies to minimize a business’s tax liability, such as tax deductions and credits.

  1. Using Accounting Software

Nowadays, entrepreneurs have embraced using small business accounting software because of its convenience, efficiency, and affordability. Accounting software automates manual accounting tasks, such as:

  • Record-keeping
  • Generating basic financial statements
  • Calculating taxes

Accounting software can cut long hours of complicated work for small businesses. Most accounting software programs also integrate with other business tools, such as payroll and invoicing software, which helps streamline financial management.

Tips to Make Finances Easier to Handle

Want to know how to make your business finances easier to manage? Check out these tips:

  1. Link Bank Accounts

Link your business bank account to your accounting software. Doing this makes bank payments convenient for your customers who opt for them. When your customers pay or you make any payments and withdrawals, the transaction is automatically recorded in bank statements and the books. 

Fraud is also less likely to occur because your bookkeepers can easily raise the alarm when data don’t match. 

  1. Make and Collect Payments on Time

When you have set up bank linking, invoicing, and receipt management for your business, making and collecting payments on time will be easier. You can give your customers discounts and incentives to encourage them to pay in advance or on the due date. 

💡Through timely payment, the data you can generate from reports will be accurate, and cash flow management will be easier. 
  1. Forecast and Plan Your Finances

Forecasting and planning your transactions is necessary instead of just recording them as they happen. As a small business owner, you need to keep your records even from previous years, as they will be useful in planning finances for the coming year. 

Through historical financial data, you can project possible revenue and expenses. As a result, you can budget your money for the year and break it into quarterly, monthly, and even weekly allocations. 

  1. Work With Accounting Professionals

Here’s our last but not least tip. You can hire small business accounting services to simplify bookkeeping and accounting. Partner with trained bookkeepers and accountants to handle your business finances. 

Hiring an in-house team works, too, but partnering with reliable agencies is the way to go if you want to save costs while receiving the same quality of work. 

Partner with Unloop!

So there you have it—the small business accounting basics and how to make your finances easier to manage. We hope these tips have made you feel more confident handling your business finances. 

If you ever need a hand with accounting, don’t hesitate to reach out! We at Unloop are passionate about helping growing businesses and making them succeed through our bookkeeping, income tax, and sales tax services. 

Book a call with us now to get started on accounting for your business.

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New York, NY 10003
United States
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Markham, ON L3R 2N2
About unloop

Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.