The Beginner’s Guide on How To Do Accounting for a Small Business

Michael Pignatelli
Feb 06, 2023

Every great business starts small, and every great business owner knows that the key to success is a little grit. 

That’s right! It takes someone with a keen eye and an open mind willing to consume a good amount of knowledge to expand a business that’s just starting out. After all, nothing remarkable ever comes easy.

If you’re reading an article like this, you’ve already got that part checked out, which means you’re up for something a little bit 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 the proper presentation of financial data. 

Of course, if you’re still starting out, it might be a good idea to read up on online business accounting to catch up on how new businesses are doing things in the modern world, because you know what they say? “A strong foundation turns students into masters.”

Luckily for you, we’ve prepared a quick guide you can breeze through.

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 it a lot easier to track business expenses and income. 

Before you get a separate bank account for your small business, do your research and compare different banks and their offerings, such as fees, interest rates, and account features. 

The convenience and accessibility of the bank's branches and ATMs, as well as the level of customer service they offer, are also things you might want to take a look at, especially since you’re probably going to be transacting with the bank in the long run.

Besides having separate bank accounts, you might also want to get a business credit card. Having a good credit score helps small businesses gain access to business assets and capital that they wouldn’t have had otherwise, allowing them to make large purchases and take advantage of supplier discounts without having to pay upfront in cash.

Recording Financial Transactions

When you run a business, you must keep track of the money going in and out of your operations. This is what “bookkeeping" is for. 

You’ve probably heard of that word, and perhaps, you’ve 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 recording sales, purchases, receipts, and payments systematically. 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, such as income statements and balance sheets, which provide a snapshot of a business's financial position at a given time.

What’s the Basic Small Business Accounting Process?

Basic business accounting cycle

This question might have popped up in your head 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 that a business follows to ensure that its transactions are recorded, processed, and reported accurately. It follows eight significant steps:

  1. Journalizing: Transactions are recorded systematically in the business's books of account, such as a general ledger. 
  2. Posting to Ledger Accounts: After all the journal entries have been completed, they are posted to the appropriate ledger accounts, which are accounts payable, accounts receivable, and cash.
  3. 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.
  4. Adjusting Entries: Adjusting entries are made to correct any errors or omissions in the recorded transactions, such as depreciation or accruals.
  5. Preparing an Adjusted Trial Balance: An adjusted trial balance is prepared to ensure that the total of the debit balances still equals the total of the credit balances after the adjusting entries have been made.
  6. Preparing Financial Statements: A balance sheet and an income statement are usually prepared from the financial data indicated in the adjusted trial balance.
  7. 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.
  8. Beginning the Next Period: The next period starts by recording new transactions and repeating the steps of the accounting cycle.

Accounting Methods

There are also two methods to record financial transactions that business owners have to decide to use at the start of their business operations. 

The first one is the cash accounting method. This is an accounting method where transactions are recorded when cash is received or paid out. In this method, income is only recognized when cash is received, and expenses are only recognized when cash is paid out.

The second is the accrual accounting method. This method records transactions when they occur, regardless of when the cash is received or paid out. Income is recognized when earned, and expenses are recognized when incurred.

Which Is Better for My Business?

The cash accounting method is easier to understand. Still, it might not provide an accurate picture of a business's financial health because it leaves out transactions involving accounts receivable and payable. On the other hand, the accrual accounting method provides a more accurate picture of a company's financial health, but it is more complex and requires more detailed recordkeeping.

Filing Tax Returns and Other Obligations

Now that you’ve got a good grasp of what basic accounting for small businesses really is, it’s essential to build on that knowledge by learning about the other tasks that are related to accounting. Tax and accounting are a good example as they both deal with a business's financial information. 

Accounting involves recording, processing, 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. 

In preparing tax returns, accounting, and tax professionals may also provide services to businesses. This can involve advising on tax-efficient strategies to minimize a business's tax liability, such as taking advantage of tax deductions and credits.

Utilizing Accounting Software

Nowadays, small businesses have embraced the use of accounting software because of its convenience and efficiency. You see, accounting software automates many of the manual tasks involved in the accounting process, such as record-keeping, generating basic financial statements, and calculating taxes. 

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

Many accounting software programs are available in the market at incredibly affordable prices, making them accessible to any kind of small business out there. 

Partnering With Professionals

Of course, it’s always a wise choice for small business owners to consult a professional like a certified public accountant when setting up and understanding accounting systems. 

Accounting firms like Unloop provide services to help small businesses manage their finances and meet their regulatory obligations. If you need financial statements prepared, we can even do that for you with relative ease.

What’s important is that you look for an agency with a proven track record of expertise in accounting, offers a wide range of affordable services, and provides good advisory services that can impact your business in the long run.

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

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228 Park Ave S #82849
New York, NY 10003
United States
7676 Woodbine Ave #2
Markham, ON L3R 2N2
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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.