small business accounting

Basics of Small Business Accounting: 12 Steps to Get Your Company on Track

If you’ve just launched or are about to start your small business, congratulations! It takes uncommon passion and perseverance to get to where you are today.

However, as you know, business ownership is a constant flood of satisfying milestones coupled with expanding to-do lists. With your launch, you’ll need to get on top of the accounting tasks that come with owning a store.

This list of small business accounting steps will give you the confidence to know you’ve covered your bases and are ready to move on to the next item on your business to-do list.

How to do accounting for a small business

1. Open a bank account

After you’ve legally registered your business, you’ll need somewhere to stash your business income. Having a separate bank account keeps records distinct and will make life easier come tax time. It also protects your assets in the unfortunate case of bankruptcy, lawsuits, or audits. And if you want to fund down the line from creditors and investors alike, vital business financial records can increase the likelihood of approvals.

Start by opening up a business checking account, followed by any savings accounts that will help you organise funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. A good rule of thumb is to put 25% of your income aside, though more conservative estimates for high earners might be closer to one third.

Next, you’ll want to consider a business credit card to start building credit. Credit is essential for securing funding in the future. 

Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have higher fees than personal banking, so pay close attention to what you’ll owe.

To open a business bank account, you’ll need a business name, and you might have to be registered with your state or province. Check with the individual bank for which documents to bring to the appointment.

2. Track your expenses

The foundation of solid business bookkeeping is adequate and accurate expense tracking. It’s a crucial step that allows you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and legitimise your filings.

There are five types of receipts to pay special attention to:

  1. Meals and entertainment. Conducting a business meeting in a café or restaurant is a great option; just be sure to document it well. On the back of the receipt, record who attended and the purpose of the meal or outing.
  2. Out of town business travel. 
  3. Vehicle-related expenses. Record where, when, and why you used the vehicle for business, and then apply the percentage of use to vehicle-related costs.
  4. Receipts for gifts. For gifts like tickets to a concert, it matters whether the gift giver goes to the event with the recipient. If they do, then the expense would be categorised as entertainment rather than a gift. Note these details on the receipt.
  5. Home office receipts. Like vehicle expenses, you need to calculate what percentage of your home is used for business and then apply that percentage to home-related costs.

Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You can deduct the portion of your home that’s used for business, as well as your home internet, cell phone, and transportation to and from work sites and for business errands.

Any expense that’s used partly for personal use and partly for business must reflect that mixed-use. For instance, if you have one cell phone, you can deduct the percentage you use the device for business. Gas mileage costs are 100% deductible, just be sure to hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip).

3. Develop a bookkeeping system

Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorising them, and reconciling bank statements.

Accounting is a high-level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements. As a new business owner, you’ll need to determine how you want to manage your books:

  1. You can choose to go the DIY route and use software like Quickbooks or Wave. Alternatively, you could use a simple Excel spreadsheet.
  2. You have the option of using an outsourced or part-time bookkeeper that’s either local or cloud-based.
  3. When your business is big enough, you can hire an in-house bookkeeper and accountant.

With so many options out there, you’re sure to find a bookkeeping solution that will suit your needs.

Australian business owners need to determine whether they’ll use the cash or accrual method of accounting. Let’s take a look at the difference between the two.

  • Cash method. Revenues and expenses are recognised at the time they are received or paid.
  • Accrual method. Revenues and expenses are recognised when the transaction occurs (even if the cash isn’t in or out of the bank yet) and requires tracking receivables and payables.

4. Set up a payroll system

Many online stores start as a one-person show. When you’ve reached the point where it makes sense to hire outside help, you need to establish whether that individual is an employee or an independent contractor.

You’ll have to set up a payroll schedule for employees and ensure you’re withholding the correct taxes. Many services can help with this, and many accounting software options offer payroll as a feature.

5. Investigate import tax

Depending on your business model, you may be planning to purchase and import goods from other countries to sell in your store. When importing products, you’ll likely be subject to taxes and duties, which is worth noting if you run a dropshipping business. These are the fees your country imposes on incoming goods. If you’re importing goods, a duty calculator can help you estimate the payments in your own business and plan for costs.

6. Determine how you’ll get paid

When sales start rolling in, you’ll need a way to accept payments. If you’re a North American store owner on Shopify, you can use Shopify Payments to accept credit card payments. This saves you the hassle of setting up a merchant account or third-party payment gateway.

If you want to accept credit card payments without using Shopify Payments, you’ll either need a merchant account, or you can use a third-party payment processor like PayPal, Stripe, or Square. A merchant account is a type of bank account that allows your business to accept credit card payments from customers.

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7. Establish sales tax procedures

The world of eCommerce has made it easier than ever to sell to customers outside of your state and even your country. While this is an excellent opportunity for brands with growth goals, it introduces confusing sales tax regulations.

When a customer walks into a brick and mortar retail store, they pay the sales tax of whatever state or province they purchase in, no matter if they live in that city or they’re visiting from somewhere around the world. However, when you sell online, customers may be located in different cities, states, provinces, and even countries.

8. Determine your tax obligations

Tax obligations vary depending on the legal structure of the business. If you’re self-employed, you’ll claim business income on your tax return. Corporations, on the other hand, are separate tax entities and are taxed independently from owners. Your income from the corporation is taxed as an employee.

Self-employed people need to withhold taxes from their income and remit them to the government instead of the withholding that an employer would typically conduct. 

9. Calculate gross margin

Improving your store’s gross margin is the first step toward earning more income overall. To calculate gross margin, you need to know the costs incurred to produce your product. To understand this better, let’s quickly define both cost of goods sold (COGS) and gross margin.

  • COGS. These are the direct costs incurred in producing products sold by a company. This includes both materials and direct labour costs.
  • Gross margin. This number represents the total sales revenue that’s kept after the business incurs all direct costs to produce the product or service.

Here’s how you can go about calculating gross margin:

Gross margin (%) = (revenue – COGS) / revenue

The difference between how much you sell a product for and how much the business takes home at the end of the day is what truly determines your ability to keep the doors open.

10. Apply for funding

There are many scenarios where a growing eCommerce business might need to secure external business financing, be it through a line of credit, investors, a small business loan, or even a business partner.

For instance, you might have an unexpected downturn in sales due to uncontrollable external circumstances, or maybe you need a financial boost during slow periods in a seasonal business. Brands with big growth goals often need to secure funding to make investments in new product developments, inventory, retail stores, hiring, and more.

Remember, to get a small business loan; you’ll likely have to provide financial statements—a balance sheet and income statement at the very least, possibly a cash flow statement as well.

But before you sign off on the debt, it’s essential to make sure the numbers make sense. In other words, it’s a good idea to calculate the ROI of the loan. Add up all the expenses you need the loan to cover, the expected new revenue you’ll get from the loan and the total cost of interest. 

11. Find high-quality accounting partners

Whether doing your accounts is too much for you or just want a little external guidance, small business accountants and financial professionals can help you get more control of your money. There are a few individuals you might want to consider enlisting:

  • Accountant. A small business accountant can advise at many different points, including your business structure, creating financial statements, obtaining necessary licenses and permits, and even writing a business plan.
  • Certified public accountant (CPA). In the case of an audit, a CPA is the only individual who can legally prepare an audited financial statement.
  • Bookkeeper. The bookkeeper manages the day-to-day records, regularly reconciling accounts, categorising expenses, and managing accounts receivable/accounts payable.
  • Tax preparer. Your tax preparer fills out necessary tax forms and may file them on your behalf. Some will also set up your estimated tax payments.
  • Tax planner. These professionals help optimise your taxes before you file them, helping you learn ways to lower your tax burden.

12. Periodically re-evaluate your methods

When you first start, you may opt to use a simple spreadsheet to manage your books, but you’ll want to consider more advanced methods like Quickbooks or Bench as you grow. As you keep growing, continually reassess the amount of time you’re spending on your books and how much that time is costing your business.

The right bookkeeping solution means you can invest more time in the business with bookkeeping no longer on your plate and potentially save the business money. Win-win!

Know your numbers to grow your business

Starting a business can be an overwhelming process, but if you follow this list, you’ll have your new store’s finances in order from the beginning. From opening the correct type of bank account to determining how much you’ll bring in per product, these tasks will all contribute to your business’s success, now and as it grows.

Bookkeeping 101: How to Keep Records for Your Small Business

Doing your bookkeeping can indeed be a complete nightmare. 

Whether you’re starting a new business or have been running an online store for years, learning how to track your expenses and revenue can feel like a huge challenge.

You’re not alone. Nearly three-fourths of small business owners feel they are not very knowledgeable about bookkeeping and accounting. 

On top of running your business, you also have to manage an asset account, tax returns, credit card chargeback, and more. It can be confusing and overwhelming if you’re diving in for the first time. But it doesn’t have to be.

Want to become a pro at your bookkeeping? In this article, you’ll learn everything about starting to keep books for a small business and how you can become more profitable today.

What is bookkeeping?

Bookkeeping is the process of recording and managing all financial transactions for your business, including sales, purchases, and payments—Bookkeepers track all costs and income to help a company make informed financial decisions. 

The goal of bookkeeping is to show you your business’s bigger financial picture, balance your accounts, and improve cash flow management more strategically. 

The basics of bookkeeping

An account records all debit and credit entries of a particular type in business bookkeeping, such as accounts payable or payroll.

There are five basic types of accounts:

  • Assets. Resources or things of value owned by a company result from its transactions (e.g., inventory, accounts receivable).
  • Liabilities. The obligations and debts owed by a company to suppliers, banks, lenders, or other providers of goods and services (e.g., loans, accounts payable).
  • Revenues or income. Money earned by the company through sales or providing a service.
  • Expenses. Cash flows out of the company to pay for assets or services (e.g., utilities, salaries).
  • Equity., The remaining value of an owner’s interest in a company after all liabilities have been subtracted(e.g., stock, retained earnings).

Small business accounting begins with setting up each account so you can record transactions in the appropriate category. This makes up your general ledger. You likely won’t have the same bookkeeping processes as the next eCommerce store, but many different accounting methods are standard depending on your business needs. 

How to keep your books

1. Maintain and update financial records

Bookkeeping involves working with numbers. Most of the work involves basic math and accounting. The details depend on the type of business you own, but it can include tasks like settling accounts receivable and bank statements, recording financial transactions, invoicing, billing, and tracking payroll.

You’ll also take care of other finance-related matters, including:

  • Tax bookkeeping for payroll, income, employment, and even small business tax deductions.
  • Budget planning to help the company stay on track and grow.
  • I was getting financial statements (balance sheets, income statement, cash flow, and changes in equity) ready for stakeholders. 

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Bookkeeping requires careful analysis and a little legal know-how. If your business is ever audited, you want to make sure your records are in order, and deductions are legitimate.

2. Keep track of what everyone is doing (and spending)

Financial bookkeeping can take a great deal of time. You have to ensure accuracy for each financial transaction. Plus, you have to balance the books each day and track payments in and out from employees. 

This means, to master bookkeeping and accounting, you should have excellent communication and organisation skills. You may need to collect receipts from employees on any given day, manage travel expenses, or reimburse people for costs. Creating a system for submissions and reimbursements helps make sure you don’t miss a transaction and that records stay up-to-date and accurate. 

3. Use bookkeeping services to improve processes

Good bookkeeping or accounting software should be in your kit of small business accounting tools. With the rise in virtual bookkeeping and other online bookkeeping services, small business owners need to keep up with the latest technology. 

With good bookkeeping services or software, you can streamline data entry, create detailed financial reports, consolidate data, and automate record-keeping. It’s also an easy way to improve accuracy across your business and eliminate time spent doing repetitive tasks.

Double-entry bookkeeping versus single-entry

In the single-entry bookkeeping method, business transactions are recorded as you make deposits and pay bills into your company account, like keeping a check register. This method works best for smaller businesses with a small number of transactions.

Double-entry bookkeeping is for businesses of any size and complexity. In this method, when an entry is made to an account, a corresponding and opposite access is made to a different one. For example, if you record revenue of $100, you would create two entries: a debit entry of $100 to increase your cash balance sheet and a credit entry of $100 to increase the income statement account “revenue.” 

How to master small business bookkeeping

Understanding and tracking your financial data is an essential part of small business finance. That’s why, when you’re running a business, it’s something you either have to learn from bookkeeping classes or outsource.

Luckily, not only is it possible to learn how to manage your books, there are a few notable benefits to tackling it yourself.

We spoke with two experts to help you get a handle on managing your finances on your own: Charlie Ashbourne, an internal accountant here at Shopify, and Sheena Brady, a merchant success manager for Shopify Plus who also runs a successful business, Tease Tea and has built a system to manage her business’s books.

If you’re new to keeping track of your accounts and can’t afford to pay a bookkeeping company or self-employed bookkeeper, you can still learn the basics and manage things independently. Here’s a look specifically at e-commerce bookkeeping from a daily, monthly, quarterly, and yearly perspective.

What to do daily

Daily, the one general bit of bookkeeping that needs to be on your mind is receipts.

Keep a paper trail of anything that happens in your business, which might mean keeping the receipt from your coffee meeting with a new supplier or bookmarking the email receipt for your latest round of digital ads.

The reason it’s so important to keep these records is simple. To get the full tax benefit of claiming legitimate business expenses, you need to support them.

“If you don’t have adequate support, you can be denied both tax credits and deductible expenses, which, if you’re entitled to them, can be a big hit at tax time,” says Charlie.

So your daily bookkeeping task is to make sure you’ve got a plan to keep track of receipts, invoices, and relevant emails. You want these documents to be easily accessible, so working with them doesn’t require significant time or effort.

Receipts and invoices can be kept in a specified folder. If you tend to get emails from specific senders (your software providers, digital ads, and the like), you can set up a simple rule in your inbox to funnel them into a folder called “Receipts and Invoices.”

You could even create a simple to-do list item to handle this process, which Sheena has done for Tease Teas.

“Anytime an invoice or receipt is emailed to us—95% are these days—I upload the attachment to Google Drive, into an invoice folder broken down by month. This means I rarely ever have to print, file, or store any of this information, which in itself saves a lot of time.”

What to do weekly

Bookkeeping shouldn’t balloon into a huge weekly task on your to-do list. There are two key things to keep an eye on every week: your cash flow statement and your variable expenses, especially when they’re brand-new.

Pay attention to your cash flow

Do you have money in the bank, how much, and what does that money need to cover? That’s what you’re looking at when it comes to cash flow.

“Aside from revenue and expenses, the key thing is managing your cash and your cash flow. There’s usually a misconception that if you have revenue of X amount, then you have cash of that amount just sitting there, but that’s not necessarily the case,” says Charlie.

On a day-to-day basis, you might need to decide when to buy something or how much to spend on your business. 

Understanding how much cash you have on hand and what else that cash needs to cover is a vital part of managing your books and your business.

Want a simple bookkeeping system to help plan and analyse your cash flow?

Keep an eye on new or variable expenses

Most of the time, watching and reviewing your expenses can be a monthly task. But if you have any new fees or variable costs, you’ll want to keep a closer eye on them to make sure they’re aligned with expectations.

“Take marketing expenses, for example: if you’ve recently allocated a budget to run paid ads and it fluctuates day by day, you should keep a closer eye on it until you’re comfortable with the behaviour,” says Charlie.

After all, if there are ways to evaluate new initiatives and expenses before the end of the month, you can make faster but still-informed decisions.

What to do monthly

If you were working with an in-house or remote bookkeeper, you’d probably be in touch with them to check on your books every month. As a DIY-er, you should make a plan to sit down and commit some time every month to keeping your books in order.

Get a business snapshot.

Every month, you should be looking at your business to understand how things are going and get a feel for the bigger picture.office-workspace

“At the end of the month, you want to make sure you’ve got all of your expenses in and then look at your sales, your expenses, your income, and your cash position as a whole,” says Charlie. “You also want to make sure to look at any key areas of the business that you’re interested in.”

Use bookkeeping services or software to track trends you’re seeing from month to month, and think about how you’ll handle the upcoming month from a financial perspective. You can also pay special attention to any new projects, campaigns, or operational changes to see if they’re impacting your sales, your expenses, or both.

Keep an eye on expenses.

Your monthly review is a good time to think more strategically about how expenses fit into your business.

“I always look at expenses deeply, even when we’re performing well in sales,” says Sheena. “A significant success indicator in business is profitability, and you can often create unexpected profit by analysing your expenses and creatively finding ways to lower them.

You can find different ways to cut costs by looking into supplier discounts based on your payment history, bulk orders, or pre-ordering certain products. 

“Last year, I looked at a popular tea accessory we sold and did some research. I asked our supplier if there was room for a discount based on our history and my knowledge of the manufacturer. He was able to lower our cost per unit, and we saved over $5,000 last year alone on this one ask.”

Stay organised

If there’s a tax and bookkeeping cliché every entrepreneur can identify with, it’s the “shoebox full of receipts.” The dream, of course, is to hand that shoebox off to a CPA or one of the many bookkeeping services that can make sense of it all, but there are ways you can tackle the shoebox all on your own.

During your monthly review, go through all of your stored receipts in your email, your Google Drive file, or, yes, your shoebox. Sort them into expense categories, both to keep yourself organised for tax season and to get a look at how much you’re spending on inventory orders versus advertising.

Adjust based on what you need to know

No two businesses are the same. While there are fundamentals that are true for every business, your unique mix of revenue and expenses may lead to a slightly different set of bookkeeping needs from others.

“I used to review my books based on orders. Every order that came in, I’d ensure it was logged and tracked with bookkeeping software,” says Sheena. “It turns out; this wasn’t necessary. For our business, all that mattered for our reviews were overall sales by month.”

Suppose you’re recording everything you need for tax and bookkeeping purposes, and you’re getting the financial information you need to make strategic decisions about your business. In that case, you can opt to streamline processes that aren’t critical to either of those things.

The best bookkeeping software for small business

If you’re looking for ways to make online bookkeeping easier, there are several tools to consider, depending on the needs of your business:

  1. A2X. This app automatically posts Shopify store sales to Xero or QuickBooks and reconciles your payouts so you can see everything has been accounted for correctly. Hundreds of leading eCommerce accounting firms trust A2X.
  2. OneSaaS integrations. OneSaas connects business apps across accounting, eCommerce, fulfilment, CRM, billing and invoicing, and email marketing. You can easily build custom workflows and create a bookkeeping system that grows with your business.
  3. FreshBooks. This cloud bookkeeping software helps you manage Shopify orders in FreshBooks based on three objects: items, invoices and payments. It also uses your Shopify inventory as the source of truth for all inventory management, updating information automatically. 
  4. QuickBooks. When you integrate Shopify with QuickBooks, your orders, inventory, customers, and shipping are updated and accurate automatically. You can use QuickBooks to post eCommerce order information as batch journal entries or granular order-level posting and sync with other eCommerce marketplaces, such as Etsy and Amazon. 
  5. Bench. Bench offers affordable outsourced bookkeeping services for your Shopify store. The app syncs directly with your merchant and bank accounts. Then, a virtual bookkeeping team balances your monthly books and prepares financial reports. 

“When choosing the best bookkeeping system, consider one of the lead cloud accounting systems, such as QuickBooks or Zero,” says Ellen Main of A2X Accounting.

“When doing tax bookkeeping for your Shopify business, it’s not enough just to record the sales. You need to pick up all the fees and taxes,” Ellen adds. “This is no small task without the help of an app, connector, or integration.

Choose a bookkeeping software that posts summarised statements and attribute all your sales and fees to your bookkeeping system. This will ensure that, as your business scales, your books will always be tidy and accurate. 

Understanding small business bookkeeping is key for growth

Whether you do all bookkeeping yourself or decide it’s best to hire a certified bookkeeper, understanding how money flows through your business is good business.

“Having proper data and knowing where you are, what seems to be driving your revenue, and where you might be able to trim some costs is critical,” says Charlie. “Having solid data when it comes to bookkeeping for startups puts you in a better spot to succeed in the future.” 

Even if you have little bookkeeping experience, you now have firsthand knowledge of and access to all your financials, which puts you in a powerful place to make informed decisions about your business’s future. And while there’s value in getting expert bookkeeping help and advice, make sure you never lose the solid understanding of your numbers, no matter who you have managing the day today.

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