Quick Business Accounting Guide

Woman working in her office using a calculator.

When bringing a business to life, it’s important not to gloss over some of the less glamorous parts of the job. Whether you like it or not, basic accounting skills are a key component of running a successful company. You don’t need to be a numbers whiz, but you should have a relatively firm grasp on things like budgeting, payroll management, and taxes.

This quick accounting guide will help you stay organized while reducing liability and making smarter financial decisions for your business.

Recommended: Hiring an accountant can save your company thousands of dollars in taxes each year. Get a free tax consultation with 1-800Accountant.

Familiarize Yourself With Accounting Terms

As you wade further into the weeds of starting a business, you will probably come into contact with select accounting terms on a regular basis. You don’t need to read a book or take a class on the subject (although this would be useful), but if you want to put your company in the best position for making money, you should try to familiarize yourself with common accounting terms.

Pay Simple compiled a useful list of 42 common accounting terms all business owners should know, which serves as a great jumping off point. You can also find many other simplified lists on the internet to increase your understanding. Learn the abbreviations and definitions of terms like Accounts Payable, General Ledger, and Variable Cost so that you don’t have to feel thrown for a loop in your next investor meeting.

Open a Business Bank Account

Once you’ve learned the basics of accounting theory, you can start putting your newfound skills to the test by opening your first business bank account. As soon as you have registered your business, you need to decide where you’ll be keeping your income (this is legally required for Corporations and LLCs).

Sole proprietors are legally allowed to manage their business income in the same bank account as their personal income. However, this is heavily discouraged by government agencies like the Small Business Association as it makes taxes significantly more complicated.

The first step in opening a business bank account is selecting a bank. Don’t commit to the first one you see — take the time to carefully weigh your options, coming up with a list of priorities that takes into account factors like fees and compatibility with your POS systems/other technologies. You’ll also want to select a bank that you can access both online and in-person.

Once you’ve chosen a bank, you will need to open a business checking and a business savings account. It’s important to have two accounts because it is easier to organize your money that way — you can divide up what you need to save and what business revenue you are able to spend.

This is not required, but your business could benefit from getting a business credit card. If you choose the right card, you can boost your business’s credit rating while stocking up on additional benefits, like cash back or travel points.

Track Expenses

As a small business owner, you can benefit from tax deductions on certain business startup expenses. This, however, requires careful tracking of all your business’s expenses. According to the SBA, you need to keep a careful record of the following:

  • Receipts
  • Bank and credit card statements
  • Bills
  • Canceled cards
  • Invoices
  • Proof of payments
  • Financial statements from your bookkeeper
  • Previous tax returns
  • W-2 and 1099 forms
  • Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return

While there are a few exceptions among the list of things you need to keep, it is recommended that you hold onto everything just in case (either physical or digital copies). You don't want to be on the wrong side of the IRS.

Speaking of which, there are five types of receipts that the revenue service historically scrutinizes more than others, so pay special attention: meals and entertainment, out of town business travel, vehicle related expenses, business gifts, and home office expenses.

You don’t need to do all of this manually. There are apps and technologies that have been designed to take some of the weight off your shoulders. Shoeboxed, for example, is a service that scans, stores, and organizes your receipts and records.

We would also recommend doing research on common tax deductions for small business owners, as you’ll likely find some surprising results. One example is that if you’re using a spare room in your house or apartment as an office space, you’ll probably be able to deduct expenses for the business use of your home, which includes mortgage interest, insurance, utilities, repairs, and depreciation.

Establish a Bookkeeping System

While they may seem interchangeable, bookkeeping and accounting are actually two different things. According to SBA partner Bench, “Bookkeeping is more transactional and administrative, concerned with recording financial transactions. Accounting is more subjective, giving you business insights based on bookkeeping information.”

One of the first things you should do when starting your business is establishing an accurate, reliable bookkeeping system. This is comprised of recording financial transactions, producing invoices, posting debits and credits, completing payroll, and maintaining and balancing subsidiaries, general ledgers, and historical accounts.

Bookkeeping is an ongoing task that you’ll need to stay on top of so that at the end of each month you can produce financial statements with up-to-date information on how your business is doing.

Depending on your personal financial knowledge, you can either do the bookkeeping yourself by using an Excel spreadsheet or run-of-the-mill accounting software. Alternatively, if you’re not a numbers person, there are a number of services to which you can outsource the work.

You can also hire an in-house, full-time bookkeeper if your business grows big enough to pay for it. Whatever you choose, you will need to choose a bookkeeping method:

  • The Cash Method: revenues/expenses are recognized the moment they are actually received or paid
  • The Accrual Method: revenues/expenses are recognized the moment the transaction takes place, regardless of whether the money has moved hands yet

Consider a CPA

When your business gets to a certain size, it is recommended that you hire a Certified Public Accountant (CPA), who can help with tasks like lease negotiations, treasury management, and tax reporting, as well as longer-term financial planning.

When hiring a CPA, prioritize finding one who has expertise in dealing with entrepreneurs — and potentially, your industry. Make sure you discuss their vision and rates before coming to any hiring decisions.

While CPAs are recommended, technological advances mean that there are software programs out there that can do many of the tasks CPAs traditionally perform when they are hired. One of the benefits of using software is that the cost will be significantly less than that of hiring a tax professional (the average price for software ranges from $100 to $120 while the least expensive tax preparers cost $100 minimum, with CPAs at least twice that cost).

While software can be quick and straightforward to use, there are key drawbacks. For example, CPAs have access to much more sophisticated software than what is sold on the market and will save you time when handling complicated issues.

Set Up Payroll

Though your business may be just you at the start, you will likely pick up some help along the way. As you do, you’ll have to figure out a payroll system for your employees or contractors.

Firstly, it’s important to establish the division between an employee and an individual contractor. Then, for employees, you’ll need to decide on a schedule for paying them and make sure you’re withholding the correct taxes. For contractors, keep track of how much you’re paying each person as you may need to file 1099s for each contractor at the end of the year.

Determine Tax Obligations

The tax obligations of your business depend on the legal structure of your business. If you are self-employed, you need to withhold taxes from your income and remit them to the government in the same way as an employer withholding taxes from an employee’s pay. If you owe over $1,000 in taxes, you will have to pay quarterly estimated taxes four times each year.

You should also be aware of sales taxes, which are relatively straightforward if you’re running a regular brick-and-mortar store. If you’re conducting sales outside of your home state, then things get a little more tricky as you’re navigating more than just your own state’s regulations. If this is the case, we recommend hiring a CPA to help you figure out the rules applying to your business.

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