It’s an exciting journey to launch a new business, but it also carries a lot of obligations, including handling your funds. No matter the size of the company, accounting is a critical component.

It ensures that you abide by tax regulations and assists you in keeping track of your costs, earnings, profits, and losses.

If you’re a small business owner and new to accounting, you may find it daunting and confusing. However, with the right guidance and tools, it can be a simple and straightforward process.

In this article, we’ll take you through nine easy steps on how to do accounting for your small business.

From setting up your accounting system and chart of accounts to reconciling your bank statements and generating financial statements, we’ll provide you with practical tips and resources to help you manage your accounting tasks effectively.

How To Do Accounting for Your Small Business

How To Do Accounting for Your Small Business?

Set up a separate business bank account

Creating a separate business bank account is a vital step in managing your small business’s finances. This measure is critical for several reasons.

For starters, it keeps your finances distinct from your corporate finances. This separation is critical for keeping accurate financial records and reporting since it allows you to monitor your business’s income and expenses without getting mixed up with personal expenses.

Furthermore, having a separate company bank account helps to manage your cash flow easier because you can correctly track incoming revenue and departing expenses.

Furthermore, because you may issue checks or make online payments directly from your business bank account, it streamlines taking payments from consumers and paying bills.

A separate company bank account can also help you build a business credit history necessary for the future when applying for credit cards or loans.

It is vital to choose a bank that offers the services and features you demand when opening a business bank account. Costs, interest rates, internet banking options, and customer service are all important considerations.

Finally, opening a separate company bank account is critical for laying a solid financial basis for your small business. It allows you to separate your personal and corporate funds, manage your cash flow, and build a business credit history.

Choose an accounting method

There are two basic accounting approaches: cash accounting and accrual accounting. When money changes hands, cash accounting records the transaction.

When you receive payment for selling a product, for instance, you record the revenue. In contrast, if you buy a thing and pay for it, you record the expense at the time of purchase.

Cash accounting is a common choice among small firms since it is simple and easy to understand. Yet, it may not provide an accurate reflection of your company’s financial health because it does not account for billed but unpaid transactions.

Accrual accounting, on the other hand, entails recording transactions as they occur, regardless of when money changes hands. When you sell a product and issue an invoice to the buyer, you must record the revenue even if they haven’t yet paid you.

Similarly, even if you haven’t yet paid the invoice, you must record the expense at the time of purchase if you buy anything and receive an invoice.

Accrual accounting delivers a more realistic picture of your company’s financial health since it accounts for all transactions, regardless of when money changes hands. It is, nevertheless, more complicated and time-consuming than cash accounting.

Finally, the accounting approach you use will be determined by the demands and preferences of your firm. Cash accounting may be a smart choice if your company has basic transactions and few outstanding invoices or payments.

Conversely, if your company has more complex transactions or a large number of pending invoices or bills, accrual accounting may be a better solution.

Select accounting software

Selecting appropriate accounting software is crucial for effectively managing your small business finances.

Accounting software can automate routine tasks, produce financial reports, and streamline bookkeeping procedures. Consider the following factors when choosing accounting software for your small business:

i. Features: Look for accounting software that offers the features you need to manage your finances efficiently. Features may include invoice management, expense tracking, inventory management, payroll processing, and financial reporting.

ii. User-friendliness: Opt for accounting software that is user-friendly and easy to understand, even if you lack accounting expertise. Some software choices offer tutorials or customer service to help you get started.

iii. Scalability: Consider whether the accounting software can grow alongside your business. If you intend to expand, you’ll require software to accommodate more transactions and handle more intricate financial reporting.

iv. Integration: Choose accounting software that integrates with other business tools you use, such as your bank account, payment processors, and customer relationship management software.

v. Security: Select accounting software that offers robust security features, such as two-factor authentication and encryption, to safeguard your financial data.

vi. Cost: Factor in the cost of the accounting software, including subscription fees or additional charges for extra features. Look for software that balances features and affordability.

Some common accounting software options for small businesses include QuickBooks, Xero, FreshBooks, and Wave. Take the time to investigate and evaluate several possibilities to get the best accounting software for the demands of your small business.

Set up your chart of accounts

Establishing a chart of accounts is a crucial aspect of the accounting process for small businesses. It involves creating a comprehensive list of all accounts utilized to record financial transactions in the company’s general ledger.

The chart of accounts is an organized list of accounts used to classify financial transactions, tailored to the specific requirements of the business.

Typically, a chart of accounts is categorized into assets, liabilities, equity, revenue, and expenses, with further subcategories or specific accounts that track transactions. For instance, the expenses category may include subcategories for salaries, rent, utilities, and supplies.

Creating a chart of accounts that meets the specific needs of the business is critical. This involves considering the nature of transactions the business engages in and how to track them. It may be helpful to consult with an accountant or bookkeeper to ensure that the chart of accounts is established accurately.

A well-organized chart of accounts is vital for generating financial reports and tracking transactions. It enables business owners to make wise choices for their companies, such as purchasing new machinery or recruiting new staff.

By providing a structure for recording transactions, the chart of accounts helps generate reports that offer insight into a business’s financial performance.

Record all transactions

This is an important step in maintaining your company’s finances and producing accurate financial reports. Here are some more details to think about:

a. Track all income: Keep track of all earnings from sales, services, and other sources. Cash and credit sales are both included.

b. Maintain a record of every expense incurred by your business, including purchases, rent, utilities, salaries, and any other costs related to operating it. You will be able to accurately track your cash flow and profitability thanks to this.

c. Categorize transactions: Using your accounting software, categorize all transactions according to your chart of accounts. This will assist you in creating reports and making sound business decisions.

d. Save any receipts and invoices relating to your transactions if you need to submit proof for tax purposes or to reconcile your accounts.

e. Maintain track of all payments: Keep tabs on all payments, including those made to contractors, staff members, and other expenses. Making sure you have enough money to satisfy your responsibilities might help you remain on top of your financial outgoings.

Consider employing automation to help simplify transaction recording. You can, for example, configure automatic bank feeds to automatically import your bank transactions into your accounting software.

Maintaining a trustworthy accounting system for your small business requires accurate and consistent recording of all financial activities. This step lays the groundwork for accurate financial reporting and making sound business decisions.

Related: Importance of accounting for small businesses

Reconcile accounts

Reconciliation involves comparing the data in your accounting software to the financial data for your business, such as bank and credit card statements.

Account reconciliation is critical for detecting errors or anomalies, such as missing or duplicate transactions, before they become larger issues. It can also aid in the detection of fraudulent or unauthorized transactions.

Use these simple procedures to reconcile your accounts:

  • Collect your bank and credit card statements for the applicable period.
  • Check the amounts, dates, and descriptions of the transactions on your statements against those in your accounting software.
  • In your accounting software, mark transactions that match as “cleared” or “reconciled.”
  • Analyze any discrepancies you discover right away. This could include contacting your bank or credit card company for extra information or checking your accounting software for problems.
  • If you’ve detected any errors or discrepancies, update your accounting records to reflect the proper information.

You can keep your financial records correct and up to date by balancing your accounts regularly.

Generate financial statements

Financial statement generation is an essential component of accounting for any small firm.

These statements provide a thorough assessment of a company’s financial health and can assist in making sound financial decisions. When preparing financial statements, keep the following points in mind:

A balance sheet is a picture of a company’s financial situation at a specific point in time that contains assets, liabilities, and equity. Assets are anything that has monetary value in a firm, such as cash, inventory, and equipment. Any debts or commitments, such as loans or credit card bills, are considered liabilities. The percentage of the business owned by the owner and shareholders is referred to as equity.

An income statement shows a company’s revenue and spending over a given period. It aids in establishing a company’s profitability by subtracting expenses from revenue. A profit and loss (P&L) statement is another name for this statement.

A cash flow statement displays the inflows and outflows of cash in a business during a specific period. It gives an overview of the available funds and whether it is sufficient to cover expenses. It also assists in identifying any cash flow concerns and, if necessary, proposes improvements to corporate operations.

The accuracy with which transactions are recorded in accounting software is crucial in the generation of financial statements. This includes all earnings, payments, and expenses.

Frequent financial statement review is also necessary to maintain correctness and up-to-date information. Using financial accounts to track business performance allows for more informed decisions about managing funds and growing the business.

Monitor your cash flow

Monitoring your small business’s cash flow is an important aspect of financial management. Cash flow is the term for the flow of funds into and out of your company, covering revenue, expenses, and other financial activities.

Here are some tips for efficiently managing your cash flow:

Observe all incoming money: Keep an eye on every dollar entering your business, including sales proceeds, investments, loans, and other sources of income. Accounting software can assist you in recording these transactions and producing reports.

Handle departing cash: Keep track of all money leaving your company, such as rent, utilities, salaries, taxes, and supplies. This can assist you in identifying areas where you can cut costs and improve your bottom line.

Anticipate future cash flow: To generate a cash flow prediction, predict future cash inflows and outflows. This allows you to plan ahead of time for potential cash difficulties.

Keep a cash reserve: Put aside a percentage of your money to cover any unexpected expenses or cash shortfalls. This can keep you from using credit or borrowing money to cover your expenses.

Keep track of your receivables and payables: Carefully manage the money due to you by customers (receivables) as well as the money owing to vendors and suppliers (payables). Unpaid invoices and late payments can hurt your cash flow, therefore it’s vital to handle these issues correctly.

By frequently evaluating your cash flow and taking actions to manage it properly, you can guarantee that your small business has enough cash to meet its responsibilities and capitalize on growth prospects

Consult with an accountant

Seeking help from an accountant or tax specialist is undoubtedly an important step for small business owners who do not have a solid experience in accounting or taxation.

These experts can provide valuable advice and suggestions to manage funds and conform to tax rules and regulations.

Here are a few to consult with an accountant or tax professional:

Tax preparation: You can optimize deductions and reduce tax liabilities by planning for taxes throughout the year with the help of an accountant or tax specialist.

Financial analysis: They can examine your financial statements and advise you on how to improve your financial health by discovering cost-cutting options or prospective revenue development.

Developing business strategy: They may assist you with developing a business strategy and forecasting your financials, which can be essential when seeking financing or making long-term business decisions.

Compliance: They may assist you in ensuring that all tax laws and regulations are followed, so avoiding penalties or legal complications.

Search for an accountant or tax specialist who has worked with small businesses in your industry.

You can also get guidance from other small business owners or professional organizations like the American Institute of Certified Public Accountants (AICPA). It’s also critical to analyze their fees and make sure they fit inside your budget.


Although financial management may be challenging for small firms, it is one of the most crucial elements of managing a successful business.

Maintaining accurate records and staying on top of financial reporting might mean the difference between success and failure in today’s competitive business market.

You can create a reliable accounting system that will enable you to comprehend your company’s financial status and make wise decisions by following the nine stages described in this article.

Also, it’s critical to keep in mind that accounting is a continuous process that requires continual care and management. Maintaining a current understanding of the most recent accounting procedures and trends can also assist keep your organization on track.

In conclusion, accounting is essential to managing a small business. By investing the effort to create a reliable system, you’ll be well on your way to success.

Always prioritize correctness and preciseness, and don’t be shy about seeking help when you need it. Your small firm can achieve financial stability and expansion with attention and devotion.

Also Read:

7 Best Accounting Software For Schools.

7 Best Auto Dealership Accounting Software.

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