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Accounting Basics Every New Business Owner Needs to Know

Accounting Basics Every New Business Owner Needs to Know

Basic bookkeeping is the practice of recording all financial transactions for a business. It includes tracking money coming in (income) and going out (expenses). Maintaining accurate books gives small business owners a clear picture of the financial health of their company. 

Bookkeeping provides the data needed to produce financial statements like the income statement, balance sheet, and cash flow statement. These reports allow business owners to analyze their company's performance, spot trends, and gain insights to make intelligent financial decisions. 

For small businesses, bookkeeping is a fundamental part of financial management. With proper bookkeeping, it's possible to know whether the company is profitable, what the revenue streams are, what expenses need to be controlled, how much cash is available, and what taxes are owed. In short, bookkeeping gives small business owners the visibility they need to manage their finances and strategically operate their company. 

Keep Track of Income  

Keeping track of all money coming into your small business is critical to bookkeeping and accounting. It includes recording your business's income from sales, services, interest, or other sources. 

Most small businesses' income comes from providing products or services to customers. It's important to have a system to track each sale and payment transaction. Use software or spreadsheets to log details like date, customer name, product/service, and dollar amount for every income transaction. Keep all sales receipts and invoices organized for your records. 

If your business earns interest income from a bank account or investments, record these earnings as they are paid out. Other less common sources of business income may include rent payments from tenants, proceeds from asset sales, or miscellaneous income like rebates. Input each income transaction when it occurs. 

Having a complete record of all money coming into your business is necessary for accurate bookkeeping. It allows you to determine your true revenue and net income over time. Failing to track income transactions can cause major headaches at tax time or if you ever need to audit or analyze your finances. Get into the habit of logging every dollar that comes into your business from the start. 

Keep Track of Expenses

Keeping track of all business expenses is a crucial part of bookkeeping for small business owners. Records every dollar that goes out of the business, whether it's recurring expenses like rent and utilities or one-time purchases like office supplies or equipment. Some basic expenses small business owners need to track include: 

Inventory costs: If you manufacture or sell products, you need to log the amount you spend to purchase inventory and document the value of your current inventory. This allows you to calculate the Cost of Goods Sold. 

  • Payroll: Track everything you spend on payroll, such as employee wages, bonuses, benefits, payroll taxes, and retirement contributions. Payroll is often one of the largest expenses for small businesses. 
  • Rent and utilities: Log all monthly expenses like rent, electricity, gas, water, internet, phone service, and other bills.
  • Supplies: Things like office and cleaning supplies used to run the business must be recorded. Keep track of one-time big supply purchases as well as ongoing smaller ones. 
  • Equipment/assets: Record and depreciate business equipment, furniture, and vehicles.
  • Repairs and maintenance: Track costs related to upkeep, maintenance, and repairs of business equipment and property. 
  • Travel: Mileage, flights, hotels, transportation, meals, and other travel costs should be diligently recorded, especially when traveling for business. 
  • Marketing: All advertising, promotion, and marketing expenses, such as online ads, printed materials, signage, sponsorships, trade shows, and more, should be tracked. 
  • Professional services: Record payments made to freelancers, accountants, lawyers, consultants, designers, contractors, and any other professional services.

Carefully tracking every expense is critical for getting an accurate picture of the business's financial health and for tax purposes. Keeping meticulous records makes completing tax returns much smoother. There are various methods small business owners can use to track expenses, from expense reports to bookkeeping software. The key is to record everything and have an organized system. 

Manage Accounts Receivable 

Accounts receivable refers to money that customers owe your business for goods or services purchased on credit. Effectively managing accounts receivable is crucial for ensuring a steady cash flow and avoiding late or missed payments. 

You'll need to track all outstanding invoices and payments due from customers. Send invoices promptly and clearly state payment terms like net 30 days. Follow up with customers as invoice due dates approach. Offer easy payment options like accepting credit cards. 

Use accounting software to create professional invoices, log transactions, and generate aging reports showing unpaid invoices. Send payment reminders when invoices become past due. Evaluate individual customers' payment history and creditworthiness when deciding whether to continue offering credit terms. 

Write-offs or collections may be needed for severely late or uncollectible accounts. However, staying on top of accounts receivable and communicating with customers can go a long way toward getting paid on time. 

Manage Accounts Payable 

Managing accounts payable is a vital part of bookkeeping for small business owners. Accounts payable refers to the money your business owes to vendors, suppliers, contractors, and anyone else who provides goods or services to your company. 

It's important to keep track of accounts payable so you know who you owe money to and can pay your bills on time. Late payments can damage supplier relationships and hurt your business' credit. 

To manage accounts payable: 

  • Keep a record of all purchases and expenses. Save invoices, contracts, and other documentation related to anything you purchase on credit. 
  • Enter bills into your accounting software as soon as you receive them. It helps you keep track of due dates. 
  • Pay bills by their due date to avoid late fees and interest charges. Paying on time also maintains positive relationships with vendors. 
  • Take advantage of early payment discounts when offered by suppliers. It saves money for your business. 
  • Set up payment reminders and alerts in your accounting software so you never miss a due date. 
  • Review accounts payable reports in your accounting software. It gives an overview of who you owe and when payments are due. 

Staying on top of accounts payable is crucial for maintaining cash flow and keeping vendors happy. Pay your bills on time every time to build lasting business relationships. 

Reconcile Bank Accounts 

Reconciling your bank accounts is a crucial part of basic bookkeeping. It involves regularly comparing your internal financial records to your bank statements. The goal is to ensure that transactions are recorded accurately in both places. 

When you receive your monthly statement from the bank, gather your most recent records and carefully review each transaction. Ensure every deposit, check, withdrawal, and fee on the statement matches what you show in your books. If you find any discrepancies, you must determine the cause and make adjustments. 

For small business owners using accounting software, reconciliation can often be automated by linking bank accounts. The software will match up transactions and flag any discrepancies for you to review. But it's still important to verify that everything looks right. 

Reconciling regularly, such as monthly, helps catch any errors early before they compound. It also helps deter potential fraud or misuse of company funds if multiple people have access to accounts. Plus, reconciliation gives you an updated look at your true available cash. 

Overall, reconciling bank accounts takes a bit of time each month, but it's vital for accurate financial reporting. It's easiest to reconcile when you enter transactions frequently so they match recent bank statements. Proper reconciliation in your basic bookkeeping helps ensure your financial records are always up-to-date. 

Produce Financial Statements 

Financial statements are reports that summarize a business's financial performance over a specific period of time. They are important for business owners to produce on a regular basis in order to understand the financial health and position of their company. The three main financial statements are the income statement, balance sheet, and cash flow statement. 

Income Statement 

The income statement shows the revenue earned and expenses incurred over a period of time, such as a month, quarter, or year. It allows you to see whether your business made a profit or loss during that time period. The income statement lists all sources of revenue first, followed by all expenses. The difference between total revenue and total expenses is the net profit or net loss. Monitoring income statements monthly and annually allows you to see trends and growth over time. 

Balance Sheet 

The balance sheet provides a snapshot of a business's financial position at a specific point in time. It lists all assets (things of value owned), liabilities (debts owed), and equity (value belonging to shareholders) as of a certain date. Assets must equal the sum of liabilities and equity. The balance sheet gives business owners insight into the company's resources, obligations, and owner equity. Tracking changes in assets, liabilities, and equity over time shows the strengthening or weakening of a company's financial foundation. 

Cash Flow Statement 

The cash flow statement outlines how much cash is coming into and going out of the business during a defined period. It breaks down cash from operations, investing, and financing. While profitability is important, cash flow determines the business's ability to pay expenses and purchase assets. Monitoring cash flow statements helps owners understand their liquidity, ability to grow, and financial flexibility. 

Pay Taxes 

As a small business owner, it's crucial to understand and fulfill your tax obligations in order to avoid penalties. You'll need to pay various federal, state, and local taxes. 

Federal Taxes 

The main federal taxes for small businesses are income tax and self-employment tax. You must accurately report your business's income and expenses on your personal tax return using Schedule C. Any profit left after business deductions will be subject to income tax. You'll also owe self-employment tax to pay Social Security and Medicare taxes since you are your own boss. 

State Taxes 

Most states levy some form of income tax on businesses. The tax rate and rules vary by state. For example, some states tax business profits passed through to personal tax returns, while others allow you to file and pay taxes for your business separately. Check your own state's requirements. 

Local Taxes 

Many cities and counties collect taxes from businesses based on income and gross receipts. Common examples are occupational taxes, franchise taxes, and business license fees. Research the local taxes in your area. 

Keeping solid financial records will help you accurately calculate taxes owed. Deducting all eligible business expenses will lower your taxable income. Form 1040-ES can be used to make estimated quarterly payments if needed. Failing to pay taxes on time leads to interest and penalties, so filing and paying all required taxes should be a priority. Consider hiring a tax professional if you need help. 

Choose Accounting Software 

When starting out, most small business owners handle their finances using a basic spreadsheet. But as your business grows, you'll likely want to upgrade to small business accounting software. Accounting software helps automate tasks, synchronize bank accounts, generate financial reports, and make tax time stress-free. The three popular options for small businesses are QuickBooks, Xero, and FreshBooks.

Here are their descriptions according to their websites:

QuickBooks is the most widely used small business accounting software. It offers a desktop version with robust features for inventory tracking, invoicing, bill pay, and reporting. QuickBooks Online has a more intuitive interface designed for the cloud. You can start with a simple start plan and scale as your business grows. QuickBooks is ideal for companies that want an all-in-one solution to handle accounting, payroll, payments, and more. 

Xero takes a cloud-first approach and focuses on real-time visibility into cash flow. It syncs seamlessly with popular small business tools. Xero offers tailored plans based on the number of bills and invoices per month. Xero is best for service-based businesses that need to send invoices, track expenses, and have multiple users. 

FreshBooks combines accounting features with better billing and invoicing. It offers monthly plans based on the number of clients. The intuitive dashboard provides visibility into accounting and outstanding client invoices and payments. FreshBooks is an excellent choice for freelancers and service providers who want to simplify their billing and accounting in one place. 

When choosing accounting software, consider your business needs, number of users, and budget. All three of the leading solutions offer free trials, so you can experience each one hands-on before committing. The right accounting software saves time, keeps everything organized in one place, and sets your business up for success as it grows. 

When to Start Bookkeeping 

New business owners should start their bookkeeping as early as possible when starting their business. We recommend beginning basic bookkeeping practices immediately at launch rather than waiting until the company grows. 

Tracking finances from day one establishes good habits and business discipline. Recording all transactions from the outset provides an accurate picture of the business's financial health over time. It helps identify trends, expenses, and cash flow at a granular level. 

Beginning early also prevents an intimidating backlog of accounting work from piling up. Bookkeeping is much easier when done consistently in real time. As each transaction occurs, it can quickly be logged or input into accounting software. Waiting months or years to organize finances leads to the headache of sorting through piles of receipts and bank statements. 

The old adage applies: "Anything worth doing is worth doing from the start." Bookkeeping is core to a business's success. It provides data to make intelligent financial decisions and understand the bottom line. Rather than putting it off, entrepreneurs should prioritize basic accounting practices from launch. Consistent bookkeeping and financial awareness offer peace of mind and a foundation for growth. 

Should you have any questions, the West to East Business Solutions LLC team is happy to assist you with any level of accounting and financial planning. Please call for a free consultation today at (602) 821-7516 or email us at  Schedule an appointment with our CEO, Nadia Conn, who has the knowledge and experience to get your business off to a successful start.