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While starting your small business may feel pretty daunting, setting up an accounting system, especially for those of us who barely scraped by the subject in college, can feel impossible.
Well, thankfully, I've done my homework and "earned my stars," so I'm ready to take you through 7 easy(ish) steps to setting up a small business accounting system.
Are you ready(ish)? Let's get started:
Yes Pam from The Office, it is.
“But author-person (Joshua), how is this relevant to accounting systems at all?”
Just hold on a minute; I promise you it'll make sense. You see, small business accounting includes a lot of factors:
Because of this, it's crucial to determine where your money will be deposited first. And (you've probably guessed it) your business structure determines how you handle many of these variables.
In particular, the structure you opt for ultimately decides your tax management. So, you need to think carefully when deciding on the correct business entity. Here are the four main types:
While I could get into depth (and write an entirely different article), I won't. This is the necessary “just of it.”
But if you do want to go into greater detail about this, there are some great resources you can explore online.
Otherwise, note that sole proprietorships don't require a separate bank account, whereas the other three do.
In addition, sole proprietors are subject to "pass-through taxation." This means that entrepreneurs can report their losses and income on their business on their personal tax return. The same can be said for partnerships.
However, because LLCs and corporations are separate entities, tax is also treated as a separate affair.
(I know this is a lot of information, but bear with me!)
Now that you've chosen your business structure (and presumably) registered your business, it's time to open a business bank account.
And while you might be thinking that you're a sole proprietor and, therefore, can skip this section, I'd strongly urge you to reconsider.
Here's the thing: it just makes your life easier. This is especially true if you already have a full-time job with debit orders at different times of the month.
It's easier to understand your business if you have business transactions in one account.
And if (and ideally when) you get a business credit card, you'll have some extra money to make those large purchases that can't wait till month's end.
... Such as the client who makes a large order, forcing you to contact the supplier who wants immediate payment for a discount. These things happen!
Don’t be this person, learn to keep record!
From the get-go, a small business owner must have a proper record-keeping system. And although (technically speaking) you don't have to provide receipts to the IRS that are under $75, it's still not a bad idea for your own records.
And this doesn't just mean keeping receipts for purchases. No, this could include:
This could be done manually (i.e., pencil and paper) by using preformatted record books. You might also opt for ledger sheets.
Alternatively, if you'd like to reduce error, there's also computerized record keeping. You could opt to install a program such as Quicken to do this.
Now, the fourth (and probably most daunting) step is creating a bookkeeping system.
As you probably know, this is so that you can (1) keep a record of your business transactions, (2) categorize them appropriately, and (3) ultimately reconcile them into your bank statements.
Now, there are a few ways you can approach this:
While the former two (particularly accounting software) may seem like a more attractive option due to the cost savings, make sure you brush up on your accounting know-how, or you risk making (potentially costly) mistakes.
“QuickBooks Online: It is a cliché, but I recommend it as the best bookkeeping software for small businesses. Small businesses are often on a budget, and they might not hire top talent out there because of budgetary constraints.
Still, QuickBooks has regular resources that the accountant can use and rely on to learn more about the software, increasing their skills and accuracy. I also recommend it for small businesses because it has affordable monthly subscription plans, which most small businesses can afford and continue to upgrade as the business continues to grow.”
And this brings me to my next step:
Now, if you don't already know, there are two methods of accounting: the cash and the accrual method.
The cash basis involves recording expenses and revenue when cash is actually received or given. However, the accrual basis is when expenses and revenue are recorded before money is given or received.
Remember that, as a US business owner, if your business revenue is less than $5 million, you have to use the accrual accounting method.
Okay, I know I've provided a lot of information. But stick with it; you're almost at the end.
And if you keep reading, I'll be providing additional resources to help you out.
So, while you may start without any employees, mainly if this is a family-run business or an online venture, eventually, you'll have to hire help.
By developing a payroll system, I mean that you need to ensure that you're withholding taxes correctly.
While I won't get into extensive detail about this, you can find more information online that will help guide you in the right direction.
It's important to understand:
Okay, so we're almost at the end of it.
Thank you for sticking with me on this journey! So, while I could get into a few more points, I think sales tax is the most relevant.
Consider how sales tax is pretty straightforward if you operate a traditional brick-and-mortar business. Online, however, is not so simple. In an e-commerce store, you'll need to determine whether:
(a) You're in an origin-based state
(b) Or you're in a destination-based state
As the name suggests, origin-based states have tax applied based on location. In contrast, origin-based states use the tax rate of the destination of the service or product.
However, remember that US-based businesses are exempt from tax for international purchases.
Okay, so here are the resources that I personally find pretty useful and that also explore accounting terminologies:
I hope you've found this beneficial! Search our business section for more helpful articles.
(We made a video on this below, and yes, that’s my voice at the end!)
There are several steps to set up a small business accounting system. The first, of course, is to open a business bank account. After this, it's about creating record-keeping, bookkeeping, and payroll systems. You also have to become familiar with the tax requirements of your state, type of business, and entity type.
The five basic accounts in bookkeeping are assets, expenses, liabilities, equity, and income.
The primary bookkeeping rule is to always debit the receiver but credit the giver. Also, consider the following:
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Joshua J. Brouard brings a rich and varied background to his writing endeavors. With a bachelor of commerce degree and a major in law, he possesses an affinity for tackling business-related challenges. His first writing position at a startup proved instrumental in cultivating his robust business acumen, given his integral role in steering the company's expansion. Complementing this is his extensive track record of producing content across diverse domains for various digital marketing agencies.
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