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Small Business Accounting: The Basics

By DeVry University

October 16, 2022

9 min read

 

Small businesses have been described as the backbone of the American economy. Driven by a group of creative and diverse risk-taking entrepreneurs, small businesses of all kinds fuel our economy and add flavor to our communities.

 

According to reporting by Forbes, 99.9% of businesses across the United States are small businesses, which means they meet various criteria for establishment size, sales and revenue and industry sector. You may be surprised to know there are 33.2 million small businesses across the United States, and that nearly half of all U.S. employees are employed by a small business.

 

These facts reveal the important contribution small businesses make to our economy. One of the most important steps you as an entrepreneur can take is to set up a robust small business accounting system to ensure a solid foundation for your growing business.  

 

In this article, we’ll outline how to do accounting for small business, defining some of the common terms and tasks you’ll encounter, and discuss when you may want to look for professional help with your books. 

What Is Small Business Accounting?

Accounting is an essential part of any business, whether you’re a mom-and-pop retailer or a large corporation. Business accounting enables you to track all the transactions, assets and liabilities, inventory and other aspects of your regular operations, and to have the figures needed to prepare the regular filings required by state and federal taxing authorities. 

In small business accounting, there are tasks that need to be done daily, weekly, monthly, quarterly and annually to keep things running smoothly. Even small business owners who’ve earned a business degree may find tackling the bookkeeping and accounting responsibilities challenging to wrap their head around at times. Business accounting software, however, has made these tasks more manageable. 

Basic Terms for Small Business Accounting

To help get you started in small business accounting, there are some regular business terms you should familiarize yourself with. Think of these items collectively as a compass that will help you get your bearings as you navigate your businesses’ finances:

Accounts Payable and Receivable

These two accounting terms help you determine what you owe, and what is owed to you. Accounts payable is money that you owe to others, like vendors, suppliers and creditors, and are listed as liabilities because you are obligated to pay them. Accounts receivable is money that is owed to you by your customers, for the goods or services you’ve sold them. These items are listed as assets because the customers are obligated to pay you.

Accrual and Cash Basis Accounting

Accrual and cash-basis accounting are terms that designate when a sale is recognized by the business. In accrual-basis accounting, businesses recognize revenues and expenses at the time a sale is made. In cash-basis accounting, businesses recognize a sale when a payment is made.

Assets and Liabilities

Assets are anything your business owns that has value. This may include the money you have in the bank, accounts receivable, inventory, furnishings and equipment or real estate. Liabilities are items that detract from the value of your business, such as anything considered a debt or financial obligation. These could include accounts payable, wages and taxes, and small business loans.

Balance Sheet

A balance sheet is a financial report that acts as a snapshot of your company’s financial position at the end of a specified period, listing your business’s assets, liabilities and shareholder’s equity. Your balance sheet can give you an accurate indication of how you’re handling your business’s assets and liabilities when compared with the numbers from an earlier timeframe and can help you identify trends in your financial performance. 

Profit and Loss Statement

The profit and loss statement, or P&L, is also called the income statement. This important document reports earnings, expenses and net profits for a specific period. 

Common Accounting Tasks

Common small business accounting tasks are performed on a regular basis to help you gain a clear understanding of your business’s performance and profitability, as well as to comply with state and federal filing requirements. How often each of them is to be done varies according to the task. Here’s an example of some of the things you’ll need you need to do and how often you might do them:

Daily accounting tasks

  • Check your cash position: Begin each business day by checking how much cash you have on hand. 

Weekly accounting tasks:

  • Record each business transaction: Record business transactions including customer billing, cash received from customers and payments made to vendors.

  • Document and file receipts: This includes invoices sent, receipts from check, cash or credit card deposits and all cash payments.

  • Review unpaid bills from vendors: Keep a folder for these accounts payable items and keep track of the due dates.

  •  Pay vendors and sign checks: Track your accounts payable and be sure to have funds earmarked for on-time payment to suppliers. This will avoid late fees and maintain positive relationships with key suppliers. Whether you pay online or put a check in the mail, keep copies of invoices using accounting software to make things easier at tax time.

  • Prepare and send invoices: Your invoices should be configured in a way that encourages customers to pay on time. Be sure to include payment terms and a firm due date. Without a due date, it will be difficult for you to forecast your monthly revenue.

  • Review projected cash flow: Managing cash flow is crucial to the health of your business. Forecast how much cash you will need in the coming weeks and months to be sure you have enough to cover your overhead costs.

Monthly accounting tasks:

  • Balance your checkbook: Just like you would with your personal checking account, you need to know that your cash business transaction entries are accurate, and no errors have been made by you or the bank.

  • Review aging and past-due receivables: Keep an eye on these open invoices. The beginning of the month is a good time to send reminders to about overdue payments.

  • Analyze inventory: If your business maintains inventory, set aside some time to reorder the products that sell quickly and identify others that stay on the shelf too long and may have to be marked down. Compare what you find to the previous month’s numbers to identify trends.

  • Process payroll and taxes: Regardless of the schedule you’ve established for paying your employees, you’ll need to meet the payroll tax requirements of federal, state and local authorities. This involves withholding, reporting and depositing income tax, Social Security, Medicare and disability taxes on the required dates. As your business grows, a payroll service provider can save you time and ensure accuracy.

  •  Review the P&L: Measure your profit and loss statement for the current month and year-to-date against your monthly or quarterly budget, and against the same prior period. This will tell you whether you’re spending too much or not enough and help you determine where to adjust.

  • Review month-end balance sheet vs. prior period: Compare your balance sheet over time to get a picture of how you’re managing assets and liabilities, identify anything that is significantly up or down and understand the trend. 

Quarterly accounting tasks:

    • Prepare revised annual P&L estimate: Get a clearer picture of how much money your business is actually making by looking at the differences between revenues and expenses, what caused those variations and how you are spending the profits. Identify trouble areas and adjust improve sales and profit margins.

    • Review quarterly payroll reports and make payments: You’ve been reviewing your semimonthly payroll reports, but the IRS and most states also require quarterly payroll reports and any remaining quarterly payments.

    • Review sales tax and make quarterly payments: Be sure to comply with any state requirements for collection, reporting and payment of sales tax.

    • Compute estimated income tax and make payments: The IRS and most states collect income taxes. Review your year-to-date P&L to see if you owe any estimated taxes for the quarter. Here’s where a tax accountant can help.

Annual accounting tasks:

    • Review past-due receivables: Check those receivables that are significantly past-due and determine whether you think the bill will be paid, or if you’ll send it to a collection agency or write it off as losses for a tax deduction.

    • Review your inventory: This review is important to determine the value of items not sold. If you don’t do this, you may be overstating your inventory balance and paying excessive taxes.

    • Complete IRS forms W-2 and 1099-MISC: Mail copies of these forms to the people who worked for you during the year. The W-2 applies to employees and the 1099 applies to independent contractors.

    • Review and approve full-year financial reports and tax returns: Before handing them over to your accountant, carefully review your business’s full-year financial reports. Before signing your tax return, be sure to review it for accuracy based on those full-year financial reports. This will help you avoid any additional taxes, penalties or interest.

Using an Accountant

With everything that needs to be done to track your small business’s financial performance, you might be thinking if it’s better to use a business accountant or use accounting software. While you could hire a professional to take care of it all, there is an additional expense to think about.

Unless your business is very complex, using  accounting software programs can save you a lot of time and be a convenient way to handle regular bookkeeping tasks and track income and expenses. That leaves you with more time to work on the things you enjoy doing and that generate revenue for your small business. This is why an attractive option for small business owners is a hybrid approach, where you use an accounting software program for the regular tasks and an accountant for the big picture work. It might be a good idea to look for a business accounting software platform that is user-friendly, with user resources that offer clear guidance and a customer service line.

An accountant, or more specifically a Certified Public Accountant, can help you with that big picture, providing guidance on how to structure your business and minimize your tax liability. At the end of the year, the CPA can certainly be a big help in preparing and filing your annual tax return and using up-to-date knowledge of the tax code to identify all allowable deductions.

Trying to tackle everything yourself can be a small business mistake, no matter how on top of things you feel. From time to time, we all need help. As your business grows, chances are you will consider hiring a part-time or full-time bookkeeper to take care of many of those regular tasks.  

Want to Help Small Businesses Navigate Their Finances?

Learn how to leverage your skills to help small business owners chart their course with an accounting career. At DeVry, degree programs like our Bachelor’s Degree Specialization in Accounting can help you reach your professional goals. In this online or hybrid1 Accounting degree specialization, you’ll gain insights from knowledgeable and experienced faculty using  real-world accounting scenarios as you practice skills that include handling payroll, managing billing functions and communicating financial information.

Online learning with DeVry can help you balance your commitment to education with work, family and other aspects of your busy life. Classes start soon. 

1Program, course, and extended classroom availability vary by location. In site-based programs, students will be required to take a substantial amount of coursework online to complete their program.

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