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Small Business Accounting: The Basics

By Steve Smith

The information presented here is true and accurate as of the date of publication. DeVry’s programmatic offerings and their accreditations are subject to change. Please refer to the current academic catalog for details.


October 16, 2023

14 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 at times. Business accounting software, however, has made the various tasks in the accounting process more manageable. 

Basic Terms for Small Business Accounting

To help you get 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 basics 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. 

Cash flow statement

The cash flow statement indicates how well a company manages the inflow and outflow of cash through operating activities, investing activities and financing activities, and supplements the balance sheet and income statement.

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. 

How to Get Started with Small Business Accounting

There’s a lot to do, but if you take things one step at a time and make sure to be thorough, research your obligations in terms of documentation and reporting and set up an organized set of processes, your small business accounting system will be set up for success.

Determine the legal structure of your small business

The business structure you choose to follow can affect several crucial things, including how much you’ll pay in taxes, the forms to file, your personal liability and your ability to raise money. Common business forms include sole proprietorships, partnerships, C corporations, S corporations and limited liability companies (LLCs).

According to the U.S. Small Business Administration (SBA), you’ll need to choose how you want to structure your business before registering with your state, and that consulting with a business counselor, attorney or accountant may be helpful when taking this foundational step.

Open a business bank account

Your small business should have its own bank account to separate your personal finances, and to help you begin establishing business credit. Once you have your business name and structure set up and have registered with your state, you’re in a good place to open a business checking account. You also may want to open a separate account to help you set aside funds for paying taxes or support cash flow planning efforts.

Establish an accounting method

Before you start earning revenue you’ll need to pick an accounting method. Your business’s accounting method establishes the rules of the road concerning reporting and tracking expenses. As we mentioned earlier, cash and accrual-basis accounting are the two main accounting methods used by businesses:

  • Cash accounting: In this accounting method, revenues and expenses are only recorded as settled in financial documents when they’re paid in full.

  • Accrual accounting: In the accrual accounting method, revenues and expenses are recorded as they occur. If your business is going to use Generally Accepted Accounting Principles (GAAP) or it’s made an average of $25 million or more in sales for the preceding three years, you must use accrual basis accounting.

Determine a bookkeeping system

Whether you decide to keep your own books or hire someone to do it for you, the next step is to establish your bookkeeping system. For small businesses, keeping the books involves keeping track of where the money is going (expenses), and what money is coming in (revenue).

Begin by setting up a list of all the accounts you’ll be recording transactions for. Accounts are typically organized in categories, including asset, liability, equity, revenue and expense accounts. Recording financial transactions accurately will make things easier when it’s time to deduct business expenses at tax time. If you use a bookkeeping software program, keeping track of it all can be much easier as you perform the most important daily, weekly, monthly and quarterly bookkeeping tasks.

You will also need to determine your fiscal year. As you may know, your business could follow a standard calendar year, but a fiscal year is any consecutive 12-month period. Some businesses choose to have their fiscal year start on July 1 and have it end on June 30 of the following calendar year, but ultimately the choice is up to you.

Set up payroll

At some point you’ll have to establish how the people who work for you get paid.  

Small business payrolls are typically handled by the business owners. It’s a major expense for most businesses, and is almost always deductible from gross income, which reduces the company’s taxable income.

The payroll process encompasses several tasks, including tracking employee hours worked, calculating pay and distributing it via paper check or direct deposit into the employees’ bank accounts.

But that’s not all. Payroll comes with its own set of accounting and recordkeeping rules, which may include setting aside funds for Social Security, Medicare and unemployment taxes. Because of payroll’s complexity, some businesses may choose to outsource their payroll or use a cloud-based service once they’ve reached a certain size.

Know your tax requirements

Another responsibility that comes along with small business ownership is making sure you familiarize yourself with your tax obligations and the regulations of local, state or federal taxing authorities. This will not only help make tax season more manageable but can also help you avoid costly penalties.  

When it’s tax time, different types of business entities may be required to file different tax forms. The 4-step process you’ll use for filing small business income tax for your business’s taxes will likely be as follows:

  • Collect your records: Gather up any records that reflect your business expenses and earnings. If you use a bookkeeping software, you may be able to export the data right into an online tax preparation program.

  • Find the right form: While all businesses need to report their earnings to the IRS, they don’t all use the same form. Be sure you’re using the form that corresponds to the way your business is structured.

  • Fill out the form: What form you use will determine how you file your taxes. You can search for the correct forms on the IRS website or generate them using online tax preparation software programs.

  • Pay attention to filing deadlines: Some companies are subject to the familiar April 15 filing deadline, but others are due by March 15. Double check when your taxes are due beforehand so that your deadline doesn’t catch you off-guard.

Calculate gross margin

There’s more to small business accounting than just keeping accurate records. Knowing your profitability is important too. Gross margin is an important small business accounting benchmark that can help you get your bearings and determine how far away you are from your break-even point. With a strong gross margin, you will be better able to know how much you can reinvest in the business, how quickly you can pay off debts or how well you may be able to attract investors.

Gross margin is calculated by subtracting the cost of goods sold (COGS) from total revenues collected and is usually expressed as a percentage. The higher the gross margin, the more efficiently your company is creating profitability.

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 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. A careful review of your bank statements will reveal any errors that may 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 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 to 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.  

Learn to Navigate Small Business Finances with Help From DeVry

If you want to help small business owners work out their finances, or gain a better understanding of accounting methods for your own small business, DeVry can help. Here at DeVry, certificate and degree programs like our Undergraduate Certificate in Accounting or our  Bachelor’s Degree Specialization in Accounting program can help you pursue your professional goals.

Our Undergraduate Certificate in Accounting can help you develop your skills in building financial reports, producing accounting records and utilizing technology to streamline the accounting process.

Coursework in our online or hybrid1 Accounting Specialization covers essential topics like accounting information systems, federal income taxation, financial accounting and auditing; and knowledgeable and experienced faculty using real-world accounting scenarios will help you become adept at 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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