10 Small Business Bookkeeping Tips

What is small business accounting? 

Small business bookkeeping refers to keeping accurate financial records of your business transactions: how much you spend and how much you make. Small business bookkeeping has two main forms:

• Single-entry bookkeeping (or accounting): When you make only one entry per transaction, whether it's a credit or debit.

• Double-entry bookkeeping (or accounting): When you make two entries per transaction, recording it as a credit in one account and a debit in another account.

With the right tools, you can feel confident managing financial transactions and helping your business grow. Continue reading to discover why small business accounting is important, as well as how to streamline your business's finances. 

Importance of accounting and bookkeeping for small businesses

Keeping accurate records of business income and loss is essential to knowing the financial health of your business. Here's what small business bookkeeping allows:

• Making informed operational decisions

• Investing resources in the business's growth

• Applying for a loan

• Filing taxes

• Detecting fraud and mismanagement

What are some of the challenges of small business accounting?

When setting up a bookkeeping or accounting system for your small business, you first need to decide between manual record keeping, using business accounting software, or hiring an outside firm. 

When running a small business, it’s essential to track cash flow and have the ability to cover unexpected expenses. Unless you’re using a bookkeeping service to alert you when a problem arises, you’ll need to track your income and revenue closely. This can be challenging with the other commitments of operating a small business.

You’ll be responsible for accurate payments to employees and taxing authorities. Tax reporting errors can result in costly penalties from the IRS. With tax codes frequently changing, it’s important to ensure you follow the most current laws and regulations.

Reconciling the books is another challenge for small business owners. Miscalculations can result in large penalties if miscalculations are sent to the IRS or state tax department. If your business requires the collection of sales tax, you may be required to submit accurate quarterly payments, depending on your state’s requirements. 

If you find it feasible to keep your books in-house, you might consider using a software accounting program. This can help alleviate some problems you might run into with manual record keeping. 

How to do bookkeeping for small businesses

The steps below will walk you through actionable steps you can take to manage your small business's finances effectively.

1. Choose accounting software that works for your needs.

When choosing an accounting software program, one of the first things you need to decide is how you’ll use it and the features you’ll need. You’ll also need to weigh the cost and number of users.

If you intend to do payroll in-house, you’ll want a software program matching your business type. For example, if your company hires only part-time employees, you won’t need the same features as a construction company with full-time employees and frequent overtime.

Will your business be generating invoices, cost estimates, or billing statements? If so, you’ll want a software program to prepare statements. 

Inventory tracking and tax preparation software programs can help streamline your business operations. The number of employees using the system will factor into the program you choose. If you use other software applications, you’ll want accounting software that you can integrate with those applications. Some of the accounting software available for small businesses include:

• Intuit QuickBooks Online: Various features are available to help your business run smoothly and stay up-to-date. The monthly cost varies by the number of users, from one to 25. 

• FreshBooks: For smaller businesses, Freshbooks charges per billable client rather than the number of users. It’s an inexpensive program for companies with small invoicing needs.

• Xero: Xero is a cloud-based program geared toward the micro-business owner. While it doesn’t include the features found with QuickBooks or Freshbooks, it’s low cost and offers a payment collection option if you need to collect payments from customers.

• Wave: Wave is designed for service-based businesses that don’t require payroll accounting. It offers unlimited users and bills on a transaction basis rather than a standard monthly fee.

2. Choose an accounting method.

The two primary methods of small business accounting are cash-based and accrual. While the cash-based method is the simplest to use, it’s not suitable for every small business. Take a look at the difference between cash and accrual accounting and the restrictions. 

Cash-based accounting 

Cash-based accounting is the simpler of the two methods and is typically used for short business cycles when inventory is not involved. Businesses that sell directly to consumers and have annual revenue over $25 million can’t use this method.

Income is recorded as it’s received; otherwise, it’s not considered revenue. A disadvantage of the cash method is that it only provides a short-term look at your company’s financial health.

If you decide to grow your business or sell to consumers, you’ll need to transition to the accrual method to meet generally accepted accounting principles (GAAP). This can be challenging if you’ve operated under the cash method for a long time, but it will most likely be more efficient.

Accrual-based accounting 

The accrual-based accounting method records income when it’s billed, not when it’s received. Once the invoice is generated, income gets recorded. 

The accrual method of accounting provides a broader financial picture, so you can adjust your business operations should your financial outlook not be favourable. A disadvantage is that you may not always know what funds you have on hand, and you might not have the necessary funds when you have many outstanding invoices.

3. Track and record every expense. 

As a business owner, you’re responsible for recording every expense paid from your business account. No matter the payment method used, each transaction must be recorded with the date, amount, and purpose. 

4. Prepare a bookkeeping schedule. 

To track your business's financial health, having a bookkeeping system can help you stay organized and aware of where you stand each week and month. A schedule can include paying vendors at a specified time each month, reconciling monthly bank statements, recording revenue weekly, and making regularly scheduled bank deposits.

Create financial reports based on books. 

At the end of each month, creating a financial report is best. If you’re using accounting software, financial reports might be automatically generated. If someone on your staff or an outside accountant prepares the report, review it for accuracy and keep apprised of your financial standing.

A balance sheet is a glance at how much your business is worth. This is generated by looking at your assets and what you own versus your liabilities and outstanding debts. It can help determine if your business is taking on too much debt to support its revenue.

5.  Ensure your accounting method pays bills and invoices on time. 

If your small business uses accounting software, it will help track when invoices are due. Most software programs provide options for automatic bill-paying and bank transfers. 

If you’re not using software, you should consider setting a time each month to make payments and the payment method used. You may have vendors you can pay online, or you can mail a cheque. 

6. Keep personal and business expenses separate. 

When starting a new small business, one of the first steps should be opening a business chequing account. It’s important not to combine business and personal funds. You might also consider opening a savings account to deposit tax obligations. 

Unless your financial institution provides perks for keeping your personal and business accounts with them, you might want to consider using different banks. This will eliminate possible confusion. 

7. Pay yourself.

It’s a good business practice to pay yourself a salary. This will alleviate potential commingling problems between personal and business accounts. Setting aside a cheque for yourself regularly and depositing it into your personal account will alleviate bookkeeping errors. 

Should the need arise when you must pay a business expense with your personal funds, be sure to reimburse yourself by cheque or electronic transaction that can be traced. Record each transaction as you would any other business expense.

8.  Have a digital filing system in place. 

Digital recordkeeping of your business's finances can streamline your bookkeeping process, reduce clutter, and improve data security. You can file information in your accounting software or another cloud-based program. Categorize documents like invoices, cash flow statements, income statements, bank statements, and receipts.

9.  Embrace new technology.

Technological advances can help to streamline your small business bookkeeping and accounting practices. Integrating the most recent communication systems into your business allows you to communicate better with your employees and clients. To save on costs and add efficiency to your business, consider video conferencing, a cloud phone system, and having remote employees.

10. Invest in an accountant. 

This investment can benefit your business in that an accounting professional will be up-to-date on tax laws and regulations and can sometimes find deductions that were overlooked.

When choosing an accountant, interview several candidates and go over your accounting needs and expectations with each one. Choose the accountant that can offer you the best working relationship.

Next steps

With these tips, you can begin to streamline your finances to give your small business the best chance of succeeding. Consider taking some short bookkeeping or accounting courses to learn more. You might want to begin with Bookkeeping Basics or Intuit Bookkeeping, both offered by Intuit on Coursera. You can also learn how to use Excel to keep your books or create your business budget with Google sheets.