When a small business gets launched, you need to get on top of the accounting duties that go hand in hand with being a business owner. Although accounting isn’t the most exciting aspect of running a successful business, it’s a crucial aspect to run it right.
So in this guide, we'll cover everything you need to know about small business accounting.
Table of Contents:
What is Small Business Bookkeeping?
Business accounting is all about balancing all of the key financial activities of a business enterprise. These involve communicating, measuring and processing that company’s finances. Elements can include management, mergers and acquisitions, taxes, wages and inventory. This aspect of the guide will give an overview of this topic.
At a glance, here are some to know about what small business bookkeeping is:
- ✔️ Bookkeeping is useful for keeping track of payments, receipts, purchases, sales and making a record of transactions made by the business.
- ✔️ It’s useful for summarising your business’ expenses, earnings and financial records.
- ✔️ This also allows for periodic financial reports giving particular details about your business such as its profits and its valuation — these can later be useful for attracting buyers to sell your business.
Key tasks of bookkeeping include:
- ✔️ Receipts and billing for sold services or goods to customers.
- ✔️ Reviewing invoices and making a record of them from clients and suppliers.
- ✔️ Tracking payments made and so on…
History of Bookkeeping 📖
Bookkeeping of the practice of recording and tracking transactions and accounts for a business. This system is used by all kinds of organisations, down to schools and churches. Doctorates and degree programs have been offered for bookkeeping (today known as accounting), however, this practice has been used all the way far back as 4000 B.C.
The beginning
The non-written form of bookkeeping began when humans began using tokens as a way of trading livestock and other goods. Even as early as 8000 BC, this was used in the western city of Jericho. The basic forms of bookkeeping were constructed as a way to trace the accounts of properties under the ownership of kings. This evolved into a more complex system as time advanced and more modern trading systems evolved. Merchants and other training industries made this more necessary.
Recent discoveries
A New York Times article describing clay tablets in Assyria claim to find ancient bookkeeping dating all the way back to 4000 BC. These clay tablets were apparently relics of the first earliest bookkeepers. On these tablets were inscribed details of communal and business contracts including dowries for marriages, lawsuits, wills and purportedly the lending and borrowing of money.
Modern-day versions
In 1494, the foundations of the modern-day bookkeeping system began to form. Frater Luca Pacioli produced what is generally accepted as the first full writing about bookkeeping. It was called "Everything About Arithmetic, Geometry and Proportion." and it detailed a lot of the systems used in modern accounting today. This book is remarkable because Pacioli painstakingly reviewed all of the various instruments used for bookkeeping such as letters and journals. Which is why he is generally called the father of modern bookkeeping.
Fathers of bookkeeping
Frater Luca Pacioli was active in the 15th century in Tuscany, Italy. As a mathematician, numbers came naturally to him. One of his acquaintances was Leonardo da Vinci. Luca took eternal life, becoming a friar when he turned 37. During his travels around Italy, he taught and learned more about mathematics. However, it wasn’t until 1486 they gained a doctorate degree in maths, after accomplishing many things in the arena of mathematics.
There were earlier accounting texts before Luca’s. One of those was by Benedetto Cotrugli, entitled "Of Trading and the Perfect Trader." in fact, Benedetto was responsible for creating the double entry process in bookkeeping. Double-entry bookkeeping is a system in accounting where each transaction gets recorded into two separate accounts; one account is credited while the other was debited. For any assets that credit your account, your liabilities are increased by the same amount.
There are many benefits of the system, including reducing errors in bookkeeping, making reports transparent and giving a more comprehensive picture of your business. However, Benedetto codified this by creating a book that covers the process of accounting. Today, this is an important process for big organisations. Some businesses even offer this double-entry accounting process as a single service.
The Steps: Getting Started in Bookkeeping for Small Business
Bookkeeping, why the need to be learned by the business owner or outsourced to an accountant (who may or may not be your spouse). Fortunately, the everyday business owner can learn bookkeeping and there are a few benefits to going about it yourself.
1. Registering a bank account
So you’ve registered your business. And you start the process of running it. Hopefully, you are not yet receiving substantial cash flow. And you need a place to put your business income as separate from your personal finances. Segregating your funds into a separate business bank account ensures that your transactions are transparent, separate and clear, which can make your tax returns much easier when that time of the year comes around.
Business bank accounts are there to safeguard your personal capital and assets, as distinct from your business capital assets (and importantly, your liabilities), in the event of bankruptcy. Or, in the event of a lawsuit or financial audit. Having a separate business account makes your is more attractive to a buyer if you are trying to sell it. It’s overall more professional — and it is good practice for generating investment funding in the future, getting credit, being approved for regulations and overall having a strong company record.
In some cases, depending on when where you are based you may be required to have a separate business account. For instance, some states in the US legally require companies who are LLCs (for instance, Florida, Texas and California) — or corporations and partnerships — to set up a separate business bank account. Typically, sole traders do not need to do this but it is recommended.
Checking account
Step one is to open up a checking account. Next, create a savings account, savings account is there to manage the necessary funds for things like planning for your taxes. For example, YOU CAN create a standing order that siphons off enough to handle self-employment taxes according to the percentage of your tax band — so that you have it readily available when the tax year comes to a close. Many people recommend putting aside 25% of your income, although if you are a higher earner you may want to go as high as 33%.
Business debit card
Some people recommend getting a business credit card, in order to build up credit. But with the British economy in every state of recession and inflation, now might not be the time to have any liabilities.
In fact, there is word that many banks have stopped even issuing mortgages in the UK. But having a separate debit card for your business is one way of continuing the practice of separating business funds from your personal funds. Once again, this increases your transparency, the strength of your financial records, and later down the line might make you more of an attractive prospect for any potential buyers or investors of your business.
Research
It could pay to do your homework before opting with service for your business bank account. By shopping around and comparing the different pricing structures, you will realise that some checking accounts incur higher charges than others, and they were typically have higher fees than personal accounts. So read the fine print and understand what you’re getting into.
There are many perks of getting a business credit card, but once again you may want to avoid liabilities despite the perks on offer. In a debt-laden economy where resources are becoming heavily biased on commodities versus financial derivatives, you may want to focus on being a productive company offering hard value that will last. This is a great foundation for attracting all manner of investment in the future.
Before we can open a business bank account, you need to provide them with a business name that is not copyrighted but this will need to be registered with Companies House. Double-check the documents needed to open up with your bank.
2. Tracking expenses
Fundamentally, bookkeeping tracks expenses for businesses. This is a key step in allowing you to understand how your business is changing over time. Also allows you to build up a solid financial report. By keeping track of any expenses that your business to operate, you are simplifying your life when it comes time to issue your tax return. You can also backup your tax return with all of the evidence and due diligence that you’ve done leading up.
Develop the habit of running a solid bookkeeping system. This should involve the solid organisation of your receipts. The organisation of key documents and records. You can make this something very straightforward and simple, such as having a binder full of this information. Or you can use software like Freshbooks.
What are the main kinds of receipts that you should make a record of?
- Leisure and food. Perhaps you are running a business meeting in a restaurant or cafe setting. Make sure you keep the proper record of this period, for instance, write down on the back of the receipt who was involved in the meeting and what the function of the outing or the meal was.
- Flying out for business. All tax entities, from HMRC to the IRS are cautious about businesses that track any activities that overlap with personal things down as a business expense. Fortunately, by keeping receipts you are able to back up your activities and have a solid paper trail.
- Car-related expenses. Typically, the HMRC does not like business owners to claim leasing or buying of cars as a business expense. But vans and lorries are allowed. Overall, the rule of thumb is to make sure you record the exact details, including the purpose and date that a vehicle was used for business purposes and figure out percentages that were wholly for business.
- Gifts. Receipts can be categorised as gifts. For instance, if somebody gives you tickets to the theatre. It’s important whether the person who gifted you the ticket attends as well. If this is the case, the expense can be categorised as leisure instead of a gift. Make deals of this on the back of the receipt.
- Business home office. Once again, you need to figure out a percentage of use as accurate for your home office. How many hours are you spending using your home office for business purposes? What percentage is being used for leisure, entertainment or other purposes? You need to keep track of this so that you can accurately deduct it from your business tax at the end of the year.
Having a home business (multimillionaire, Sam Ovens, started his business in his parent's garage, surviving on ham sandwiches and selling his car so he could focus on nothing but doing work) gives you an incredible advantage if the environment is suitable for doing focused work. This obviously makes a great way to potentially minimise overheads. You can also deduct a surprising amount of expenses from your tax return, including your Internet bill, business phone and in some cases transportation costs to run business errands.
Just remember that you need to be transparent about any usage that overlaps with personal use. This involves figuring out a ratio that accurately reflects how much of that business office environment is being used for things that are not wholly business-related. Wi-Fi is a good example of this; perhaps you use it to stream Netflix much of the time. How much mileage is deductible according to gas will depend on how well you log things in the context. For instance, what was the purpose of your journey?
3. Developing your bookkeeping process
In a nutshell, you are tracking business transactions (making a record of them), putting these transactions into specific categories, and doing any reconciling in your statements.
And actually gets pretty complex at the highest levels. An experienced and qualified accountant will be trained to overview the progress of your company and interpret the data that the bookkeeper is compiling in order to create a financial report that reflects the health and prospects of your company. It’s a highly logical approach to running a business. But new entrepreneurs will need to figure out a system of managing accounting books in a way that is right for them:
- The DIY path could involve using a binder, in the old-school fashion. Or you might choose something like QuickBooks, Freshbooks or WaveApps. others will just opt for a straightforward Excel spreadsheet
- A busier business owner who wants to avoid bookkeeping might outsource this to their spouse. Or outsource it to somebody part-time who operates in person locally or over the cloud on a website like Upwork.
- Bigger companies frequently have somebody working in-house as their accountant or bookkeeper. Once again, this could actually be a close relative, friend or spouse. Or a qualified accountant.
There are many options out there, so educate yourself and look around. Another aspect to consider is whether you are going to use the accrual or cash method. There are some important differences between these two approaches.
The cash approach focuses on acknowledging transactions related to expenses and cash flow immediately at the time that they are received and paid into accounts. Whereas the accrual method investigates cash flow and expenses in terms of the transaction itself — even if the accounts haven’t yet been credited, it will still track the receipts and invoices.
Some countries prefer the cash method, whereas others prefer the accrual approach. For instance, Canadians are obligated to use the accrual approach. One way to simplify any differences in this is to simply go for a cash approach. Log any payments that were invoiced and payable; do this throughout the year. However, adjust and add any entries that are outstanding, for tax purposes. Whether or not you have to use the cash or accrual method can also depend on the size of the revenue — the more your revenue, the more likely might be that you need to use the accrual method.
4. Creating a payroll process
Many businesses begin with one or two people. If you become successful enough, small business owners find that they need to begin getting outside assistance. This happens when problems become large enough that outsourcing is the best solution. But there were differences between hiring a staff member and somebody who is an independent contractor.
If you have actual employees, you may be required to create a payroll system that inherently accounts for whether or not the right taxes are being taken out of staff payments. Because your staff are not working as sole traders, you are responsible for managing the tax portion of their payment as separate from their income. You can find a lot of services that automate the payroll of staff members — these pieces of software automate the process. If working with independent contractors, make sure to track the exact amount you pay each individual. You should also keep a record of their address and name on a file.
5. Understand the import taxes
This will depend on what your business model is. For instance, if you plan to buy and import goods from other countries in order to sew them on your online store, then this tax will come into play. Suppose you are importing products, there will be duties and other taxes to track — one example of this is for businesses wanting dropshipping services. Your country will impose a particular tariff on any incoming produce. Do your homework on the financials of importing goods into the UK, and the relevant taxes, so that you know the rules from the beginning.
One helpful piece of software for people who are importing goods is a duty calculator that tallies up the fees as an estimate, helping you to prepare for the surcharges.
6. Payment processor
So transactions are beginning to roll in. You need a way to accept these payments as a business. If you are a UK store owner on Shopify (review), then your business could use Shopify Payments for taking credit or debit card orders. This removes a lot of the stress required to setting up the various third-party payment gateways and merchant accounts that can take up time and require more hands-on work.
However, it’s perfectly okay for smaller businesses to begin with a third-party payment processor like PayPal. This can let you work directly with clients, taking money and issuing invoices on a one-to-one level. Suppose you are a programmer who has a roster of two or three big clients. Every month, you are given an itinerary in which to fulfil a certain amount of work.
Instead of using something like Shopify Payments, you instead use your merchant account or a third-party payment processor, such as Stripe, or Square. By comparison, merchant accounts are a form of bank account that lets your business take card payments from its customers.
Keep in mind that there’s a big difference between the different processes, in terms of fees. There will be different pricing models, for instance, interchange rates, flat fees and monthly membership costs. Something likewise has better fees for getting payments from services on personal accounts than PayPal does. Then there are special ways of minimising these fees even further.
7. Handling your tax process 💵
You need a procedure for your taxes today, an Instagram model can be shipped out from Colombia to the UAE. While this is open the border to all kinds of different businesses and business models, with brands popping up all the time in unexpected niches, it can confuse regulations for taxes that trickle down the line later.
In the old world, a customer walked into a shop, a physical store. They paid sales tax on whatever item they purchased. It didn’t matter if they were on a visit from Paris or lived in London, everyone enjoyed the same rate. But when doing online sales, different rules may apply.
There’s a difference between if your business classifies as operating in the UK or operating abroad but from the UK. So you need to get clear on the differences, as different tax rules apply. Note that some countries only charge you for operations in their country. But in the UK, all taxes, including corporate assets (CT) are charged for all activities, even those abroad — at the time of this writing.
8. Know your tax requirements
What taxes you pay vary according to how your business is legally structured. For those who are self-employed, use your personal tax return to log your business income. But if you are a corporation, then you are a separate tax entity and you are independently taxed. This is separate from the owner itself. The entity itself is being taxed; so if it goes bankrupt you don’t but the business does. And you count as an employee in the corporation, not the corporation itself.
That means you are responsible for knowing what tax bracket you fall under and withholding a certain amount throughout the year, ready for your tax return when that time filing wipes. In some situations, if you have enough tax that you owe, then you will be automatically requested to pay your income tax via instalments. However, you need to reach a certain size of revenue yearly for the HMRC to request you to do this.
However, if you think that you don’t know about something important that could be critical when filing a tax return, then consider talking to a tax professional. The primary consequence of this is that you have to pay a fee, but the secondary consequence is that you could save a lot of time and money later on.
9. Know your margin
You really don’t understand the health of your business unless you know your gross margin. Pretty much, your job as business owner is to boost this.
For instance, you are income seems like it has a lot, but what liabilities are involved and whether expenses for offering the service or product? Your course module factors all of this in. Somebody selling a manufactured product will need to know how much it takes to produce it. So there are two aspects to it — the gross margin and the cost of goods sold (COGS).
- COGS. The cost of goods sold I need expenses needed for producing and delivering the product that your company sells. For instance, manufacturing labour costs and the cost for parts and materials.
- Gross margin. Now that you have the COGS, you can get the bigger picture. The gross margin accounts for all of your revenue sales — but only once factoring in all of the specific costs needed for their service or product before it enters into the hands of your customer.
So with that said, how can we go about calculating what the gross margin is for our business?
Gross margin (as a percentage) = (total revenue - COGS) / total revenue
Let’s explain this real quick… it’s a very simple equation. Your total revenue is all of the money you get from the sales you make. It’s your gross earnings. So now you know what your profits are. This is useful, but the gross margin functions differently. It gives you a percentage figure that you understand how much of your work is profitable and what percentage of it is being churned by expenses.
So by dividing that figure by your revenue again, you get to understand it proportionately. What your profits proportional to your earnings? A fast way of doing this just looking up a profit margin calculator, so that you can have it spit out a quick figure.
Why is this important? Margins are everything in business, no different to online trading. You need to know what you actually take home at the end of the day. This margin is your profitability — your edge that allows you to keep your business' doors open.
10. Funding
Even the most organic business products may find a time when funding is the best way for them to produce the most amount of value. A homesteading community might buy a massive plot of land that its exclusive members can run events on, for instance.
So you should always be at least open to the idea of funding. There are still scenarios where small businesses can grow optimally by receiving external business investment. Although, getting loans might be a good idea now, at a time when many economies are floundering from debt.
An example of getting funding is something like Patreon. Members know what they will receive they are willing to invest on goodwill, rather than making a firm business contract. This kind of funding is only possible if you have a strong track record of keeping your word, being honest and delivering value that people really want. Businesses like this are often almost forced into receiving funding — the community demands away to participate more deeply!
That is the ideal situation. Compare it to getting a financial loan from a bank or building trust… Companies that are struggling to stay afloat turn to getting lines of credit in order to get financial boosts when their economic periods are slow. Or a brand decides it needs to expand and soul seeks a line of credit to open up a new store, hire more or to increase its inventory.
So in this way, community-driven goodwill is superior to getting a traditional business loan. Small business loans will require financial statements — these are sheets disclosing balances and incomes, perhaps including cash flow. These companies calculate what they can lend out based on your track record, then your sales are used to repay in instalments.
Overall, look at reality — valuable businesses will inevitably attract goodwill and funding based on this basis. Getting credit from a bag of an institution can easily be a way to dig yourself into a deep ditch. None of this is financial advice, but it should be common sense.
11. Finding qualified accountants
The team is everything. Plenty of businesses handle their own bookkeeping. This could be the spouse or an experienced bookkeeper. If you’re doing it DIY, then get yourself up to date on generally accepted accounting principles (GAAP). These give you a good guiding principle to understand the finances of your business.
However, if you want more expert guidance or assistance — even if this is just the initial consultation to validate whether or not you are on the right track — there are many financial professionals and accounts for small businesses who can give you insight.
Here are a few types of people you might want to consider getting onto your team for a one-time period or in the long-term:
- ✔️ Accountant. Accountants are detailed and logical thinkers. They know a lot about the regulations, how businesses are structured how to obtain required permits and licenses, and can even write you a business plan or review a specific aspect of your business finances.
- ✔️ Certified public accountant (CPA). CPAs are involved in auditing companies in order to deliver transparent financial reports and statements.
- ✔️ Bookkeeper. Bookkeeping is a practical manager who keeps daily records. These include reconciling accounts, calculating and categorising expenses, and generally managing business accounts.
- ✔️ Tax preparer. This function is important for streamlining aspects that relate to taxes — filling out administrative papers, no more forms to deal with, and in some cases even giving you an estimation for taxes you will need to pay when the tax season comes.
- ✔️ Tax planner. Finally, the tax planner is important for businesses that want to find places where taxes can be better organised, particularly with ways to reduce the amount of tax that you pay.
12. Keep yourself up-to-date
This also involves slowly evolving your process to better suit your business and become increasingly more efficient and effective. For instance, many bookkeepers start out using a simple spreadsheet for her handling their accounts, but busier businesses may find that they need to switch over to software that does the same thing in an automated way.
These pieces of software are not perfect. So what best fits you will differ according to circumstances. Typically, the financial statements for businesses grow in complexity as the business does. To keep yourself from getting into the weeds, periodically review how much time you are spending managing these aspects. Time is an important vector when understanding your business expenses.
Indeed, this is why giving yourself training in the basics of accounting can be crucial, even if you don’t intend to become an accountant or do it yourself. It seamlessly gives you an understanding of who you need, what needs to be done and when. Having a solid bookkeeping solution means you can set aside more time to do more things you love to do rather than work on administrative and cumbersome duties. Or are in the end, this is a good result.
FAQs 📙: Getting Started in Bookkeeping for Small Business
Had a Bookkeeper for My Small Business?
Do this in a natural way according to your business needs. For instance, if you’re just starting out, it may be less relevant. But if you are slowly increasing your revenue each year, and finding that you are having more stress during the tax return time and increasing complexity with larger sums of tax paid yearly, then it becomes obviously important to find ways of reducing your taxes and streamlining the process.
So you might start out with a basic spreadsheet handling the books, but this quickly becomes tedious. There is also a risk of manual errors. Some people opt to track their expenses using cloud-based bookkeeping services.
How Much Do Accountants Charge Small Businesses?
What you pay will depend on the complexity of the task, its scope and whether it’s full or part-time.
Some sources give the average earnings for accountants at around £70,000 yearly. But what you pay will vary on the services you are requesting — for instance, small businesses will be less likely to require the services of a full-time accountant — and it might be more important to look at the hourly rate. You can also charge a fixed rate.
We can expect to pay something like more than £15 per hour depending on where your accountant is based and what level of skill sets they have. Consider using freelancer sites like Upwork, which allows you to quickly gain a sense of the going rate on the market — and then book services for specific tasks that need to be accomplished. This limits the overhead involved and allows you to get key insights on an ad hoc basis rather than managing an accountant full-time.
What Do Accountants Do for Small Businesses?
Small business accounts have made different functions, including forming your business itself. They can also help you to write a business plan, to audits on your cash flow and find places where you can cut costs strategically. A good accountant will advise on your business strategy, managing your liabilities, making sure that your payments are expedient and handling any applications.
Accounts will obviously be savvy on using and installing the latest accounting software, overseeing your inventory, using the various business tools needed for producing financial reports, overseeing bank accounts, staff payroll is, making sure audits don’t happen and giving advice on your personal finances.
The key question to ask yourself is this: Does your advisor have a financial life that you want for yourself? If your accountant is highly successful, this is a sign that they are good with money.
What Do Bookkeepers Do for Small Businesses?
By comparison, bookkeepers are there to deal with the more immediate day-to-day tasks involved in operating a business — including administrative duties like reconciling accounts, keeping the no transactions, overseeing accounts payable and receivable. Also making adjustments to entries, doing invoices, keeping up-to-date regulations and laws, handling staff payroll and working with the other financial specialists.
There is some overlap between workouts and bookkeepers do, such as preparing financial statements and handling payroll and statements. But ultimately, a bookkeeper does the things that are necessary for the business to survive while keeping within the law, minimising lost opportunities, and keeping the financial aspect of things smooth.
Closing Thoughts 📘
We hope you enjoyed this guide to getting started in bookkeeping for small business. Running a business is one of the hardest things a person can do. Indeed, your level of success is often tied to the level of stress you are able to tolerate without breaking. The more stress that you can integrate, the more successful you may find yourself.
Much of bookkeeping involves dealing with the tedious but necessary things needed to make sure the business is profitable, legal, and optimal. Keeping your eye on your gross margins, revenue, liabilities, taxes, and relationships of clients as a foundation of bookkeeping.
None of this is regimented; be prepared to get things wrong, to learn on the fly and to improve your capabilities naturally over time as your business grows.
