The complete guide to accounting for small businesses
Keeping proper track of your business’s financial transactions is the best way to ensure your long-term viability as an entrepreneur. While the tools and techniques of accounting can seem intimidating at first, they’re well within reach for those who take the time to learn. Here’s an overview of what you absolutely should know.
What is small business accounting?
At the core of entrepreneurship is the tracking of money in and out of your business. Being able to meticulously record and analyze this financial information – otherwise known as accounting – will help you make informed decisions for your company. If you’d rather hire outside help in the form of a bookkeeper or an accountant, it’s important to know the difference.
Which accounting method should you choose?
Tracking cash inflows and outflows to analyze financial performance is the foundation of accounting. To that end, you’ll need to decide whether to use a cash basis or accrual basis accounting method – two options that differ mainly in when they record transactions.
Cash basis accounting
Under this method, there are no accounts payable or accounts receivable. Revenue is recorded when money comes in, and expenses are recorded when they’re paid. Cash basis accounting is often considered simpler and is frequently used by small businesses with relatively simple operations. It provides an overview of the amounts that are actually available.
Accrual basis accounting
Used largely by businesses with more complex operations, accrual basis accounting means revenues are recorded when goods and services are delivered (accounts receivable) and expenses are deducted when they are incurred (accounts payable). This method provides a more accurate view of the company’s overall financial situation. Incorporated businesses, for example, are required to adopt it.
What are the steps to setting up a small business accounting system?
Certain decisions you make will depend on your business’s size, the industry you’re in and your own personal preferences. But there are some steps that every entrepreneur must take. These include:
- Opening a business bank account: The first thing you should do to ensure sound business accounting is open a business bank account. Doing so will help you keep your personal and professional finances separate, making it easier to process government remittances and export your data to accounting software, for example.
- Choosing accounting software: The right program will speed up the accounting process and reduce the potential for error, but finding the perfect fit for your business requires thought. Things to consider include what is necessary for a business of your size, what your budget will allow, how user-friendly you need the software to be, if you’d like it to be cloud-based, whether you’d prefer something tailored to your industry and what kind of add-ons are important to you.
- Developing a chart of accounts: Once you’ve chosen your accounting software, you’ll want to create categories that reflect your business’s financial activities – namely assets, liabilities, equity, revenue and expenses.
What are your essential daily and weekly accounting tasks?
It’s important to allocate the necessary time and resources to accounting. Using current data is the only way to make informed decisions, so you should follow up on your accounts rigorously and regularly.
At the end of each business day, you should:
- Process payments received from customers and deposit funds into your business account.
- Enter income and expenses into your accounting system.
- File receipts and invoices (you can upload paper ones with your phone, then organize them using specialized software).
Your weekly tasks include:
- Sending invoices to customers and following up on past-due invoices.
- Paying bills that are due.
- Comparing your internal financial records and your bank account statements to make sure they match up.
- Running payroll for your employees (this could also be done on a bi-weekly basis).
- Examining your cash flow projections to make sure you’re able to cover expenses.
What are your monthly and quarterly accounting responsibilities?
Monthly accounting tasks include:
- Reconciling your credit card statements to ensure there are no errors.
- Checking on the status of your inventory, then reordering products that are running low and perhaps discounting those that aren’t selling.
- Reviewing payroll. Canadian employers must deduct and remit taxes from their employees’ gross earnings, but the timing of withholding, reporting and depositing taxes varies according to federal and provincial requirements.
- Setting aside money for your own taxes.
- Comparing the month’s profits and losses to your monthly budget and making adjustments as required.
- Comparing the month’s balance sheet to the same time period in the previous year to identify and learn from the differences and similarities.
- Backing up your financial data in a secure manner.
Quarterly accounting tasks include:
- Filing and paying sales tax, such as GST and HST.
- Meeting with your financial advisor to go over your accounts, prepare for tax filing and evaluate your business goals.
-> Find more tax planning tips for small business owners
What are the common accounting mistakes to avoid as a small business owner?
Small mistakes have the potential to become big problems over time. Here are some things to watch out for:
- Not separating your personal and business expenses, which creates chaos in your financial records.
- Not keeping proper track of receipts or invoices that can help with deductions come tax time.
- Not regularly reconciling your bank accounts, chequebooks and credit cards, making it harder to spot discrepancies.
- Not tracking your cash flow in a way that allows you to anticipate shortfalls.
- Not making your tax payments on time, leading to unnecessary and expensive penalties.
Whether or not business accounting is a strength of yours, it’s important to be prepared. Don’t hesitate to seek specialized help in analyzing your business’s financial health and performance. Reach out to a financial advisor today.
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