A Guide to Small Business Accounting for Beginners

By Mary Girsch-Bock
The Ascent (A Motley Fool Service) | Originally published May 18, 2022
Updated: Aug. 5, 2022

Accounting for your small business can be intimidating. We make it easier for you, breaking it down step-by-step, so you can get started today.

As a business owner, the thought of doing accounting for your business may be more intimidating than the prospect of owning a business. But accounting doesn’t have to be intimidating.

By knowing what you need to do and getting some guidance on how to do those things, you can be performing accounting tasks for your business in no time.

Overview: What is small business accounting?

While most larger businesses have an accounting staff that takes care of financial transactions, as a small business owner, the job of accountant typically falls to you. For business owners without a bookkeeping or accounting background, the prospect can be overwhelming.

To make it easy to get started, we’ve created a guide with the 10 essential steps necessary for accounting for small business.

How to do accounting for your small business

Though not a recommended method, all you need to start doing accounting for your business is a pencil and paper, and a lot of patience. To start properly, though, accounting software is the way to go.

If you’re still not sure what the difference is between a debit or a credit, and couldn’t tell an asset from a liability, accounting software can make your life a lot easier.

But even if you’re ready to find an accounting software application that’s right for your business, there are a few other things you need to do first.

Step 1: Choose a business structure

First on the list is choosing a business structure. Since everything you do will be affected by your business structure, choose wisely. There are four basic business structures:

1. Sole proprietorship: A sole proprietorship is essentially what it sounds like. Popular with consultants and freelancers, a sole proprietorship has a single owner and requires little setup. The downside is that there is no legal differentiation between you and your business, making you liable for anything the business owes.
2. Partnership: If you’re going into business with one or more people, ownership of the business can be shared equally through a partnership. Each partner is responsible for contributing to the business, with the details of their responsibilities included in a partnership agreement.
3. Limited Liability Company (LLC): An LLC is similar to a sole proprietorship, except you are not responsible for business debt. Another upside to an LLC is that you can be the sole owner or have multiple partners, giving you flexibility when filing business taxes as well.
4. Corporation: A corporation is the most complex business structure and is considered a separate entity from its owners for tax purposes. While there are benefits such as added legal protection and lower corporate taxes, corporation structure is complicated and can be expensive.

Step 2: Open a business bank account

Even if you’re a sole proprietor, it’s a good idea to open a business bank account. In fact, the other three business structures require it.

Having a business bank account makes it much easier to file business taxes, it keeps business income separate from your personal funds, and it provides you with a way to pay your vendors.

Step 3: Choose an accounting method

If your accounting experience is limited to reconciling your checking account at the end of the month, you might not understand the difference between the cash accounting method and the accrual accounting method.

• Cash method: The cash method is the simpler of the two methods and requires you to recognize revenue and expenses when money changes hands. Cash accounting is frequently used by freelancers with limited accounting activity.
• Accrual method: The method recommended by CPAs, the accrual method recognizes revenue when earned and expenses when they occur. This method provides you with a more accurate picture of your business health, but it’s more complicated than the cash method.

Choose wisely, as once you choose an accounting method, you’ll need authorization from the IRS to change it….[MORE]

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To read the entire article by Mary Girsch-Bock at The Ascent website, visit: A Guide to Small Business Accounting for Beginners