Few topics in small business are as confusing as
accounting, especially to the new business
owner (also known as "bookkeeping" or
"doing the books"). This section is dedicated
to helping the small business owner understand accounting
and provides some helpful resources.
The dictionary lists accounting
as "A precise list or enumeration of financial transactions." For
the most part, thats all that accounting is, a list
of financial transactions in your small business.
Its a method for you to track the money coming
into your business and the money going out.
Obviously, accounting is important because you want
to know if your business is making a profit. Also, the
small business owner wants to be able to look at sources
of income and expenses and make decisions based on that
information. Using accounting software, the business
owner can generate reports on "profit and loss",
"cashflow", the "balance sheet"
and dozens of other reports that can help him/her get
an overall picture of how the business is doing now
or in the past.
Also, many Federal and State forms require tracking
of money for sales taxes, payroll and income tax purposes.
In fact, a good accounting system can make the
filing of these government forms much easier and less
NOTE: If you are not financially-inclined, we sometimes recommend you speak to an accountant
or bookkeeper, especially when initially setting up your accounting
system. This way, they can help you
setup your accounting system properly the first
time so you dont make mistakes that will need
to be corrected later in the year when filing taxes
or other government forms. Our Recommended Resources
section below includes resources for finding an accountant nationwide. However, with QuickBooks,
the setup is usually pretty painless.
The first decision to be made is which type of accounting method to choose,
there are 2 choices:
The Cash Method (or Cash Basis) - this means that you count income
when you actually receive it (either as cash, credit
card charges or check) and your expenses are counted
when you actually pay them. This is the most common
method for small businesses, especially those that take
immediate payment for a product or service (credit card,
check, cash, etc.)
The Accrual Method (or Accrual Basis) - this
means that you count income when a sale is made (regardless
if you actually receive the money for it) and expenses
are counted when you actually receive the good or service
(instead of paying for it immediately). This method
is common for larger businesses or small businesses
that utilize "invoicing" and frequently deliver
a product or service before being paid for it.
You are free to pick either
method provided you have less than $5 million in annual
sales OR you maintain inventory (in that case, then
you must use the accrual method).
The accrual method is generally considered to give
you a more accurate picture of your companys financial
situation but requires you to take extra steps like
maintaining accounts receivable and accounts payable
records. The cash method is generally easier to
maintain and is the preferred method for small businesses.
After youve decided on an accounting method, the
next step is to decide how you are going to record
You have basically 2 choices:
Hand-Recording Transactions — you actually
hand-write each transaction in a ledger.
Software — you enter transactions in a software program
which then automates many routine tasks.
By far the most popular method is software. There
are dozens of accounting software packages and most
of them will help you maintain your books as well as
automate things like payroll and reports.
After choosing a method for recording transactions,
its time to setup your "chart of accounts".
A "chart of accounts" is simply a listing
of all the various accounts in your accounting system.
There are income accounts, expense accounts, asset
As noted above, an accountant can be of great assistance
in setting up your initial chart of accounts. Also,
QuickBooks Pro and some other software programs include
a "wizard" that will customize a "chart
of accounts" for your business.
Once youve chosen your accounting system, the next
step is learning and maintaining your accounting system. Learning the system will obviously depend on what
solution youve adopted, but maintaining the system
is accomplished primarily by 2 things:
We hope weve given you a good overview of accounting
and accounting systems; below weve listed some additional
resources that may be helpful to you.