The Zen Guide to Small Business Accounting & Bookkeeping
For many of us they're some of the least enjoyable aspects of running a company— handling your bookkeeping, keeping track of receipts, understanding your cash flow, filing taxes.
So how do you save time, money, and brain power when it comes to accounting and bookkeeping? And, what's the difference between accounting and bookkeeping, anyway?
Finally, how do you get into a flow state, shift into accounting cruise-control, and access that inner calm?
In this guide, we'll cover the basics of small business accounting and bookkeeping, as well as some suggestions for bookkeeping the easy way.
Accounting vs. Bookkeeping
Accounting and bookkeeping are both about recording transactions and monitoring your company's financial health, but they differ in a few ways.
What is bookkeeping?
Bookkeeping is the basis of accounting. It involves administrative tasks like daily expense tracking, record-keeping, account reconciliation, and expense categorizing.
Bookkeeping also involves processing payroll, managing invoices, and paying your suppliers. In this sense, business bookkeeping touches on many operational aspects of a business, but the good news is that you can automate most of your small business bookkeeping to save time.
What is accounting?
Accounting builds on the financial information you gain through bookkeeping.
Accountants prepare financial statements, analyze costs, and ensure your business is prepared for tax filing.
They also make budget recommendations and help you plan future investments. If you decide to handle your own small business accounting, you can still automate bookkeeping tasks or outsource them to a freelancer.
As a business owner, you may also want to familiarize yourself with Generally Accepted Accounting Principles (GAAP). GAAP isn’t a law, but it does explain how to measure and present a company’s finances.
Helpful tips before you get started
Before you begin setting up a bookkeeping or accounting method for your small business, it’s a good idea to do a few things first.
Open a business bank account
Opening a business bank account is a simple way to keep your business and personal finances separate. Without this separation, it can be difficult to see an overview of your company’s cash flow, figure out where you may be gaining or losing money, and where you can cut costs (in other words, all the things that are essential for helping your business grow). It’s also important for tax filing or if your company ever gets audited.
To apply, you’ll typically provide your organizing documents, EIN or social security number, a certificate of good standing, and other business information. Traditional banks may also look at your business credit score or personal credit score.
Once you have a business bank account, you’ll have the peace of mind of knowing you have a place to track all of your business earnings and expenses.
Organizing your business records
The IRS requires businesses to keep tax-related records for at least three years. Creditors or insurance providers may require you to keep records even longer. That means you’ll have to maintain copies of your receipts, invoices, bills, tax returns, and proof of payments.
There are a few tools that make it easy to track spending and safeguard financial records. Startup teams can use convenient receipt-scanning apps to digitize paper receipts or consider all-in-one expense management software.
With these tools and the above steps completed, you’re prepared to set up your small business accounting.
Basic Accounting Terms You Should Know
Below are some of the common accounting and bookkeeping terms you’ll generally come across as a business owner:
- Revenue or income: Money your business earns from the sale of goods or services or other business activities.
- Expenses or expenditures: Costs you incur to generate revenue, including rent, labor costs, and office supplies.
- Accounts payable: Any money your business owes. This could be an amount you owe to a lender, creditor, vendor, freelancer, etc. Accounts payable are categorized as ‘liabilities’ on your balance sheet because they’re a form of debt owed by your company.
- Accounts receivable: Money owed to your business for goods or services by customers, clients, and anyone you do business with. These are recorded as ‘assets’ on a balance sheet.
- Assets: Liquid and non-liquid assets owned by your business, like land, equipment, accounts receivable, stocks, and patents.
- Liabilities: Debts and obligations owed by your business, like business loans, accounts payable, income taxes, and mortgage payments.
- Equity: The value remaining when you subtract liabilities from assets. This amount represents ownership in the business.
- General ledger: The complete record of all business transactions, like sales, expenses, and credit. Used to generate financial statements.
- Chart of accounts: Lists your different accounts and transaction categories, like income, expenditures, assets, and liabilities.
- Journal entry: Accountants and bookkeepers make journal entries to update the general ledger. Each entry has a unique reference number, transaction date, debit or credit amount, and description.
- Trial balance: An accounting report that lists the balance for all accounts in the general ledger, labeled as a debit or credit. Used to check for mathematical errors.
The 3 Different Types of Financial Reports
Below are the three standard financial reports used in business. Accountants create them using your company’s bookkeeping records.
These reports (or 'projections') are important if you intend to expand, because they’re often used by investors to decide if investing in your business is a good move for them.
1. Balance sheet: Summarizes your company’s assets, liabilities, and owner or shareholder equity for a certain time period.
2. Income statement: Summarizes your company’s revenues and expenses during a certain time period. Also called a profit and loss statement.
3. Cash flow statement: Summarizes your company’s cash inflows and outflows during a certain time period due to sales, expenses, and other investments.
Next, we’ll explain how to put together a complete small business accounting system.
Accurate accounting starts with a simple system
As your company grows, you’ll inevitably have greater accounting needs. If you plan to expand your business, then you’ll want to use an accounting system that will help your company scale into the future.
Let’s walk through the different ways you can approach accounting and bookkeeping for your company.
The Cash vs. Accrual Accounting Method
Every business has to choose between the cash or accrual accounting method, and once you make that choice, things tend to feel a bit clearer.
- Cash method: With cash-basis accounting, you record transactions only once you've received payment for goods or services. It’s the easier method to use and gives you a clear picture of your company's cash flow, but it often isn’t suitable for larger businesses.
- Accrual method: With accrual-basis accounting, you record transactions when goods or services are exchanged, even if you haven’t received payment. This method is popular with startups that carry a lot of inventory. It offers a more accurate view of your business’ current financial situation. Also, GAAP requires accrual accounting. (We dive deeper into the accrual method in this episode of our podcast)
A certified public accountant (CPA) or bookkeeper can help you decide which method is best for your business.
Accounting software and other tools
Accounting software is fairly essential if you want to balance your own books. For modern businesses, manual data entry is unnecessary and can also be a bit risky because it's easier to make errors. And even if you have great Excel spreadsheet skills, you can still save more time by automating your accounting. Many mid-sized companies that outsource accounting still use software for light bookkeeping.
Popular software like QuickBooks Online, Xero, and Freshbooks lets you take care of accounting basics or manage your finances end to end, whichever you prefer. It's also intuitive enough to use on your own.
To get the most out of accounting software, integrate as many of your other financial tools as possible. This includes your banking services, credit cards, payroll software, time tracking apps, and receipt apps.
Doing this enables the software to automatically find and categorize your business activity. It can flag discrepancies, reconcile bank transactions, and adjust account balances. You can also generate financial reports in a few seconds. Let's take a deeper look at what this means.
Simple Ways to Make Bookkeeping Easy
Use receipt scanning or receipt matching tools
A long time ago in a galaxy far away, everyone had to keep their receipts in overstuffed envelopes and manually reconcile their transactions.
Thankfully, there’s now many receipt scanning apps that will catalogue your receipts for you, however, these apps sometimes fall short in that they don’t automatically match the receipt with your transaction. Brex goes a step further by offering a built-in receipt-matching tool that allows you to snap a photo of your receipt from your phone and upload it to the Brex mobile app. For receipts in your inbox, you can simply forward your receipt to firstname.lastname@example.org.
From there, the receipt is automatically matched to the correct transaction on your Brex card. No more manual reconciling, and no more storing your physical receipts if you don’t want to. In this way, Brex takes receipt-scanning a step further.
You can learn more about receipt scanning apps here.
Use business financial services that send you reminders
Whenever you use your Brex card, Brex sends a text message to your phone reminding you to upload your receipt. Simply respond to the text with a photo of your receipt, and Brex will then store the receipt in your dashboard and match it to the correct transaction.
Outsourcing your small business accounting
Hiring an accountant lets you focus on running your business while a professional watches over your financials for you.
However, many small business owners understandably don't have the funds to hire a dedicated accountant, and that's perfectly ok.
There’s a variety of more affordable online accounting platforms that can help. For example, Pilot offers bookkeeping, cash management, financial planning, billing & payroll, tax preparation, technical accounting, audit readiness, IPO readiness, R&D tax credit, outsourced CFO, and sales tax management services.
Pilot is user-friendly, and caters to businesses of 2-21 employees, 21-50 employees, or 50+ employees. Their core plan starts at $600 a month, but comes with a dedicated finance expert, automatic imports for your transactions, and accurate bookkeeping. In this sense, it's basically an all-in-one accounting solution.
Pilot also offers a special $200 monthly discount for pre-revenue companies during their first year, bringing the cost to $400 per month for qualifying companies.
You can view a full list of our recommended accounting partners here.
Keeping your own books
If you do choose to manage your company’s bookkeeping yourself, it’s good to stick to a schedule. The standard is to reconcile your bank statements and internal records at least once a month. Below is an example task list to help keep your books up to date.
Daily or weekly accounting tasks
- Enter transactions into your bookkeeping system
- File or digitize business receipts
- Prepare and send invoices
- Categorize business transactions
Monthly accounting tasks
- Reconcile your accounts
- Pay bills and vendors and record payments
- Review and run payroll
- Review overdue customer payments
- Record the value of your purchases and inventory sold
- Analyze your financial standing using reports
Quarterly accounting tasks
- Estimate quarterly taxes
- Report and remit sales tax
- Record depreciation or amortization
- Assess and write off bad debt
Yearly accounting tasks
- File year-end income taxes, payroll taxes, etc.
- Review aged receivables
- Analyze year-end inventory
- Create full-year financial reports