Here we provide you some of tips to manage your business using Accounting
system. 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
article is dedicated to helping the small business owner understand accounting
and provides some helpful resources.
What is Accounting System?
The dictionary lists accounting as "A precise list or enumeration of financial
transactions." For the most part, that's all that accounting is, a list of
financial transactions in your small business. It's a method for you to track
the money coming into your business and the money going out.
Why is Accounting Important for Business?
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
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 time consuming.
How do I Setup My First Accounting System in Business?
|NOTE: We always 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 don't 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.
Pick An Accounting Method for your Business
The first decision to be made is which type of
accounting method to choose, there are 2 choices:
The Cash Method for your business (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 for accounting (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.
Choosing a Method of Accounting
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
The accrual method is generally considered to give
you a more accurate picture of your company's 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.
Choose a Method for Recording of your Business Transactions
After you've decided on an accounting method, the next step is to decide how
you are going to record transactions. You have basically 2 choices:
Hand-Recording Transactions - you actually hand-write each transaction in a
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.
Recommended Accounting Software
- by far the most popular and most user-friendly accounting software.
(amazon.com) - SPECIAL:
You can get a
FREE Copy of
QuickBooks Pro with any approved Merchant Account -
Simply Accounting -
not as user-friendly but includes many of the same features as QuickBooks
Pro at a lower price. (amazon.com)
- entry-level product that provides the basics of accounting at a low price.
Setup for Your "Chart of Accounts"
After choosing a method for recording transactions, it's 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 accounts, etc.
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.
Learning and Maintaining Your Business Accounting
Once you've chosen your accounting system, the next step is learning and
maintaining your accounting system. Learning the system will obviously depend on
what solution you've adopted, but maintaining the system is accomplished
primarily by 2 things:
1. You Have to Use the System for your Business - once you've taken the time and energy
to setup an accounting system, you have to actually utilize it properly. This
means entering every transaction, check, bill, charge or refund.
2. Reconcile Your Bank Statement - the best way to maintain your
accounting system is by reconciling your bank statement with your accounting
system every month. This means that you compare each transaction from your bank
account or accounts with your accounting system and make sure that they balance.
This process alone will force you to properly account for the company's money.