13 Apr Must-Know Foundations of Small Business Accounting
Small business accounting doesn’t come easy to every company or individual, and we hear lots of questions when working with new clients. We hope that the information below can help you through the learning process.
Start a business bank account
Before you do anything with your business, you need a business bank account. As a sole proprietor, it can be tricky to say exactly when your business started. Businesses can be in the concept and planning stages for years, but once you need to buy goods or services for that planning stage, you need a business bank account.
If you purchase things for your business such as web hosting, advertising, or market research data without first starting a separate bank account, it will be difficult to track business transactions later down the road. Especially if you’ve set up auto-pay on a personal card. Starting a business account is just as easy as starting a personal one, there may just be a small deposit required.
Small Business Accounting Tip: If it’s not business, it’s personal
Continuing the theme of banking, it is extremely important to keep all of your business and personal transactions separate. It can be hard to change a transaction later on down the road, and the balance of your books depends on accurate documentation.
Also, be careful deducting items on your taxes that are used for both business and personal accounts. Examples could be a home office or a car that you use for your business, but is not owned by your business. You can claim a partial deduction on your business tax return. However, if the IRS thinks you might have claimed a personal expense on your business return, the penalty can be expensive—up to an additional 75% of what you already owe. When in doubt, a <<virtual bookkeeper>> can be helpful for navigating this issue. <<link this text to The Advantages of a Virtual Bookkeeping Service post>>
Ditch the pen and paper
You might have romantic ideas about the days when bookkeepers would write in a leather-bound book called the ledger, but the advent of computers has drastically improved the field of accounting. If you can record every transaction electronically, you can enjoy peace of mind. You don’t have to depend on that written work order from six months ago when it is stored in your system and securely in the cloud.
This is an equally important principle to follow even in you use a computer program to handle your books. When you pay with cash, it’s unlikely for you to receive an electronic receipt. But fortunately there are apps today that let you just snap a picture with your phone and upload the information to your software. Getting in the habit of this will protect you from the stress that comes up when a missing dollar amount has to be accounted for.
Decide which bookkeeping system you’ll use
By bookkeeping system, we don’t mean Quickbooks or Xero, we mean whether your business should use cash method or accrual method bookkeeping.
The cash method is suitable to many small and medium sized businesses. It basically means that you record a transaction when cash is exchanged. So, if you hired a contractor who gave you an invoice due in 30 days, you’d record the transaction when you pay him.
With the accrual method, you record the transaction when the goods are exchanged, whether there has been an exchange of cash or not. So in this example, the transaction would be recorded on the day he provided services. Likewise, if you made a sale with net 30 terms, you’d record the transaction on the day the goods were sold. This method is used by large companies, but should also be used if you have a business that tracks accounts payable and receivable.
Prepare for payroll
Even if you don’t have employees now, you may in the future (your nephew has to go back to college at some point, right?). It’s a good idea to figure out how you’d bring on the new talent, whether they would be an employee or an independent contractor. Keep track of everything you pay everyone, because you’re required to issue a 1099 to anyone you paid more than $600 to. The list of who gets one and who doesn’t can be a little confusing, which is why we’re available to help you prepare your 1099-MISCs.
Decide which way the cash will flow in
East, or West? Just kidding. Here, we’re talking about the actual method that people will pay you. Do you sell in stores? Online? Are your customers members of the public or are they other businesses? Nowadays, the ability to take credit card payments is almost non-negotiable. But do you want to invest in the ability to process mobile wallets like Apple Pay, Samsung Pay, or Google Pay as well? There are a variety of payment processors to choose from, so it’s a good idea to think ahead and go with one who can offer you all that you might need later.
When you’re ready to move on
All of these insights are useful when you’re running the accounting for your own small business. But when you’d like a more robust accounting operation, we’ll be here. MiHi Pro clients enjoy peace of mind when it comes to their small business bookkeeping. We also specialize in reporting for 501(c)3 nonprofits and nonprofits of other kinds, and would be happy to find a solution that meets your needs.