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The quick guide to small business accounting and bookkeeping

piggy bank on a stack of books

You don’t need a master’s degree in small business accounting to handle the finances for your startup. In fact, one of the first choices you'll make for your business is whether to manage your books in-house or outsource accounting duties. 

Even if you hire an accounting partner, it’s useful to know the fundamentals. Accounting and bookkeeping are central to each growth stage. Calculating your net working capital and cash runway depends on accurate figures. You’ll leverage financial reports to get better credit terms from banks, vendors, and lenders. And after a successful fundraising round, your investors will want regular updates on your books.

In this guide, we'll break down the basics of small business accounting. We’ll explain key accounting terms and methods, compare do-it-yourself tools and outsourcing options, and give you a checklist of yearly bookkeeping tasks.

Accounting vs. bookkeeping 

Accounting and bookkeeping are both related to recording transactions and monitoring financial health. Knowing the difference helps you understand which tasks you’ll delegate.

Bookkeeping is the basis of accounting. It involves administrative duties, like day-to-day expense tracking, recordkeeping, account reconciliation, and expense categorization. Some bookkeepers can also process payroll, manage invoicing, and pay your suppliers. Business bookkeeping touches on many operational areas, so it’s best to schedule time to handle it each month. (We’ll cover that later.)

Accounting builds on the financial information collected through bookkeeping. Accountants prepare financial statements, analyze costs, and ensure your business is prepared for tax filing. They make budget recommendations and help you plan future investments. If you decide to handle your own small business accounting, you can still outsource some bookkeeping tasks. 

Startup owners need to be aware of Generally Accepted Accounting Principles (GAAP). GAAP isn’t a law, but it does explain how to measure and present a company’s finances. If your stock is publicly traded or you share financial statements outside your startup, you must follow these rules.

Accounting and bookkeeping aren't activities you just dive into. Below, we've rounded up preparatory steps that help you put the right practices in place.

Before you set up your small business accounting

There are a few prerequisites to take care of before you start making spreadsheets or contacting accounting firms.    

Register your business 

How you register your startup determines how you’ll organize funds, file taxes, and publish company information. A sole proprietorship, for instance, doesn’t need an Employer Identification Number (EIN) to get a bank account, but a limited liability company does. 

Depending on your state, you may need to collect sales tax and use tax and follow other accounting guidelines. Register your startup by submitting an application to your state filing office.

Open a business bank account 

It’s not just best practice to keep business and personal finances separate—it’s the rule for some business types. An easy way to do this is to open a business checking account and a business savings account

To apply, you’ll provide your organizing documents, EIN or Social Security number, a certificate of good standing, and other business information. Traditional banks may also examine your business credit score

You can simplify your finances even further with a single cash management account like Brex Cash. While this isn't a bank account, it will help you manage your working capital and savings easily while getting an industry-leading interest rate on both. 

Organize 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 couple 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 and reports

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Here are some of the standard accounting and bookkeeping terms you’ll come across as you organize your small business accounting. 

  • Revenue or income: Money your startup 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.
  • Assets: Liquid and non-liquid assets owned by your startup, like land, equipment, accounts receivable, stocks, and patents.
  • Liabilities: Debts and obligations owed by your startup, like business loans, accounts payable, income taxes, and mortgage payments.
  • Equity: The value remaining when you subtract liabilities from assets, which 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.
  • Accounts payable: Money your startup owes to lenders, creditors, vendors, and other entities. Recorded as a liability on the balance sheet in the form of debt owed by your company.
  • Accounts receivable: Money owed to your startup for goods or services by customers, clients, and other entities. Recorded as an asset on the balance sheet.
  • 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.

Financial reports

Below are the three standard financial statements used in business. Your accounting team will create them using your business books. These reports (or projections) are often used by investors to decide whether they’ll invest in a startup. 

  • Balance sheet: Summarizes your startup’s assets, liabilities, and owner or shareholder equity for a certain time period. 
  • Income statement: Summarizes your startup’s revenues and expenses during a certain time period. Also called a profit and loss statement.
  • Cash flow statement: Summarizes your startup’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 unified system

As your startup grows, your accounting needs will become more complex. Ideally, you want to put a financial system in place that will see your startup into the future. Let’s walk through the different ways you can approach accounting and bookkeeping for your company. 

Cash vs. accrual accounting method

First, businesses need to choose one of the two standard accounting methods—and stay consistent.

  • Cash method: With cash-basis accounting, you record transactions when you receive payment for goods or services. It’s the easier method to use and gives you a clear picture of your startup’s cash flow.
  • 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 condition. 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 essential if you want to balance your own books. For modern businesses, manual data entry is both risky and unnecessary. Although your Excel spreadsheet skills may be admirable, you can save more time by automating your accounting. Even startups that outsource accounting may still use software for light bookkeeping. 

Popular software like QuickBooks Online, Xero, and FreshBooks let you take care of the accounting basics we’ve mentioned or manage your finances end to end. These services can be used “out of the box” and are 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. 

Outsourced small business accounting 

You didn’t go into business to become an expert at adjusting journal entries. Hiring an accounting firm lets you focus on running your startup while a team of experts watches over your financials. 

There’s a wide variety of accounting services. Some firms offer everything from day-to-day expense tracking to full-service payroll and tax support. Others focus specifically on helping startups. You can pick from online-only firms or search for a local partner. 

If you enter your accounting needs, business type, and monthly sales into the Brex Portal, you’ll get a selection of accounting partners to choose from. 

Keeping your own books

If you do choose to manage your startup’s bookkeeping yourself, it’s vital to stick to a schedule. The standard is to reconcile your bank statements and internal records at least once a month. Below, we’ve provided an example task list to 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

Yearly accounting tasks

  • File year-end income taxes, payroll taxes, etc.
  • Review aged receivables 
  • Analyze year-end inventory
  • Create full-year financial reports

The bottom line on your small business accounting 

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Reconciling purchases or choosing an accounting firm may not feel as urgent as recruiting employees or growing your user base. But ambitious startups need to get organized early to avoid omissions and oversights later. 

If you have some financial experience—or the time to learn—take advantage of small business accounting software. It’s an affordable option for companies not yet ready to hire a full-time accountant or CFO. Or, you can outsource your financial duties completely to get reliable figures and sail through tax time.

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