5 Steps to get started with small business accounting

Starting a business is one of the most difficult and painstaking tasks. It takes lots of courage and hard work and even after you have taken the leap and started one, it takes immense passion and perseverance to keep going. 

Business ownership is a constant struggle between extremely satisfying milestones and regularly expanding to-do lists. One of the most important element of this to-do list involves accounting and bookkeeping.

Small business accounting is done by keeping a complete record of income and expenditures and accurately juicing out financial information from business transactions. This is an important business management process that helps owners keep track and manage their money effectively specially in the early stages of a business life cycle

To help you ensure you small business accounting goes smoothly and you books are in the perfect shape, we have listed down a few steps to make your life a little bit easier.

How to setup small business accounting ?

  1. Pick an accounting method
  2. Determine how to record your transactions
  3. Setup charts of accounts
  4. Determine how you will get paid
  5. Make a schedule and set reminders

1. Pick an accounting method

First step while setting up your books is choosing the right accounting method for your business, here’s a list of methods you can choose from:

  • Cash Basis
  • Accrual Method
  • Modified Cash Method

Cash Basis : This is the most basic and simplest of methods and does not really require extensive accounting knowledge. The transactions are recorded when money changes hands. This means you record income when you receive a payment. The cash basis method only uses cash accounts (e.g., expense, income, etc.)

Accural Method : This method requires recording of transactions as and when it takes places, even without the transfer of money at that same time. This is the most complex and time consuming method and requires more advanced accounting knowledge and know-how. It really helps in recording long term liabilities 

Modified Cash Method : This method is primarily a mix of both cash and accrual accounting that is why it is even called Hybrid Accounting. You record both cash and credit transactions and manage receivables and payables.

2. Determine how to record your transactions

Small business accounting is a simple yet complex process that tries to understand business based on the data compiled by a bookkeeper by building financial statements. When you start off a business, you need to determine how you plan on managing your account books

  • You can choose the DIY route and use software's like Tally prime. Alternatively you can also use a simple excel spreadsheet.
  • You can hire a part-time accounting team that's either local or cloud based
  • When your business scales up, you can hire in-house bookkeeper and/or accountant.

3. Setup charts of accounts for small business accounting

Charts of Accounts or COA is a list of accounts in your financial statement. It is the process of breaking your money down into various categories and sub categories to better manage incoming and outgoing cash flow.

A basic COA requires 5 sections :

  1. Assets
  2. Liabilities
  3. Equity
  4. Revenues
  5. Expenses

You break down these categories even further into small accounts (eg., product sales) as an when your business requires them.

4. Determine how you will get paid

Your business cannot grow the way you intend it to, if you do not get paid. The best practice is to always lay down a clear customer payment policy to make sure you get paid for your product and services.

Determine what modes of payment you would like your customers to pay through, It may include:

  • Cash
  • Cheque
  • Credit Card
  • Mobile Wallets

If you sell your products and services on credit basis you need to send out invoices on a later date and determine payment terms for those invoices. Payment terms can include modes of payment, due date, payment advice, late fees, etc.

5. Make a schedule and set reminders to simplify your small business accounting

When you let transaction pile up it leads to a lot of chaos, disorganized books, mistakes and unnecessary stress. The last thing you want to do is keep putting off the recording of your transactions.

To keep you small business accounting process simple, create a schedule or accounting cycle and then stick to it. A typical accounting schedule starts with opening account balances and ends by closing the books.

List out your schedule or accounting cycle and set time aside daily, weekly or monthly to go through them and update your records. You can go a little bit further and setup personal reminders for your self to take care of these tasks.