TL;DR<\/strong><\/h2>\n\n\n\nWhat every small business owner should know about bookkeeping and accounting:<\/p>\n\n\n\n
\n- What\u2019s the difference between bookkeeping (tracking daily transactions) and accounting (financial analysis for decision-making).<\/li>\n\n\n\n
- How to choose the right bookkeeping\/accounting methods and what software to use for automation and efficiency.<\/li>\n\n\n\n
- How to review financial statements (balance sheet, income statement, cash flow statement) for business insights and profitability.<\/li>\n\n\n\n
- How to stay informed on tax obligations and procedures, and work closely with accounting professionals.<\/li>\n<\/ul>\n\n\n\n
<\/p>\n\n\n\n
Contents:<\/b><\/h2><\/p>\n
1. The basic: Accounting vs bookkeeping<\/a><\/p>\n\n - What is bookkeeping?<\/a><\/li>\n
- What is accounting?<\/a><\/li>\n
- The key takeaway for a small business<\/a><\/li>\n<\/ul>\n
2. What small businesses should know about basic bookkeeping<\/a><\/p>\n\n - General Ledger (GL)<\/a><\/li>\n
- Accounts<\/a><\/li>\n
- Chart of Accounts (COA)<\/a><\/li>\n
- Key takeaways for a small business<\/a><\/li>\n<\/ul>\n
3. Financial statements or how you summarize account information<\/a><\/p>\n4. When and how are transactions recorded?<\/a><\/p>\n\n - When do you record transactions: Accounting methods<\/a><\/li>\n
- How do you record transactions: Bookkeeping methods<\/a><\/li>\n<\/ul>\n
5. Recording a financial transaction in a general ledger<\/a><\/p>\n6. Basic steps in accounting for small businesses<\/a><\/p>\n7. Do you need an accountant for your small business?<\/a><\/p>\n\n\n\nThe basic: Accounting vs bookkeeping<\/strong><\/span><\/h2>\n\n\n\nWe\u2019ll start our journey of small business accounting basics by clearing 2 key terms: accounting and bookkeeping<\/a>. To do that, we\u2019ll use a simple example of running a lemonade stand. Bookkeeping and accounting are both crucial to understanding how well your stand is doing but they focus on different aspects of its financial story.<\/p>\n\n\n\nWhat is bookkeeping?<\/strong><\/span><\/h3>\n\n\n\nBookkeeping, in our example, is keeping a detailed diary of everything that happens at your lemonade stand. Every time someone buys a lemonade, you write down how much money you made. And every time you buy more lemons or sugar, you note how much you spent. <\/p>\n\n\n\n
Bookkeeping is about recording<\/strong> these daily transactions accurately and systematically. It’s the groundwork for understanding your lemonade stand\u2019s financial activities, ensuring every penny earned and spent is tracked.<\/p>\n\n\n\nWhat is accounting?<\/strong><\/span><\/h3>\n\n\n\nAccounting, on the other hand, is taking that diary at the end of the month and analyzing<\/strong> how your lemonade stand is doing. You look at the entries to figure out if you\u2019re making money or losing it, which items cost you the most, and how you can sell more lemonade or spend less on supplies.<\/p>\n\n\n\nAccounting takes the information from your bookkeeping records and turns it into insights and strategies. It involves preparing financial statements, making budgets, and providing advice to help the lemonade stand grow and become more profitable.<\/p>\n\n\n\n
The key takeaway for a small business<\/strong><\/span><\/h3>\n\n\n\nBookkeeping is the day-to-day recording of financial transactions, laying the foundation. Accounting builds on this foundation by analyzing these records, helping you make informed decisions. So, one can\u2019t exist without the other and you need both to run your business.<\/p>\n\n\n\n
What small businesses should know about basic bookkeeping<\/strong><\/span><\/h2>\n\n\n\nNow, we\u2019ll slowly dip our toes in the bookkeeping jargon. But don’t worry, while the names might seem intimidating at times, most of them are just fancy words for straightforward ideas.<\/p>\n\n\n\n
In this section, we\u2019ll take a top-down approach, starting from big structures and getting more granular as we explore these financial terms<\/a>. <\/p>\n\n\n\nGeneral Ledger (GL)<\/strong><\/span><\/h3>\n\n\n\nGeneral ledger is our top-level book. You can have a physical book for it, though usually it\u2019ll be an online book (like accounting software for example). It provides a complete record of financial transactions<\/strong> over the life of the company. <\/p>\n\n\n\nBut if we were to input every single transaction as they come in, the general ledger would turn into a mess of data. So, to avoid that, all those transactions are organized in their allotted accounts. <\/p>\n\n\n\n
Accounts<\/strong><\/span><\/h3>\n\n\n\nThankfully, there\u2019s a list of only 5 account types<\/strong> that any transaction<\/em> can be allocated to. So if you need to record a transaction in your general ledger, it must<\/em> fit into one of those types:<\/p>\n\n\n\n\n- Assets:<\/strong> Anything of value your business owns, like cash, inventory, equipment, and real estate. Assets<\/a> can be used to generate revenue.<\/li>\n\n\n\n
- Liabilities:<\/strong> Debts or obligations your business owes, such as loans, accounts payable, and mortgages. Liabilities<\/a> are what your business needs to pay back.<\/li>\n\n\n\n
- Equity:<\/strong> The owner’s stake in the business. It’s what remains after you subtract liabilities from assets and represents the owner’s claim to the business assets.<\/li>\n\n\n\n
- Revenue:<\/strong> The total amount of money your business earns from its normal business activities, usually from the sale of goods and services to customers.<\/li>\n\n\n\n
- Expenses:<\/strong> The costs incurred by your business to generate revenue. This includes rent, utilities, salaries, and the cost of goods sold.<\/li>\n<\/ul>\n\n\n\n
But even though there are 5 basic account types, they\u2019re then further subdivided into more specific account categories, like accounts payable, for example. This can create a whole list of subaccounts that your business has. And that takes us neatly, to a chart of accounts. <\/p>\n\n\n\n
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Chart of Accounts (COA)<\/strong><\/span><\/h3>\n\n\n\nIf you imagine your general ledger being, literally, a book, your various accounts can be seen as chapters, then a chart of accounts would be a table of contents<\/strong> listing all the accounts you have.<\/p>\n\n\n\nCOA organizes financial information into a clear, accessible format that mirrors the major financial categories, as outlined in the accounts section: assets, liabilities, equity, revenue, and expenses.<\/p>\n\n\n\n
Each of these categories is then broken down into more specific accounts, reflecting the diverse nature of your business transactions. For instance, under assets, you might find subaccounts for cash, inventory, accounts receivable, equipment, and more.<\/p>\n\n\n\n
How the chart of accounts is different for every small business<\/strong><\/h4>\n\n\n\nThe COA\u2019s strength lies in its ability to be tailored to the needs of the business. While the basic structure remains consistent, the level of detail and the specific accounts included can vary widely.<\/p>\n\n\n\n
A small retail business, for example, might have a detailed set of inventory accounts to track different product lines, whereas a service-based business might have a more elaborate set of expense accounts to capture various service delivery costs.<\/p>\n\n\n\n
In other words, every chart of accounts is a unique representation of a specific business. It\u2019ll also be evolving as your business grows and changes.<\/p>\n\n\n\n
Want to learn from experts? Read a guide on how to set up and <\/em>use Chart of Accounts in QuickBooks<\/em><\/a> for efficient financial management.<\/em><\/p>\n\n\n\nKey takeaways for a small business<\/strong><\/span><\/h3>\n\n\n\nThis is how the basic bookkeeping for small businesses is done: there\u2019s a general ledger that holds all transactions categorized by the types of accounts they belong to and further divided into subcategories which create a chart of accounts – an account map for a particular small business.<\/p>\n\n\n\n
Financial statements or how you summarize account information<\/strong><\/span><\/h2>\n\n\n\nAll these accounts can (and should) be periodically summarized in the form of financial statements to give you a good understanding of your business health. Here are the 3 key financial statements:<\/p>\n\n\n\n
\n- Balance sheet:<\/strong> Summarizes what the company owns (assets), owes (liabilities), and the ownership stake (equity) at a specific point in time.<\/li>\n<\/ul>\n\n\n\n
The balance sheet is essentially a detailed and structured representation of the accounting equation:<\/p>\n\n\n\n
Assets = Liabilities + Equity<\/em><\/strong><\/p>\n\n\n\n\n- Income statement:<\/strong> Shows the company’s financial performance, including revenues, expenses, and profit or loss over a period.<\/li>\n\n\n\n
- Cash flow statement:<\/strong> Details the inflows and outflows of cash from operating, investing, and financing activities over a period.<\/li>\n<\/ul>\n\n\n\n
And this is how accounting is done: you compile and summarize the transaction records to understand how your business is actually doing.<\/p>\n\n\n\n
When and how are transactions recorded?<\/strong><\/span><\/h2>\n\n\n\nWhile it might seem obvious that a small business simply records transaction details when the transaction takes place, the bookkeeping and accounting world has a more nuanced take on it. Let\u2019s take a look at accounting and bookkeeping methods. <\/p>\n\n\n\n
When do you record transactions: Accounting methods<\/strong><\/span><\/h3>\n\n\n\nThere are two primary accounting methods: accrual basis and cash basis. These methods determine when<\/strong> transactions are recorded:<\/p>\n\n\n\n\n- Cash basis accounting:<\/strong> Records income when cash is received<\/em> and expenses when cash is paid<\/em>. <\/li>\n<\/ul>\n\n\n\n
For example, if you complete a service in March but don’t get paid until April, you record the revenue in April, i.e. when you receive the money.<\/p>\n\n\n\n
This method is simple but may not accurately reflect the business’s financial status at a given time.<\/p>\n\n\n\n
\n- Accrual basis accounting:<\/strong> Records income when earned<\/em> and expenses when incurred<\/em>, regardless of when cash is received or paid. <\/li>\n<\/ul>\n\n\n\n
Using the same example, if you complete a service in March but don’t get paid until April, you still record the revenue in March because that’s when the service was completed and the income was technically earned (i.e. you\u2019re owed to be paid).<\/p>\n\n\n\n
This method provides a more accurate financial picture but is more complex to manage.<\/p>\n\n\n\n
Some small businesses start with cash-based accounting and, as they grow, they move into accrual accounting. However, many small businesses jump straight into accrual accounting simply because it gives them a more accurate view of their finances. <\/p>\n\n\n\n
N.B.<\/strong> Country-specific laws and regulations usually determine the conditions under which the business must record transactions using the accrual method of accounting. <\/p>\n\n\n\nHow do you record transactions: Bookkeeping methods<\/strong><\/span><\/h3>\n\n\n\nHere, we also have two options as there are two primary bookkeeping methods: single-entry and double-entry. These methods determine how<\/strong> transactions are recorded and tracked:<\/p>\n\n\n\n\n- Single-entry bookkeeping:<\/strong> It\u2019s a simple and intuitive method. Transactions are recorded once<\/em>, either as an income or an expense, similar to how one would maintain a personal checkbook. <\/li>\n<\/ul>\n\n\n\n
This method typically tracks cash disbursements and receipts, making it straightforward and suitable for small, cash-based businesses or sole proprietorships. However, it may not provide a complete picture of a business’s financial health because it doesn\u2019t track assets, liabilities, or equity in detail.<\/p>\n\n\n\n
\n- Double-entry bookkeeping:<\/strong> It requires that every financial transaction be recorded in at least two accounts<\/em>: one debit and one credit (we\u2019ll talk about them in more detail in a moment).<\/li>\n<\/ul>\n\n\n\n
This method ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced, offering a more accurate representation of a business’s financial position.<\/p>\n\n\n\n
While more complex to manage due to the need for detailed tracking and balancing, double-entry bookkeeping gives comprehensive insights into the financial activities of a business. <\/p>\n\n\n\n
Recording a financial transaction in a general ledger<\/strong><\/span><\/h2>\n\n\n\nWe continue our top-down journey through accounting and bookkeeping basics. Now that we have the large-scale picture, let\u2019s look at a smaller level of transactions and exactly how they\u2019re recorded in your general ledger.<\/p>\n\n\n\n
Journal entry<\/strong><\/h3>\n\n\n\nA journal entry is the basic recording unit in double-entry bookkeeping<\/a>, used to document a financial transaction. Every transaction in a business involves the transfer of value from one account to another<\/strong>, and this transfer is recorded as a journal entry.<\/p>\n\n\n\nDebit and credit<\/strong><\/h3>\n\n\n\nAs you can imagine, this transfer of value affects the account it leaves<\/em> and the account it gets into<\/em>. That\u2019s what we call debits and credits. <\/p>\n\n\n\nDebit and credit are the two sides of any financial transaction, recorded in journal entries. Their roles in a transaction depend on the types of accounts involved:<\/p>\n\n\n\n
\n- Debit (Dr):<\/strong> This represents an increase in assets or expenses and a decrease in liabilities, equity, or income. In plain terms, adding to what you own or what costs you incur, and decreasing what you owe or what you’ve earned.<\/li>\n\n\n\n
- Credit (Cr):<\/strong> This represents an increase in liabilities, equity, or income and a decrease in assets or expenses. In other words, adding to what you owe, what you’ve earned, or your investment in the business, and decreasing what you own or what costs you incur.<\/li>\n<\/ul>\n\n\n\n
Does it make sense? Of course, it doesn\u2019t! Even if you read it a few times, it still seems arbitrary. There\u2019s a logic behind it though, and it has to do with balancing the left and right sides of the accounting equation. However, as a small business owner, what matters is the following:<\/p>\n\n\n\n
\n- Debits and credits don\u2019t<\/strong> automatically mean a decrease or an increase. It all depends on which account it affects.<\/li>\n\n\n\n
- Every action has an equal and opposite reaction – it applies to physics as much as to the debits and credits concept. <\/li>\n\n\n\n
- Debits and credits are a way that helps you balance your books in the double-entry method. They\u2019re means to an end – accurate accounting. <\/li>\n<\/ol>\n\n\n\n
Small business accounting: Summary<\/strong><\/h3>\n\n\n\nI hope that we\u2019re now armed with a good understanding of bookkeeping and accounting basics that will let any small business step into financial waters. With this knowledge under our belt, we\u2019re ready to see what bookkeeping and accounting look like in practice.<\/p>\n\n\n\n
Basic steps in accounting for small businesses<\/strong><\/span><\/h2>\n\n\n\nEvery small business will usually go through a series of steps that ensure that they set up their bookkeeping and accounting practices the right way. Without further ado, let\u2019s dive straight into it. <\/p>\n\n\n\n
1. Open a business bank account<\/strong><\/h3>\n\n\n\nYou start by opening your business checking account. Depending on your business structure, a separate business bank account<\/a> can be either legally required or not obligatory. However, it\u2019s strongly recommended to have a separate business account.<\/p>\n\n\n\nThis way, your personal and business records won\u2019t mix up, and it\u2019ll be much easier for you to prepare for the tax season, secure a loan or a credit line, and talk to investors.<\/p>\n\n\n\n
To open a business account, you need a business name and a registration with your state or province. However, it\u2019s better to check with the bank to find out what other documents they might require. Also, conditions and fees for managing business accounts can vary from bank to bank, so it\u2019s wise to compare the offerings from several banks to see what will suit your business needs best.\u00a0To manage finances more effectively, small business owners often explore options like savings accounts<\/a> to keep funds secure and organized.<\/p>\n\n\n\n2. Choose your bookkeeping and accounting methods<\/strong><\/h3>\n\n\n\nChoosing bookkeeping and accounting methods<\/a> (as we very well know now) is a crucial step that will affect all aspects of recording and analyzing your finances.<\/p>\n\n\n\nDeciding to go with single-entry bookkeeping, will make your books much simpler however, it won\u2019t give you a detailed picture of your business. Double-entry, on the other hand, while more complex, is more fine-tuned to show you exactly what happens with your finances. <\/p>\n\n\n\n
The same goes for accrual vs. cash-based accounting<\/a>. The nuanced approach of accrual accounting gives you a better understanding of your business’s financial standing.<\/p>\n\n\n\nWhile in most cases the choice might be your preference, however, there are situations where you\u2019re legally obliged to switch to a particular method. <\/p>\n\n\n\n
3. Pick the right accounting software<\/strong><\/h3>\n\n\n\nIf you\u2019re worried about the complexities involved in the above methods, you can be reassured that nowadays, bookkeeping and accounting software<\/a> let you automate most of the recording.<\/p>\n\n\n\nWhether it\u2019s recording transactions, syncing them with payment processors, analyzing the data, handling payroll, and many, many more – there\u2019s software for all your business needs.<\/p>\n\n\n\n
So take a good look at your accounting processes in order to decide what you need to automate. Your technology stack will be a representation of your unique business needs, much like your chart of accounts.<\/p>\n\n\n\n
4. Set up your financial recording basics<\/strong><\/h3>\n\n\n\nIn this step, we\u2019re talking about the general ledger and your chart of accounts. As we know, each account you create will fall into one of 5 categories of accounts, namely, assets, liabilities, equity, revenue, and expenses. <\/p>\n\n\n\n
You can create your chart of accounts in the accounting software you use. While you can do this task yourself, a trusted bookkeeper or an accountant<\/a> can really add value to this process. Whether 7 or 70 accounts better capture your business\u2019 finances, is a question best answered by an expert who is familiar with your industry and your business.<\/p>\n\n\n\n5. Record transactions in your books<\/strong><\/h3>\n\n\n\nNo matter how money moves between you and your clients, each transaction needs to be recorded. And if you\u2019re dealing with online transactions, payment processors, or subscriptions, you need the right software that can fully automate the process, without you manually inputting those transactions. <\/p>\n\n\n\n
Software like Synder offers a robust solution for businesses that handle a high volume of online transactions, integrating seamlessly with 25+ ecommerce and payment platforms<\/a>. The software automates the recording of sales, expenses, and even inventory changes directly from your online transactions, reducing the need for manual data entry and minimizing errors.<\/p>\n\n\n\nApart from automatically capturing online transactions, accurately categorizing them, and facilitating reconciliation, Synder offers comprehensive reporting<\/a> on sales, products, and customers, providing a deep analysis of your business for informed strategic decision-making.<\/p>\n\n\n\nJoin our <\/em>free trial<\/em><\/a> to see how Synder can revolutionize your online transaction management. Also, don’t miss out on our <\/em>Weekly Public Demo<\/em><\/a> to see Synder in action and get your questions answered by our experts. <\/em><\/p>\n\n\n\n6. Track your small business profit and expenses<\/strong><\/h3>\n\n\n\nYour accounts exist not only for record-keeping but also for assessing and informing your business decisions. One of the key elements in any business is profitability.<\/p>\n\n\n\n
Small businesses use the gross profit margin<\/a> to measure their profitability. Gross profit margin, in simple terms, is a measure that shows what percentage of your sales is profit after subtracting the costs of producing your products or services (COGS). It’s like looking at how much of the money you make from selling something actually stays with you as profit after paying for what it costs to make or buy that item.<\/p>\n\n\n\nHere\u2019s the formula:<\/p>\n\n\n\n
Gross Profit Margin = ( Total Revenue \u2212 COGS \/ Total Revenue ) \u00d7 100<\/em><\/strong><\/p>\n\n\n\n<\/p>\n\n\n
\n![\"Gross](\"https:\/\/synder.com\/blog\/wp-content\/uploads\/sites\/5\/2024\/03\/formula-for-gross-profit-margin.png\")
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Profitability and gross profit margins in practice<\/strong><\/h4>\n\n\n\nHere’s a simple way to think about it: If you sell a product for $100, and it costs you $60 to make or buy it, your gross profit is $40. The gross profit margin would then be the gross profit ($40) divided by the sales price ($100), which gives you 0.4. To express this as a percentage, you multiply by 100, so the gross profit margin is 40%. This means for every dollar you earn from selling that product, you keep 40 cents as profit before considering other expenses like rent, utilities, and salaries.<\/p>\n\n\n\n
After determining the target goal of the gross profit margin, you can see how much markup should be applied to get the revenue you want. Jeff Wiener, an entrepreneur, shared his 19 easy ways<\/a> to increase profit margins for your small business, where you can find some interesting ideas on how to make your business more profitable.<\/p>\n\n\n\n7. Get to know small business tax obligations and procedures<\/strong><\/h3>\n\n\n\nFor a business owner, it\u2019s crucial to understand your business tax obligations. Here, a lot depends on your industry, business structure, and activities, but, in general, business taxes fall into three types: federal, state, and local.<\/p>\n\n\n\n
It\u2019s true that the tax system is complex and accountants\u2019 help in this matter can\u2019t be overstated but it\u2019s an investment that pays off. Let\u2019s go through the basic federal taxes for small businesses:<\/p>\n\n\n\n
\n- Income tax.<\/strong> This tax<\/a> is levied on the net income (profits) of the business. For sole proprietorships, partnerships, and S corporations, the income is passed through to the owners’ personal tax returns. C corporations are taxed separately on their income.<\/li>\n\n\n\n
- Self-employment tax.<\/strong> Comprising Social Security and Medicare taxes, this 15.3% tax applies to the earnings of individuals who work for themselves. It’s similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.<\/li>\n\n\n\n
- Employment tax.<\/strong> If you have employees, you\u2019re responsible for withholding Social Security and Medicare taxes, federal income tax withholdings, and paying your share of Social Security and Medicare taxes. Additionally, you’re required to file and pay the Federal Unemployment Tax Act (FUTA) taxes, which provide funds for paying unemployment compensation to laid-off workers.<\/li>\n\n\n\n
- Excise tax.<\/strong> Levied on specific goods, services, and activities. The applicability of excise taxes<\/a> can depend on the business’s specific activities and products.<\/li>\n\n\n\n
- Estimated tax.<\/strong> For income not subject to withholding (like earnings from self-employment, interest, dividends, rent, or gains from the sale of assets), you may need to make estimated tax payments quarterly. This is common for business owners who don\u2019t have taxes withheld from their income.<\/li>\n<\/ul>\n\n\n\n
8. Balance and close your books: Accounts reconciliation<\/strong><\/h3>\n\n\n\nBalancing the books refers to the process of ensuring that all financial transactions are accurately recorded and that total debits<\/em> equal total credits<\/em> in the double-entry bookkeeping system.<\/p>\n\n\n\nThis process involves reviewing and reconciling all accounts to verify accuracy, making any necessary adjusting entries, and preparing an adjusted trial balance. The goal is to confirm that the sum of all debit balances equals the sum of all credit balances, which confirms the accounting equation, we learned about in the beginning:<\/p>\n\n\n\n
Assets = Liabilities + Equity.<\/em><\/strong><\/p>\n\n\n\nBalancing and closing books mark the end of the accounting period and the beginning of a new one and involve several steps.<\/p>\n\n\n\n
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Contents:<\/b><\/h2><\/p>\n
1. The basic: Accounting vs bookkeeping<\/a><\/p>\n 2. What small businesses should know about basic bookkeeping<\/a><\/p>\n 3. Financial statements or how you summarize account information<\/a><\/p>\n 4. When and how are transactions recorded?<\/a><\/p>\n 5. Recording a financial transaction in a general ledger<\/a><\/p>\n 6. Basic steps in accounting for small businesses<\/a><\/p>\n 7. Do you need an accountant for your small business?<\/a><\/p>\n\n\n\n We\u2019ll start our journey of small business accounting basics by clearing 2 key terms: accounting and bookkeeping<\/a>. To do that, we\u2019ll use a simple example of running a lemonade stand. Bookkeeping and accounting are both crucial to understanding how well your stand is doing but they focus on different aspects of its financial story.<\/p>\n\n\n\n Bookkeeping, in our example, is keeping a detailed diary of everything that happens at your lemonade stand. Every time someone buys a lemonade, you write down how much money you made. And every time you buy more lemons or sugar, you note how much you spent. <\/p>\n\n\n\n Bookkeeping is about recording<\/strong> these daily transactions accurately and systematically. It’s the groundwork for understanding your lemonade stand\u2019s financial activities, ensuring every penny earned and spent is tracked.<\/p>\n\n\n\n Accounting, on the other hand, is taking that diary at the end of the month and analyzing<\/strong> how your lemonade stand is doing. You look at the entries to figure out if you\u2019re making money or losing it, which items cost you the most, and how you can sell more lemonade or spend less on supplies.<\/p>\n\n\n\n Accounting takes the information from your bookkeeping records and turns it into insights and strategies. It involves preparing financial statements, making budgets, and providing advice to help the lemonade stand grow and become more profitable.<\/p>\n\n\n\n Bookkeeping is the day-to-day recording of financial transactions, laying the foundation. Accounting builds on this foundation by analyzing these records, helping you make informed decisions. So, one can\u2019t exist without the other and you need both to run your business.<\/p>\n\n\n\n Now, we\u2019ll slowly dip our toes in the bookkeeping jargon. But don’t worry, while the names might seem intimidating at times, most of them are just fancy words for straightforward ideas.<\/p>\n\n\n\n In this section, we\u2019ll take a top-down approach, starting from big structures and getting more granular as we explore these financial terms<\/a>. <\/p>\n\n\n\n General ledger is our top-level book. You can have a physical book for it, though usually it\u2019ll be an online book (like accounting software for example). It provides a complete record of financial transactions<\/strong> over the life of the company. <\/p>\n\n\n\n But if we were to input every single transaction as they come in, the general ledger would turn into a mess of data. So, to avoid that, all those transactions are organized in their allotted accounts. <\/p>\n\n\n\n Thankfully, there\u2019s a list of only 5 account types<\/strong> that any transaction<\/em> can be allocated to. So if you need to record a transaction in your general ledger, it must<\/em> fit into one of those types:<\/p>\n\n\n\n But even though there are 5 basic account types, they\u2019re then further subdivided into more specific account categories, like accounts payable, for example. This can create a whole list of subaccounts that your business has. And that takes us neatly, to a chart of accounts. <\/p>\n\n\n\n <\/p>\n\n\n <\/p>\n\n\n\n If you imagine your general ledger being, literally, a book, your various accounts can be seen as chapters, then a chart of accounts would be a table of contents<\/strong> listing all the accounts you have.<\/p>\n\n\n\n COA organizes financial information into a clear, accessible format that mirrors the major financial categories, as outlined in the accounts section: assets, liabilities, equity, revenue, and expenses.<\/p>\n\n\n\n Each of these categories is then broken down into more specific accounts, reflecting the diverse nature of your business transactions. For instance, under assets, you might find subaccounts for cash, inventory, accounts receivable, equipment, and more.<\/p>\n\n\n\n The COA\u2019s strength lies in its ability to be tailored to the needs of the business. While the basic structure remains consistent, the level of detail and the specific accounts included can vary widely.<\/p>\n\n\n\n A small retail business, for example, might have a detailed set of inventory accounts to track different product lines, whereas a service-based business might have a more elaborate set of expense accounts to capture various service delivery costs.<\/p>\n\n\n\n In other words, every chart of accounts is a unique representation of a specific business. It\u2019ll also be evolving as your business grows and changes.<\/p>\n\n\n\n Want to learn from experts? Read a guide on how to set up and <\/em>use Chart of Accounts in QuickBooks<\/em><\/a> for efficient financial management.<\/em><\/p>\n\n\n\n This is how the basic bookkeeping for small businesses is done: there\u2019s a general ledger that holds all transactions categorized by the types of accounts they belong to and further divided into subcategories which create a chart of accounts – an account map for a particular small business.<\/p>\n\n\n\n All these accounts can (and should) be periodically summarized in the form of financial statements to give you a good understanding of your business health. Here are the 3 key financial statements:<\/p>\n\n\n\n The balance sheet is essentially a detailed and structured representation of the accounting equation:<\/p>\n\n\n\n Assets = Liabilities + Equity<\/em><\/strong><\/p>\n\n\n\n And this is how accounting is done: you compile and summarize the transaction records to understand how your business is actually doing.<\/p>\n\n\n\n While it might seem obvious that a small business simply records transaction details when the transaction takes place, the bookkeeping and accounting world has a more nuanced take on it. Let\u2019s take a look at accounting and bookkeeping methods. <\/p>\n\n\n\n There are two primary accounting methods: accrual basis and cash basis. These methods determine when<\/strong> transactions are recorded:<\/p>\n\n\n\n For example, if you complete a service in March but don’t get paid until April, you record the revenue in April, i.e. when you receive the money.<\/p>\n\n\n\n This method is simple but may not accurately reflect the business’s financial status at a given time.<\/p>\n\n\n\n Using the same example, if you complete a service in March but don’t get paid until April, you still record the revenue in March because that’s when the service was completed and the income was technically earned (i.e. you\u2019re owed to be paid).<\/p>\n\n\n\n This method provides a more accurate financial picture but is more complex to manage.<\/p>\n\n\n\n Some small businesses start with cash-based accounting and, as they grow, they move into accrual accounting. However, many small businesses jump straight into accrual accounting simply because it gives them a more accurate view of their finances. <\/p>\n\n\n\n N.B.<\/strong> Country-specific laws and regulations usually determine the conditions under which the business must record transactions using the accrual method of accounting. <\/p>\n\n\n\n Here, we also have two options as there are two primary bookkeeping methods: single-entry and double-entry. These methods determine how<\/strong> transactions are recorded and tracked:<\/p>\n\n\n\n This method typically tracks cash disbursements and receipts, making it straightforward and suitable for small, cash-based businesses or sole proprietorships. However, it may not provide a complete picture of a business’s financial health because it doesn\u2019t track assets, liabilities, or equity in detail.<\/p>\n\n\n\n This method ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced, offering a more accurate representation of a business’s financial position.<\/p>\n\n\n\n While more complex to manage due to the need for detailed tracking and balancing, double-entry bookkeeping gives comprehensive insights into the financial activities of a business. <\/p>\n\n\n\n We continue our top-down journey through accounting and bookkeeping basics. Now that we have the large-scale picture, let\u2019s look at a smaller level of transactions and exactly how they\u2019re recorded in your general ledger.<\/p>\n\n\n\n A journal entry is the basic recording unit in double-entry bookkeeping<\/a>, used to document a financial transaction. Every transaction in a business involves the transfer of value from one account to another<\/strong>, and this transfer is recorded as a journal entry.<\/p>\n\n\n\n As you can imagine, this transfer of value affects the account it leaves<\/em> and the account it gets into<\/em>. That\u2019s what we call debits and credits. <\/p>\n\n\n\n Debit and credit are the two sides of any financial transaction, recorded in journal entries. Their roles in a transaction depend on the types of accounts involved:<\/p>\n\n\n\n Does it make sense? Of course, it doesn\u2019t! Even if you read it a few times, it still seems arbitrary. There\u2019s a logic behind it though, and it has to do with balancing the left and right sides of the accounting equation. However, as a small business owner, what matters is the following:<\/p>\n\n\n\n I hope that we\u2019re now armed with a good understanding of bookkeeping and accounting basics that will let any small business step into financial waters. With this knowledge under our belt, we\u2019re ready to see what bookkeeping and accounting look like in practice.<\/p>\n\n\n\n Every small business will usually go through a series of steps that ensure that they set up their bookkeeping and accounting practices the right way. Without further ado, let\u2019s dive straight into it. <\/p>\n\n\n\n You start by opening your business checking account. Depending on your business structure, a separate business bank account<\/a> can be either legally required or not obligatory. However, it\u2019s strongly recommended to have a separate business account.<\/p>\n\n\n\n This way, your personal and business records won\u2019t mix up, and it\u2019ll be much easier for you to prepare for the tax season, secure a loan or a credit line, and talk to investors.<\/p>\n\n\n\n To open a business account, you need a business name and a registration with your state or province. However, it\u2019s better to check with the bank to find out what other documents they might require. Also, conditions and fees for managing business accounts can vary from bank to bank, so it\u2019s wise to compare the offerings from several banks to see what will suit your business needs best.\u00a0To manage finances more effectively, small business owners often explore options like savings accounts<\/a> to keep funds secure and organized.<\/p>\n\n\n\n Choosing bookkeeping and accounting methods<\/a> (as we very well know now) is a crucial step that will affect all aspects of recording and analyzing your finances.<\/p>\n\n\n\n Deciding to go with single-entry bookkeeping, will make your books much simpler however, it won\u2019t give you a detailed picture of your business. Double-entry, on the other hand, while more complex, is more fine-tuned to show you exactly what happens with your finances. <\/p>\n\n\n\n The same goes for accrual vs. cash-based accounting<\/a>. The nuanced approach of accrual accounting gives you a better understanding of your business’s financial standing.<\/p>\n\n\n\n While in most cases the choice might be your preference, however, there are situations where you\u2019re legally obliged to switch to a particular method. <\/p>\n\n\n\n If you\u2019re worried about the complexities involved in the above methods, you can be reassured that nowadays, bookkeeping and accounting software<\/a> let you automate most of the recording.<\/p>\n\n\n\n Whether it\u2019s recording transactions, syncing them with payment processors, analyzing the data, handling payroll, and many, many more – there\u2019s software for all your business needs.<\/p>\n\n\n\n So take a good look at your accounting processes in order to decide what you need to automate. Your technology stack will be a representation of your unique business needs, much like your chart of accounts.<\/p>\n\n\n\n In this step, we\u2019re talking about the general ledger and your chart of accounts. As we know, each account you create will fall into one of 5 categories of accounts, namely, assets, liabilities, equity, revenue, and expenses. <\/p>\n\n\n\n You can create your chart of accounts in the accounting software you use. While you can do this task yourself, a trusted bookkeeper or an accountant<\/a> can really add value to this process. Whether 7 or 70 accounts better capture your business\u2019 finances, is a question best answered by an expert who is familiar with your industry and your business.<\/p>\n\n\n\n No matter how money moves between you and your clients, each transaction needs to be recorded. And if you\u2019re dealing with online transactions, payment processors, or subscriptions, you need the right software that can fully automate the process, without you manually inputting those transactions. <\/p>\n\n\n\n Software like Synder offers a robust solution for businesses that handle a high volume of online transactions, integrating seamlessly with 25+ ecommerce and payment platforms<\/a>. The software automates the recording of sales, expenses, and even inventory changes directly from your online transactions, reducing the need for manual data entry and minimizing errors.<\/p>\n\n\n\n Apart from automatically capturing online transactions, accurately categorizing them, and facilitating reconciliation, Synder offers comprehensive reporting<\/a> on sales, products, and customers, providing a deep analysis of your business for informed strategic decision-making.<\/p>\n\n\n\n Join our <\/em>free trial<\/em><\/a> to see how Synder can revolutionize your online transaction management. Also, don’t miss out on our <\/em>Weekly Public Demo<\/em><\/a> to see Synder in action and get your questions answered by our experts. <\/em><\/p>\n\n\n\n Your accounts exist not only for record-keeping but also for assessing and informing your business decisions. One of the key elements in any business is profitability.<\/p>\n\n\n\n Small businesses use the gross profit margin<\/a> to measure their profitability. Gross profit margin, in simple terms, is a measure that shows what percentage of your sales is profit after subtracting the costs of producing your products or services (COGS). It’s like looking at how much of the money you make from selling something actually stays with you as profit after paying for what it costs to make or buy that item.<\/p>\n\n\n\n Here\u2019s the formula:<\/p>\n\n\n\n Gross Profit Margin = ( Total Revenue \u2212 COGS \/ Total Revenue ) \u00d7 100<\/em><\/strong><\/p>\n\n\n\n <\/p>\n\n\n <\/p>\n\n\n\n Here’s a simple way to think about it: If you sell a product for $100, and it costs you $60 to make or buy it, your gross profit is $40. The gross profit margin would then be the gross profit ($40) divided by the sales price ($100), which gives you 0.4. To express this as a percentage, you multiply by 100, so the gross profit margin is 40%. This means for every dollar you earn from selling that product, you keep 40 cents as profit before considering other expenses like rent, utilities, and salaries.<\/p>\n\n\n\n After determining the target goal of the gross profit margin, you can see how much markup should be applied to get the revenue you want. Jeff Wiener, an entrepreneur, shared his 19 easy ways<\/a> to increase profit margins for your small business, where you can find some interesting ideas on how to make your business more profitable.<\/p>\n\n\n\n For a business owner, it\u2019s crucial to understand your business tax obligations. Here, a lot depends on your industry, business structure, and activities, but, in general, business taxes fall into three types: federal, state, and local.<\/p>\n\n\n\n It\u2019s true that the tax system is complex and accountants\u2019 help in this matter can\u2019t be overstated but it\u2019s an investment that pays off. Let\u2019s go through the basic federal taxes for small businesses:<\/p>\n\n\n\n Balancing the books refers to the process of ensuring that all financial transactions are accurately recorded and that total debits<\/em> equal total credits<\/em> in the double-entry bookkeeping system.<\/p>\n\n\n\n This process involves reviewing and reconciling all accounts to verify accuracy, making any necessary adjusting entries, and preparing an adjusted trial balance. The goal is to confirm that the sum of all debit balances equals the sum of all credit balances, which confirms the accounting equation, we learned about in the beginning:<\/p>\n\n\n\n Assets = Liabilities + Equity.<\/em><\/strong><\/p>\n\n\n\n Balancing and closing books mark the end of the accounting period and the beginning of a new one and involve several steps.<\/p>\n\n\n\n <\/p>\n\n\n\n
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The basic: Accounting vs bookkeeping<\/strong><\/span><\/h2>\n\n\n\n
What is bookkeeping?<\/strong><\/span><\/h3>\n\n\n\n
What is accounting?<\/strong><\/span><\/h3>\n\n\n\n
The key takeaway for a small business<\/strong><\/span><\/h3>\n\n\n\n
What small businesses should know about basic bookkeeping<\/strong><\/span><\/h2>\n\n\n\n
General Ledger (GL)<\/strong><\/span><\/h3>\n\n\n\n
Accounts<\/strong><\/span><\/h3>\n\n\n\n
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<\/figure>\n<\/div>\n\n\nChart of Accounts (COA)<\/strong><\/span><\/h3>\n\n\n\n
How the chart of accounts is different for every small business<\/strong><\/h4>\n\n\n\n
Key takeaways for a small business<\/strong><\/span><\/h3>\n\n\n\n
Financial statements or how you summarize account information<\/strong><\/span><\/h2>\n\n\n\n
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When and how are transactions recorded?<\/strong><\/span><\/h2>\n\n\n\n
When do you record transactions: Accounting methods<\/strong><\/span><\/h3>\n\n\n\n
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How do you record transactions: Bookkeeping methods<\/strong><\/span><\/h3>\n\n\n\n
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Recording a financial transaction in a general ledger<\/strong><\/span><\/h2>\n\n\n\n
Journal entry<\/strong><\/h3>\n\n\n\n
Debit and credit<\/strong><\/h3>\n\n\n\n
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Small business accounting: Summary<\/strong><\/h3>\n\n\n\n
Basic steps in accounting for small businesses<\/strong><\/span><\/h2>\n\n\n\n
1. Open a business bank account<\/strong><\/h3>\n\n\n\n
2. Choose your bookkeeping and accounting methods<\/strong><\/h3>\n\n\n\n
3. Pick the right accounting software<\/strong><\/h3>\n\n\n\n
4. Set up your financial recording basics<\/strong><\/h3>\n\n\n\n
5. Record transactions in your books<\/strong><\/h3>\n\n\n\n
6. Track your small business profit and expenses<\/strong><\/h3>\n\n\n\n
<\/figure>\n<\/div>\n\n\nProfitability and gross profit margins in practice<\/strong><\/h4>\n\n\n\n
7. Get to know small business tax obligations and procedures<\/strong><\/h3>\n\n\n\n
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8. Balance and close your books: Accounts reconciliation<\/strong><\/h3>\n\n\n\n