How to Set Up Accounting Books for Small Business in 4 Steps

A well-maintained set of accounting books is at the heart of any successful small business. Accounting books are the financial records of a company’s transactions, including purchases, sales, and other financial interactions. By maintaining these records, small businesses can monitor their financial health, measure performance, and make informed business decisions. In this article, we’ll cover how to set up accounting books for small business, plus share three essential steps to maintain the accuracy of your books.

Brief Overview

  • Setting up accounting books is the first step in organizing a company’s financial records.
  • Accurate financial records are essential for success in business, ensuring a company can comply with tax and other regulations and helping to secure funding for operations and growth.
  • The next step is choosing the right accounting software for your specific business needs.
  • Then, you must configure the accounting software. The two most important steps during configuration are setting up a chart of accounts and assigning user permissions.
  • You’ll want to ensure users are properly trained to use the software you have selected.
  • Accurate financial records require ongoing maintenance, which includes three essential steps: record keeping, reconciling, and periodic review and adjustments.
  • Finally, you’ll want to enlist the help of a CPA for certain tasks, such as expert guidance for complex transactions and preparation of financial statements and tax returns.

Setting up an Accounting System for Small Businesses

How to set up accounting books for small business using accounting software
Specialized software streamlines the process of setting up accounting books and managing financial transactions for small business.

An accounting system is essential for small businesses, and software plays a critical role in simplifying and enhancing the accounting process. By utilizing accounting software, small business owners can track income, expenses, and financial transactions effectively, comply with tax regulations, and provide accurate financial information to stakeholders and regulators. This ultimately contributes to the success and growth of small businesses.

Goals and Objectives

When setting up an accounting system for small businesses, it is important to have clear goals and objectives in mind. Setting goals and objectives helps the accountant and the client stay focused and make informed financial decisions.

One of the primary reasons for setting goals and objectives when establishing an accounting system is to ensure profitability. By setting specific financial targets, such as a desired profit margin or a revenue goal, small business owners can assess their progress and make necessary adjustments to achieve profitability. In this way, an accounting system improves cash flow management.

Another critical aspect to consider when establishing goals and objectives is growth. Small business owners can guide their financial decisions to support growth opportunities and allocate resources effectively by setting growth-oriented goals, such as increasing the customer base or opening new locations.

Compliance with financial regulations is also a crucial objective when setting up an accounting system. Small businesses must ensure that they accurately record monetary transactions and adhere to tax laws and regulations. Setting goals related to compliance helps small business owners stay on track and avoid any penalties or legal issues associated with non-compliance.

In addition to profitability, growth, and compliance, there are other essential elements to consider when establishing goals and objectives for an accounting system, such as improving cash flow management, reducing expenses, increasing efficiency in financial processes, and enhancing financial reporting capabilities.

Small business owners and their accountants can work together toward achieving the desired outcomes by clearly defining goals and objectives. Clear goals and objectives provide a roadmap for making informed financial decisions and ensure that all efforts align with the business’s overall objectives.

Choosing the Right Accounting Software

Finding the right accounting software can help streamline your bookkeeping tasks, save time, and provide valuable insights into your business’s financial health. However, with so many options available in the market, it can be challenging to determine which accounting software is the best fit for your needs.

There are five factors to consider that will help you make the best choice for your business:

  1. Price
  2. Features
  3. Customer Support
  4. User-Friendly Interface / Ease of Use
  5. Customer Reviews

Price is often a crucial factor for small business owners when considering accounting software options. Evaluating your budget and determining how much you are willing to spend on accounting software is essential. Some software providers offer different pricing plans, ranging from basic options at lower prices to more advanced features at higher price points. Consider the features included in each plan and determine if they align with your business’s needs and goals.

Features are another important consideration when choosing accounting software. Identify the specific features that are essential for your business. Some common accounting software features include invoicing, expense tracking, inventory management, payroll integration, and financial reporting. Evaluate each software’s feature set and determine which ones are most relevant to your business operations.

Customer support is a critical aspect to consider. As a small business owner, you may encounter technical issues or have questions about how certain software features work. Look for accounting software providers that offer reliable customer support, such as phone or email assistance, online guides and tutorials, and a responsive help center. Good customer support can help you overcome challenges and ensure the smooth operation of your accounting software.

A user-friendly interface is essential for small business owners who may not have a background in accounting or finance. Accounting software with an intuitive and easy-to-use interface can simplify the process of recording business transactions and generating financial reports. Look for software that offers a clean and organized layout with clear labels and instructions. A user-friendly interface can save you time and minimize the learning curve.

Along with a user-friendly interface, you want to choose software that is easy to use. Businesses are increasingly selecting a cloud-based accounting system, like QuickBooks Online, that can be accessed by any device with an Internet connection and enables real-time updates and collaboration among users.

When considering different accounting software options, reading reviews from other small business owners can be helpful. These reviews can provide valuable insights into the strengths and weaknesses of each software, as well as real-life experiences from users. Look for reviews on reputable websites or forums where small business owners discuss their experiences and recommendations. However, keep in mind that each business is unique, and what works for one may not necessarily work for another. Use reviews as a reference, but ultimately, make a decision based on your specific business needs.

Now that you have a better understanding of the factors to consider when choosing accounting software for your small business let’s explore some recommendations:

Intuit QuickBooks: QuickBooks is a widely recognized and trusted accounting software for small businesses. It offers a range of features suitable for various business types and sizes. QuickBooks provides different pricing plans, allowing you to choose the option that fits your budget.

Xero: Xero is another popular accounting software for small businesses. It offers features like invoicing, expense tracking, bank reconciliation, and financial reporting. Xero’s user-friendly interface and helpful customer support make it a great option for small business owners.

Wave Accounting: Wave is a free accounting software that offers essential features for small businesses. While it may not have advanced features compared to other paid options, it is suitable for budget-conscious entrepreneurs.

Once you have selected the accounting software, the next step is setting it up and personalizing it for your business.

Setting up Your Chart of Accounts

An example of a chart of accounts for small business
This is an example of a Chart of Accounts (COA) for a small business.

A crucial part of setting up your accounting books is establishing your Chart of Accounts (COA). The COA is a categorized list of all accounts that your company will use to record transactions in your accounting system. These accounts can be classified into five main categories: assets, liabilities, equity, income, and expenses.

Your COA should be personalized to reflect your business operations. For instance, if you operate a retail store, you may have a different income account for each product line. Take time to think through your operations and create a COA that captures all aspects of your business.

Your Chart of Accounts helps you keep track of your income, expenses, assets, and liabilities in an organized and easy-to-understand way. Let’s take a closer look at each section and how it helps organize your financial information.

Assets

This section includes all the resources your business owns or controls, such as cash, inventory, equipment, and even buildings or land. By categorizing your assets, you can easily see what resources are available to your business.

Liabilities

Your business’s debts or obligations to others are liabilities, including loans, credit card balances, or outstanding bills. By keeping track of your liabilities, you can stay on top of your financial obligations and make informed decisions about your business’s financial health.

Equity

Equity represents the owner’s stake in the business. It includes the initial investment made by the owner and any retained earnings or profits. By separating equity from other financial categories, you can track the growth and value of your business over time.

Revenue

The revenue section of your Chart of Accounts includes all the income your business generates, such as sales revenue, fees, or any other sources of income. By categorizing your revenue, you can see which areas of your business generate the most income and make informed decisions about future business strategies.

Expenses

Finally, the expenses section of your Chart of Accounts includes all the costs incurred while running your business, like rent, utilities, salaries, or supplies. By categorizing your expenses, you can easily see where your money is going and identify areas where you can potentially cut costs or optimize spending.

While these five sections form the foundation of a Chart of Accounts, it’s important to note that you can also add sub-accounts to organize your financial transactions further. For example, within the expenses section, you can create sub-accounts for specific types of expenses like marketing, travel, or office supplies.

How to Set Up Accounting Books for Small Business in 4 Easy Steps

So, how do you set up a personalized Chart of Accounts? Here are some factors to consider:

1. Understand Your Business

Take the time to understand your business and its financial operations thoroughly. This will help you determine which categories and sub-accounts are relevant and necessary for your specific business. For example, a plumbing company must include transportation-related expenses in its chart of accounts, while a bookstore will not.

It’s best to consult with a Certified Public Accountant (CPA) who has experience with businesses in your industry if you are unsure about which accounts your business might need.

2. Keep It Simple

While creating numerous categories and sub-accounts can be tempting, keeping your Chart of Accounts simple and manageable is essential. Simplicity leads to clarity and helps reduce errors in your financial records.

3. Be Consistent

Consistency is key when setting up your Chart of Accounts. Develop a naming convention and stick to it throughout all your accounts and sub-accounts. Tracking and analyzing your financial information is easier when account names are consistent.

4. Plan for Growth

Your business may grow and evolve over time, so it’s important to create a Chart of Accounts that can accommodate future changes. Leave room for additional accounts or sub-accounts to be added as your business expands.

Setting up a Chart of Accounts for your small business may seem daunting, but it is essential to manage your finances effectively. Organizing your financial transactions into distinct categories allows you to gain valuable insights into your business’s financial health and performance. So, take the time to set up your Chart of Accounts and start taking control of your small business finances today.

3 Essential Steps to Maintain Accurate Accounting Books

Record Keeping: How to Track Income and Expenses

Record Keeping for Small Business Accounting
Consistent record-keeping is essential for accurate accounting books.

In small business accounting, tracking income and expenses is crucial for maintaining financial stability and making informed business decisions. By keeping accurate records of your financial transactions, you can effectively monitor the financial health of your business and ensure that you are maximizing profits.

Step 1: Separate Personal Finances from Business Finances

The first step in tracking income and expenses is to separate your personal and business finances. Open a separate bank account and credit card solely for your business transactions. This will help you maintain clear and accurate business-related income and expense records.

Step 2: Categorize Your Expenses

To effectively track your expenses, it is important to categorize them. Here are some common expense categories to consider:

Advertising and Marketing: This category includes expenses related to promoting your business, such as social media advertising, website maintenance, or printed advertisements.

Office Supplies: Record expenses related to office supplies, such as pens, paper, printer ink, or stationery.

Utilities: Include expenses for utilities such as electricity, water, internet, and telephone services.

Payroll: If you have employees, track their salaries, wages, and associated payroll taxes.

Rent or Mortgage: If you pay rent or have a mortgage for your business premises, track these expenses separately.

Insurance: Record expenses associated with business insurance, such as liability insurance or property insurance.

These are just a few examples of expense categories. Customize them based on the specific needs and nature of your business.

Step 3: Keep Accurate Records of Income

It is essential to track and record all sources of income for your small business. This includes sales revenue, fees, or any other sources of income. Keep a record of all customer transactions, including sales receipts or invoices. Additionally, if you receive electronic payments, save the transaction details for your records.

Step 4: Maintain a System for Recording Transactions

Developing a system for recording transactions is important to track income and expenses effectively. You can use a manual method, such as a ledger or Excel spreadsheet, or invest in accounting software. When recording transactions, include the date, amount, description, and category of the expense or income. Be consistent in your recording to maintain accurate and up-to-date records.

Step 5: Be Consistent in Recordkeeping

Consistency is key when it comes to recordkeeping. Develop a naming convention for your expense categories and stick to it throughout your records. This will help you easily track and analyze your financial information. Regularly update and reconcile your records with bank statements and other financial documents to ensure accuracy.

Best Practices for Recordkeeping

To ensure accurate tracking of income and expenses, here are some best practices for recordkeeping:

1. Keep all financial documents organized in one central location. This includes receipts, invoices, bank statements, and other relevant documents.

2. Make backups of your electronic records. Store them securely in the cloud or on an external hard drive to protect against data loss.

3. Regularly review and analyze your financial records to identify areas for improvement or potential cost-saving opportunities.

4. Consider consulting with an accountant or bookkeeping professional to ensure your records are accurate and compliant with tax regulations.

You can track your income and expenses consistently by following these steps and implementing effective recordkeeping practices. Accurate recordkeeping is essential for monitoring your business’s financial health and meeting your tax obligations. Start tracking your income and expenses today to take control of your financial future.

Reconciling Books and Bank Statements

Reconciling accounting books using a trial balance
A trial balance report is used during the account reconciliation process to ensure transactions have been accurately recorded before closing a business’s books.

Reconciling Books and Bank Statements: Ensuring Accuracy in Accounting Records

In small business accounting, reconciling books and bank statements is a crucial process to ensure the accuracy of your accounting records. By regularly checking your bank statements and matching them with your bookkeeping software, you can detect any errors or fraudulent activities and maintain the financial health of your business.

Why is it important to regularly check bank statements? The answer is simple – to detect any errors or fraudulent activities that may have occurred. Bank statements provide an official record of all the transactions that have taken place in your bank account. By comparing these transactions with your bookkeeping software, you can ensure that all the entries are accurate and accounted for.

So, how do you reconcile books and bank statements? Follow these key steps:

Step 1: Gather Your Documents

Start by gathering your bank statements, credit card statements, and any other relevant financial records. Having all the necessary documents is important before you begin the reconciliation process.

Step 2: Match the Transactions

Next, compare the transactions in your business accounting software with the transactions on the bank statement. Look for any discrepancies or missing entries. It’s common to find slight differences due to timing or processing delays, but significant discrepancies should be investigated further.

Step 3: Reconcile Discrepancies

If you find any discrepancies between the bookkeeping software and the bank statement, take the necessary steps to reconcile them. This may involve contacting the bank to clarify certain transactions or investigating any errors in your own records. It’s important to address any discrepancies promptly to maintain the accuracy of your financial data.

Step 4: Update Your Bookkeeping Software

After reconciling discrepancies, update your bookkeeping software to reflect the accurate balances and transactions. Make sure to adjust any incorrect entries and include any missing ones. This will ensure that your bookkeeping software accurately reflects the financial situation of your business.

Step 5: Keep a Record

Last, keep a record of the reconciliation process. This can be as simple as noting the date and the person who performed the reconciliation. Keeping a record will serve as evidence that you have taken the necessary steps to ensure the accuracy of your accounting records.

By following these steps and making it a regular practice, you can ensure the accuracy of your accounting records and reduce the risk of costly errors or fraudulent activities.

Periodic Review and Adjustment of Books

Periodic Reviews of Financial Records Are Essential for Maintaining Accurate Accounting Books
Periodic reviews of financial records and reports, like the Balance Sheet (among others), are essential for maintaining accurate accounting books.

Periodic Review and Adjustment of Books: Maintaining Accurate Financial Records for Small Businesses

It’s essential to review and adjust financial records on a regular basis so your accounting is up-to-date, reliable, and accurately reflects the financial situation of the business. Without regular review and adjustment, errors can go unnoticed, leading to inaccurate financial information and potentially detrimental consequences for your business.

Common Areas Requiring Adjustments

During the periodic review of books, there are several common areas that may require adjustments. These include:

Journal Entries: Reviewing journal entries is essential to ensure that all transactions, both income and expenses, are properly recorded. This includes double-checking the amount, date, and category for each entry.

Accounts Receivable and Accounts Payable: Keeping track of the amounts owed to the business (accounts receivable) and the amounts owed by the company (accounts payable) is critical. Reviewing these accounts ensures that all outstanding invoices have been properly recorded and that any discrepancies or overdue payments are addressed.

Bank Reconciliation: Reconciling the business’s bank accounts ensures that the recorded transactions match the bank’s records. This helps identify discrepancies, such as missing transactions or errors, which can be promptly addressed.

Inventory: For businesses that carry inventory, regular reviews and adjustments are necessary to ensure accurate tracking and valuation of stock. This helps prevent out-of-stock items, overages, and inaccurate cost of goods sold calculations.

The Process of Reviewing Ledger and Journal Entries

The first step in the periodic review process is to review the ledger and journal entries. The ledger is a record of all the accounts in the business, categorized by type (such as cash, accounts receivable, accounts payable, etc.). The journal entries, on the other hand, are the individual records of each of the business’s financial transactions.

To review the ledger and journal entries, follow these steps:

1. Organize the records: Gather all the necessary financial documents, such as ledgers, journals, bank statements, and invoices.

2. Verify accuracy: Check each entry to ensure it is accurate, properly categorized, and supported by appropriate documentation. Look for any mismatched figures, duplicate entries, or missing transactions.

3. Balance the accounts: Ensure each account’s debit and credit entries balance out. If there are discrepancies, investigate and make the necessary adjustments.

4. Identify errors and inconsistencies: Watch for mistakes or inconsistencies, such as incorrect dates, amounts, or account classifications. These must be corrected to maintain accurate records.

Preparing the Books for Closing and Generating Financial Reports

Once the periodic review and adjustment of books are complete, the financial records are ready for closing and generating accurate financial reports. Closing the books refers to the process of finalizing the accounting records for a specific period, usually at the end of a fiscal year or month. This involves recording any adjusting entries necessary to reflect the business’s financial position accurately.

Once the books are closed, it’s time to generate financial reports. These reports include the income statement, which shows the business’s revenues, expenses, and profit or loss; the balance sheet, which provides a snapshot of the business’s assets, liabilities, and equity; and the cash flow statement, which shows the inflows and outflows of cash over a specific period. These reports help business owners understand their financial position and make informed decisions for the future.

The Role of a Certified Public Accountant (CPA)

While small business owners can manage much of their accounting, working with a CPA for certain tasks is beneficial. CPAs are accounting professionals who can provide expert advice, help with complex transactions, and prepare financial statements and tax returns.

Choose a CPA who has experience with your industry and grasps your company’s unique needs. When working with a CPA, communicate openly, provide all necessary information, and ask questions to ensure you understand the financial health of your business and the work being done.

One important responsibility of a CPA is to prepare audited financial statements for small businesses. Audited financial statements provide an unbiased and independent assessment of a company’s financial position. CPA’s expertise ensures that the financial statements are accurate, reliable, and adhere to the Generally Accepted Accounting Principles (GAAP). Business owners, lenders, investors, and other stakeholders use these statements to make informed decisions about the business.

Additionally, CPAs are well-versed in tax planning and reduction strategies. They can assist small business owners in minimizing their tax liability and maximizing their deductions by identifying eligible tax credits, understanding tax laws and regulations, and finding opportunities for tax savings. CPAs also play a vital role in tax preparation, ensuring businesses comply with the relevant tax laws and file their tax returns accurately and on time.

When choosing a CPA, there are a few factors to consider. First, verify that the CPA is licensed and in good standing with their state’s board of accountancy. The board’s website usually provides this information. It’s also beneficial to assess the CPA’s qualifications, experience, and expertise in dealing with small businesses. Finally, consider the CPA’s communication style and their ability to understand your specific needs and goals.

To work effectively with a CPA and manage your books, establishing clear lines of communication and providing them with all the necessary financial information is essential. Maintaining accurate and organized records is crucial for the CPA to perform their duties effectively. Be prepared to provide them with access to your financial records, bank statements, and relevant business documents.

Regular meetings or consultations with your CPA are also highly recommended. These sessions allow you to discuss any questions, concerns, or changes that may arise. By working collaboratively with your CPA, you can ensure that your books are impeccable, that your financial statements are accurate, and that you’re implementing the most effective tax planning strategies.

Conclusion

Setting up accounting books may seem daunting, but it’s crucial to running a small business. Proper accounting enables you to understand your business’s financial health and make informed decisions. Consistency, accuracy, and regular reviews are essential to effective accounting practices.

Take your first step today toward setting up your accounting books. Start by selecting the right accounting software for your needs, then set up your COA and record transactions. Before you know it, you’ll be on your way to better financial management and business success.

Avatar for Scott Meister, CPA

Scott Meister, CPA

I help small businesses, accountants, bookkeepers, office managers, and business owners with their accounting needs. I’ve used QuickBooks since 2002 and train folks on how to use it efficiently. I create high-quality video training tutorials for QuickBooks and post them on scottmeister.teachable.com. Certifications include: Certified Public Accountant (CPA) | Certified Bookkeeper (CB) | Advanced Certified ProAdvisor for QuickBooks Desktop | Advanced Certified ProAdvisor for QuickBooks Online | Certified ProAdvisor for QuickBooks Enterprise | Certified ProAdvisor for QuickBooks Point Of Sale