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Small business accounting 101

9 minutes

It takes passion and skill to run your own business. It also helps to know a little math. Small business accounting might not sound terribly exciting, but it’s the best way to keep tabs on the financial health of your company.

Many small businesses lack the resources to hire a professional bookkeeper, leaving the small business owners to find their own solutions when it comes to handling their books.

If this sounds familiar, we’ve got you covered. Below you’ll find a comprehensive guide that covers the basics of small business accounting, as well as some tips for how to handle your business finances.

Basic accounting terms every business owner should know

What is small business accounting? Small business accounting has a simple set of goals: to keep track of your income and expenses and prepare your financial information for tax filing.

Though it sounds simple enough, along the way you may encounter some insider language that seems foreign.

Here’s a quick snapshot of some basic accounting terms that you’ll want to remember:

  • Accounts payable: Refers to money owed to other businesses (also known as “liabilities”)
  • Accounts receivable: Any money others owe your business (also known as “assets”)
  • Assets: Money, property, or stocks that your business owns
  • Expenses/expenditures: Costs you incur to generate revenue (e.g., rent, supply costs, etc.)
  • General ledger: A complete record of all business transactions
  • Journal entry: Updates made to the general ledger, including date and transaction amount
  • Revenue: Money your business earns (also known as “income”)
  • Trial balance: A report listing the balance of all accounts in the general ledger

Every small business owner should have at least a basic understanding of these terms, as this knowledge can help you better navigate the accounting process and understand the financial status of your company.

Three types of financial reports

Your company’s financial records can be used to generate three distinct types of financial reports:

  • Balance sheet: Summarizes your assets and liabilities
  • Income statement (or “profit and loss statement”): Summarizes your revenue and expenses
  • Cash flow statement: Summarizes your cash inflows and outflows

If these sound similar, it’s because these financial statements are all based on your income and expenses during a particular period of time. But these reports may become important as your business expands. They can also be useful for investors or lenders who need to understand the probability of your company’s success.

Understanding accounting methods

One of the key components of any accounting system is your accounting method. There are two methods to choose from, and it’s important to understand their differences.

Cash-basis accounting

Cash-basis accounting is the simpler of the two accounting methods. With this method, you only record transactions once you’ve received payment for goods or services.

This straightforward method gives a clear picture of your company’s cash flow, which can be ideal for small businesses. Unfortunately, it’s not as useful once your business starts to grow, which is why many companies opt to use the accrual method.

Accrual-basis accounting

In accrual-basis accounting, transactions are recorded when goods or services are exchanged, even if you haven’t seen payment. This will also require you to use double-entry accounting.

In double-entry accounting, you’ll make two entries for every transaction: one entry for the debit and another for the credit. Obviously, the idea is for these entries to balance each other once payment is received.

How to do small business accounting

Now that you understand these basic accounting principles, you’ll need to assemble them into a small business accounting system.

Open a business bank account

If you don’t already have a business bank account, now is the time to open one. Maintaining a separate bank account for your business transactions can make you look more professional, and it can also save you from being personally liable for any debts your business might accrue.

Record income and expenses

Find a system for recording transactions. The data related to your income and expenses will be foundational for the rest of your accounting system. It will allow you to monitor your cash flow and plan your tax deductions so that you can be ready for tax season.

Select your accounting method

You’ll next need to select one of the two accounting methods we discussed earlier: cash-basis accounting or accrual-basis accounting.

If you’re not sure which method is right for your business, you might seek the input of a certified public accountant (CPA) to give you some guidance.

Transactions to trial balance

When recording transactions in your journal, make them in chronological order and record the amount debited or credited. All balanced entries within the journal should then be posted to the general ledger, and the trial balance can be prepared.

Create an adjusted trial balance

Those who use the accrual basis of accounting will need to adjust their journal entries to account for period expenses and income.

For example, if you pay rent or have to purchase regular supplies, these business expenses should be documented using a monthly adjusting entry to record the expense.

Once these entries are made, you can calculate an adjusted trial balance to confirm that your debts and credits match your adjusted entries, thus creating an accurate record of your financial activity.

Generate financial reports

Your financial information can now be converted to one of the three standard financial reports we listed above: your balance sheet, income statement, and cash flow statement. These financial statements can be useful for expense tracking and the management of your company’s finances.

Reconcile your books

Finally, you’ll make post-closing entries, which are used to reset the balances of your temporary accounts back to zero and allow you to restart your accounting cycle.

If you’re a small business owner you should aim to reconcile your books and bank accounts once a month (definitely no less than once per quarter).

How to keep your own books

Juggling these tasks can seem a bit daunting, especially if you’re new to the world of business. We’ve prepared a handy checklist so that you stay current with your bookkeeping and small business accounting process.

Daily accounting tasks

The following tasks should be completed at the close of every business day or once per week at the latest:

  • Record transactions in your bookkeeping system
  • File or digitize cash receipts
  • Prepare and send invoices
  • Categorize business transactions

Small business accounting software can be particularly helpful with these tasks, as it can save time spent manually trying to stay current on these recurring accounting duties.

Monthly accounting tasks

Once per month, small business owners should:

  • Reconcile accounts
  • Review bank statements
  • Review credit card statements
  • Pay bills
  • Run payroll
  • Record value of purchases and inventory sold

This is a good time to ensure that your accounts payable and accounts receivable obligations are up-to-date. That way your financial data remains current and you won’t fall behind between now and tax time.

Quarterly accounting tasks

Once per quarter, small business owners should:

  • Make quarterly estimated tax payments
  • Report and remit sales tax
  • Record depreciation
  • Write off any bad debt

Keep in mind that while you can write off bad debt on your company’s income taxes, you’ll have to demonstrate that you made every effort to obtain payment. This means that now is a good time to follow up with your past clients to settle accounts (well before tax season).

Yearly accounting tasks

Your main yearly tasks will center around your tax returns:

  • Year-end income taxes
  • Payroll taxes
  • Personal tax return
  • Create full-year financial reports

You may also use this time to review your inventory and make plans for the following fiscal year.

Accounting software for small business owners

Many small business owners lack the time to devote to these varied accounting tasks. This is why small business accounting software can be one of the most valuable financial tools you invest in.

Below we offer a simple list of the best accounting software aimed at helping small businesses.

Intuit QuickBooks

QuickBooks has become something of an industry-standard among accounting professionals. While it’s ideal for small businesses, the program also provides scalable options to assist growing companies. QuickBooks likewise offers cloud-based storage and a mobile app, which can make it easier than ever to monitor business activity and keep track of your financial statements.

QuickBooks also has an option for independent contractors called QuickBooks Self-Employed. Freelancers can use QuickBooks Self-Employed to manage their financial statements and prepare their tax forms.


We provide invoice templates and automated features to help you with the day-to-day process of sending invoices and receiving payment.

In addition, we offer a simple receipt-scanning feature that lets you upload the images of receipts to your invoices or other financial documents, which can be helpful for tracking income.

There are also features to help you handle payroll, as well as banking features with no fees. Our reporting system can help you make sense of your company’s financial standing and plan for the future.


Founded in 2006 in New Zealand, Xero is the new kid on the block when it comes to accounting software. The company currently offers three subscription plans.

Xero offers cloud-based solutions and a mobile app, though the reporting features aren’t as detailed as some of the other options available today.


Wave is worth mentioning. This accounting software allows you to connect unlimited bank accounts, and it includes a receipt-scanning feature as part of its free features. Wave will even allow you to run multiple businesses with the same account.

Wave does charge users a nominal fee for receiving payments, and payroll will cost a monthly base fee, in addition to fees per employee.


ZipBooks is another free software option. Like other forms of business accounting software, ZipBooks allows users to generate reports and juggle transactions through its expense management tools. You can also receive payments by integrating with Square or PayPal.

Which accounting software is right for me?

While it may be tempting to simply opt for one of the free software options above, not every small business will be served by basic forms of business accounting software. What accounting features should you look for from your accounting software?

Payroll and tax preparation

Business accounting software should make it easier to handle payroll and taxes. This means that the software can help you remit sales tax as well as streamline your tax preparation to help you meet payroll tax requirements for better management of your finances and your team.

Inventory management

The best software will also help you manage your inventory, which can be particularly important for retail businesses that need to monitor the amount of product in their warehouse.

Inventory management solutions can help you know your product availability and ensure that you’re able to fulfill every customer’s order.

Third-party integrations

Small business owners depend on a variety of tools to conduct their business, and it’s important that their accounting software fit into this larger system.

For example, a company that relies on a point-of-sale system to record transactions would ideally integrate with accounting software to record the transaction and assess any sales tax liabilities, as well as placing the transaction into a designated category.

Sophisticated financial reports

Accounting software can also prepare business financial statements and other reports, which can be used to evaluate the past performance of your company and help you hone your strategy for the future.

Your business partner, wherever you go

At Invoice2go, a Bill.com company, we partner with our clients to provide the absolute best solutions to launch their businesses into future success. Our innovative solutions can save you time and increase the efficiency of your business.


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