Breadcrumb

Guide to small business accounting

Written by

The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedFeb 20213 min read

When starting up a new business, one of the first things you should do is create an accounting system. You’ll need to accurately record all expenses and income right from the beginning. Read our guide to bookkeeping for small business owners below.

How to set up a small business bookkeeping system

There are a few basic procedures to follow when you’re just getting started as a business. Putting the proper systems into place ensures you can receive payments, track expenses, and record financial transactions accurately.

Step 1: Open a bank account.

You’ll need a new bank account for your small business that’s kept separate to your personal accounts. This is important for accurate bookkeeping, as it’s where you’ll see income coming in and expenses going out.

Step 2: Choose an accounting method.

Your business accounting method will determine how all relevant accounts are balanced. There are two accounting methods to choose from:

With the cash-based method of accounting, you only record expenses and income when the cash transaction is completed. You would only record revenue for a service after the customer has paid you.
With the accrual basis of accounting, you record income when the service is provided or sale is made, even if you don’t receive customer payment until later. Under the accrual basis, you use a double-entry accounting system to keep the books balanced. This means you must record two entries for each transaction: a debit and a credit.

Step 3: Decide how to record transactions.

The next step is to set up your personal accounts. You can opt to hire an accountant to get you started, purchase an accounting software program, or set up your own spreadsheets to record transactions by hand.

Step 4: Set up your terms of payment.

How will you accept client payments? This usually depends on the type of business you’re running. Most online retailers accept payments at the point of sale, for example. However, if you provide marketing or graphic design services, you might send invoices to clients when work is completed.

You’ll also need a method for accepting payments, whether it’s through a merchant account, third-party gateway, or integrated platform. Be sure to compare fees carefully before choosing any payment system, as these will cut into your sales profits.

Step 5: Set up the correct tax structure.

Of course, one of the main reasons for putting a strong business accounting system into place is to stay in line with all IRS regulations. Your tax role will depend on the business’s legal structure. For example, if you’re self-employed and register as a sole proprietor, LCC, or partnership, you’ll be able to simply claim all business income on your personal tax return each year. However, if you are starting a corporation it would be considered a separate tax entity.

Step 6: Think about your payroll system.

If your business is large enough that you’ll be hiring help, you’ll need to also put a payroll system into place. As with tax structure, part of small business bookkeeping is choosing the right definition: independent contractor or employee. If you’re hiring employees, you’ll be responsible for withholding taxes. However, if you’re working with independent contractors, you’ll need to file 1099 forms so it’s still important to track payments.

What documents are used in accounting for small businesses?

As with companies of any size, small business bookkeeping involves recording, tracking, and analyzing financial transactions. There are many documents used in accounting for small businesses, including:

Journal entries: You’ll need to record business transactions in a journal. These should be listed in chronological order, using the double-entry accounting method with separate accounts for debits and credits.
General ledger: Also called the books of final entry, the general ledger shows any changes you’ve made to the debit and credit accounts. It’s a general area where you can see each account’s current balance.
Trial balance: To test out the double-entry accounting system, you can prepare a trial balance using the recorded amounts from the general ledger. Ideally, the total credits should equal the total debits. If this isn’t the case, you’ll need to correct errors with adjusting entries.
Financial statements: Basic statements included in small business accounting include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.

Finally, after you’ve prepared all financial statements for the accounting period you can lay the groundwork for the next period by closing the books and preparing a post-closing trial balance.

That might seem like a lot to remember, but the hard part is simply getting everything set up. With accounting software and automated systems, it’s easy to track financial transactions and focus on growing your business.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.