10 Accounting Fundamentals All Small Businesses Should Form
Many business owners share that the thought of having to understand accounting principles in order to run their business successfully can feel overwhelming. At CPA by Choice, we want to provide you confidence that you understand business accounting essentials.
Open a business banking account. Once your business is legally registered open a business banking account, this needs to be separate from your personal banking account. Separating business revenue and expenses can help you protect your personal assets during an unfortunate event, such as an audit or lawsuits. In addition, if you want funding for your business in the future, having strong business financial records can be beneficial.
Establish a bookkeeping system. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements. As a business owner you need to determine how you will manage your books. Some ways to do this include doing it yourself using a software like Quickbooks, outsourcing a bookkeeper and/or an accountant, or hiring an in-house accounting team.
Track accounts payable and accounts receivables. Accounts payable is the money you owe to your vendors, and accounts receivables are the payments you will receive from your customers who purchased your goods/services. Accounts receivables control your company’s survival as this is the money your company is receiving. If you do not keep track of your accounts receivables, you may end up providing your product for free and negatively impacting your profitability. Tracking accounts payables is important as a mistake can lead to overpayment, a missed payment, and it may even destroy your relationship with your vendors and your business’ reputation.
Set time aside to review your accounting/financials every month. Consistently updating and reconciling your accounting will save you time and stress, as opposed to playing catchup during tax season. This time will help you remain organized and will provide you with an overview of your business’ financials month over month.
Meet tax deadlines. Avoid being penalized by the IRS because of late taxes. Know your deadlines and set reminders. According to the IRS, 40% of small businesses incur an average of $845 each year in penalties for late or incorrect filings or payments.
Use an accounting software. Accounting software is affordable and user-friendly. An accounting software will make reporting a lot easier and will minimize errors. Furthermore, a cloud-based system will allow you to access your financials from virtually anywhere in the world.
Save your receipts. Sounds simple, but unfortunately many small business owners forget to ask for a receipt. Receipts help organize expenses that can be tax-deductible for your business such as business meals, business travel, or donations. These tax-deductions can further reduce your tax liability.
Set up a payroll system. You want to ensure your employees are classified correctly, that they are set up on a payroll schedule, and that you are withholding the correct taxes. Misclassifying employees may result in steep penalties.
Continually reassess your accounting methods. As your business grows you may want to consider more advanced accounting systems. Additionally, your accounting methods can have an impact on your profitability.
Get accounting help. By hiring a professional, you can reduce accounting errors and you can ensure that you are following the most current accounting guidelines. Not only will hiring an external accounting service/CPA/accountant save you time, it may save you money by helping you identify ways to cut costs, and areas where investment can grow your business.
We have great news for you, you do not need to figure all of this on your own! At CPA by Choice we can advise you on the accounting needs for your specific business. We are available to answer your questions, feel free to call us or send us a message.