Setting Up an Accounting System for a Small Business
Setting up an accounting system for a small business is one of the most important things you can do for your company…especially one that will work effectively for your particular small business.
An accounting system is simply a system of collection and is more than being able to file tax returns.
Tips for Setting up an Accounting System:
A good accounting system can make or break a small business.
If you’re not comfortable with setting up and maintaining an effective accounting system…
…it would be worth every penny to get some professional help.
See this page on choosing an accountant.
However, if an accountant is out of the question due to cost or maybe you are a start up or small business and are comfortable with numbers is not too difficult to set up your own accounting system if you follow a few simple steps.
First Step in Setting up an Accounting System:
Follow the most important rule in accounting. Keep personal transactions separate from business transactions. Even start-up businesses that form as a sole proprietor should have a separate bank account and credit card to better track expenses.
This is a simple basic accounting principle that all business owners should keep in mind and follow. It is called the Business or Economic Entity Assumption. See this page for more information on the accounting 101 rule of keeping business and personal separate.
Second Step is Choosing Accounting Software:
Third Step in Setting up an Accounting System:
Pick your accounting method. There are basically 2 accounting methods for keeping track of your business income and expenses available to most small businesses: Cash or Accrual.
Most small businesses that do not have to keep track of inventory or sell on credit to customers use the cash method.
See the difference between the cash-based accounting and accrual-based accounting methods and learn about a third method called the hybrid accounting method on this page about accrual basis accounting.
Fourth Step is Setting Up an Accounting System Chart of Accounts:
A chart of accounts is simply a list of accounts that you will be using in your business such as revenue, cash, accounts receivable, accounts payable, payroll, supplies, rent, utilities, etc.
Which accounts you will be using in your chart of accounts will depend largely on which accounting and bookkeeping system you choose.
If you choose an accrual accounting system, you will be using a double entry bookkeeping system, so you will be including accounts such as accounts payable and accounts receivable (if you sell your goods or services on credit).
If you use the free accounting spreadsheets offered on this site you will be using the cash basis accounting and single entry bookkeeping.
See this page for the difference between single and double entry bookkeeping.
Learn what the difference is between current and long term assets and liabilities in this article: Accounting Basics
Fifth Step is Setting Up an Accounting System Maintenace:
Number one rule for this step is to enter data promptly! Set aside a certain time daily, weekly, or monthly just for entering your accounting data.
Even if you use an electronic accounting system such as QuickBooks that enters a lot of the double entry bookkeeping in the background, it is still important to know some basic accounting concepts such as debit and credits and know the basic accounting concepts involved in accounting journal entries.
Last of all … keep everything!
Get into the habit of putting all your business receipts in one certain place in your vehicle as soon as you get out to your car. I have a little coupon holder that I put receipts in in my center console. I also take a picture of it and store it in a file in Evernote or if you have a wonderful service like Shoeboxed you can take a picture and send it to them and not worry about it:-)
Then as soon as I get home I put them in a file to be recorded in my accounting system and then filed in their proper place. See this page for more tips on keeping track of your business receipts.
Business records management is an essential part of running a successful business. Make a habit of filing your business receipts or supporting documents immediately or soon as possible. See this page on business records retention for more information on what you should keep and how long to keep documents that relate to your business. Proper record keeping ensures the critical financial statements like the profit and loss statement, cash flow statement and balance sheet are correct. Remember – garbage in, garbage out!
See more tips on setting up an accounting system.