Frugal Small Business Startup Tips: Step 8-Set Up an Accounting System in the New Business

The creative, idealistic, and passionate world of entrepreneurship often leaves little room for mundane things like accounting. But how you go about arranging and maintaining your financial records will set the tone for how your business operates and help you avoid future headaches and expenses.

label_new_yellowThe Frugal Small Business Start-up Series has been updated and combined into one PDF. It also includes a detailed start-up checklist at the end. You can download it for FREE!.

Why the Accounting System in Your New Business is Important

You may be familiar with the idea that entrepreneurs and small business owners tend to wear many hats- especially at the beginning when the new business is developing and growing and employees are few if at all. But unless you have some kind of background in business, you may feel a little clueless when it comes to several of those hats.

If accounting and bookkeeping is one of those uncharted areas then you owe to yourself and your future business to learn what you can about the subject (even if you will not directly be charge of recording your business financial transactions). Maintaining an accurate, clear, and legal accounting system will be a fundamental backbone of your business that you will reference in order to make strategic business decisions. Moreover, there are many Federal and State requirements (think sales taxes, payroll and income tax, etc) for how you record the money going in and out of your business. You want your accounting system to make the filling of these government requirements as quick and as easy as possible.

In this post, I will introduce you to the major areas you will need to consider as you set up the accounting system in your new business and then offer several resources and recommendations at the end.

Startup Business Accounting 101: What Questions Do You Need to Answer?

When it comes to setting up the accounting system in your new small business there are basically three questions that you need to answer. Though it may cost you a little money, you should definitely consider seeking the advice of a qualified accountant to help you make these decisions:

1. Which accounting method will you be using?Once you have decided which business structure you will be setting up, you will then need to choose which accounting method to use: either the cash method or the accrual method. In brief, with the cash method, you record income when you actually receive the money (whether by cash, credit card, or check) and your expenses are recorded as you actually pay them. This is the most common accounting method for small businesses that generate less than $5 million in annual sales.

With the accrual accounting method you count income when a sales transaction is made (even if you have not yet received the money for it) and expenses are counted when you actually receive the good or service (even if you don’t pay for it immediately). This method is common for larger businesses or small businesses that rely on customer invoicing.

For more information on cash accounting versus accrual accounting, see the resources below.

2. How will you record transactions?You have several options for recording your business’ financial transactions. The best choice really depends on the nature and scope of your business:

  • You could do it the old fashioned way, recording hand-written transactions in a ledger. But this may only be appropriate for very small businesses and may make financial reporting difficult.
  • You could set up your own electronic ledger, using an Excel spreadsheet, for example. You could then create your own chart of accounts (a list of all your business accounts, such as income, expense, and asset accounts) and manually plug in numbers into various financial reporting templates, like the ones I have on this site. Again, this may only be appropriate for very small businesses.
  • You could use an accounting software package. Many of these programs can automate much of the financial recording and reporting as well as complex areas, such as payroll and accounts receivables/ payables. There are many free and commercial options to choose from; see below for a list.
  • You could hire an outside bookkeeper or an accountant to handle all of your financial recording. This may be the most expensive option. But it may be appropriate for those who are either totally adverse to taking on these tasks or who don’t have the time for it.

3. How will you conduct financial reporting and complete your tax forms? Here again, you have several options: do everything yourself manually, do it yourself with the aid of an accounting software package, or hire an outside accountant or bookkeeper. Here are a few points to keep in mind:

  • If your income is relatively modest (for tax year 2011, the cut off was $58,000), you may have the option of filing with the IRS’s Free File system which offers free e-filing and tax preparation via commercial software packages. The service is only available via the IRS website. Even if your income exceeds that amount, e-filing is definitely the way to go. You can file yourself via the IRS’s e-filing portal.
  • As mentioned above, many accounting software programs can automatically generate various financial reports such as balance sheets, cash flow statements, and income statements. Several commercial accounting suites, such as TurboTax, can also be used to file your business’ taxes electronically online as well as help you maximize your tax deductions.
  • If you are considering hiring an accountant or bookkeeper then be sure to read my previous post: Why You Small Business Needs and Accountant and How You Can Save on Accounting Fees

Accounting Resources for Small Businesses

Free online business accounting courses, training, and how-to’s:

Hiring an accountant for your business:

Best accounting software packages (commercial):

Best accounting software packages (free opensource):

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