When you launch your small business, it’s time to tackle the accounting tasks that come with running a store. While accounting might not be the most exciting part of building your business, it’s super important to get it right from the start.
In this guide, we’ll walk you through everything you need to know about small-business accounting. We’ll also share some of the best accounting software options out there, so you can check off the next item on your small-business finance to-do list!
What is small business accounting?
Small-business accounting is all about handling the money matters of your business. It includes activities like managing taxes, overseeing finances, handling payroll, keeping track of what you buy, and managing your inventory. Essentially, it’s how you process, measure, and share your business’s financial information.
How to do accounting for your small business
1. Open a Small-Business Bank Account
Having a separate bank account for your business is really important. It helps keep your personal assets safe in case things go wrong, like bankruptcy or lawsuits. Plus, if you ever want to get loans or attract investors, having clear financial records can make it easier to get approved.
Start by opening a checking account, then consider adding savings accounts to help manage your cash flow and plan for taxes. For example, you could set up a savings account where you put aside a percentage of each payment for taxes. A good rule of thumb is to save about 25% of your income, but if you earn more, you might want to save a third.
If you have an LLC, partnership, or corporation, you must have a separate business bank account. Sole proprietors aren’t legally required to have one, but it’s definitely a good idea.
As a new business owner, think about getting a business credit card to start building your credit. This can help you secure funding later on or finance larger purchases in the future. Corporations and LLCs should always use a separate credit card to keep personal and business finances separate.
Depending on your business, different credit cards offer different perks. For instance, if you travel a lot, look for a card that gives you miles. The Shopify Credit card gives you cash back on your most common spending categories.
To open a business bank account, you’ll need a business name and may need to register with your state. Make sure to check with the bank about what documents you’ll need.
2. Develop a Small Business Accounting System
Bookkeeping is the everyday job of keeping track of your business transactions, organizing them, and balancing your bank statements. On the other hand, accounting looks at your overall business performance and makes sense of all the data a bookkeeper gathers into financial statements.
As a new entrepreneur, you’ll need to figure out how you want to manage your bookkeeping:
- Do it yourself using software like QuickBooks or Wave, or just a simple Excel spreadsheet.
- Hire a part-time or outsourced bookkeeper, either local or online.
- If your business is big enough, you could even hire an in-house bookkeeper or accountant.
There are many free and paid accounting software options available, so you should find something that fits your needs.
You also need to decide whether you want to use cash or accrual accounting methods. Here’s the difference:
- Cash method: You recognize revenue and expenses when you actually receive or pay cash.
- Accrual method: You record revenue and expenses when the transaction happens, even if the money hasn’t moved yet. This means you’ll need to track what you’re owed and what you owe.
In Canada, businesses must use the accrual method. However, you can use the cash method during the year and then adjust at the end for any outstanding amounts.
In the US, if your revenue is less than $5 million, you can use cash accounting; otherwise, you must use accrual.
3. Track Your Small Business Expenses
Good bookkeeping starts with keeping track of your expenses. This is key to monitoring your business growth, creating financial statements, managing deductible expenses, preparing tax returns, and making sure your filings are accurate.
From the beginning, set up a system for organizing receipts and important records. This can be as simple as a box for paper receipts or you can use a service like Shoeboxed. For US business owners, the IRS doesn’t require receipts for expenses under $75, but it’s still a good habit to keep them.
Pay attention to these five types of receipts:
- Meals and entertainment: If you have a business meeting at a restaurant, keep the receipt and write down who was there and why you met.
- Out-of-town travel: Keep receipts from trips for business. The IRS and CRA are strict about personal trips being claimed as business expenses.
- Vehicle expenses: Note when and why you used your vehicle for business, then calculate the percentage for your expenses.
- Gifts: If you give gifts like concert tickets, note whether you attended the event with the recipient. If you did, it counts as entertainment instead of a gift.
- Home office expenses: If you work from home, calculate the percentage of your home you use for business and apply that to related expenses.
Starting your business at home can save you money and help you qualify for tax breaks. You can deduct the part of your home used for business, along with your internet, phone, and transportation for work.
If you mix personal and business use, like for your phone, you can only deduct the percentage used for business. Gas mileage is 100% deductible, but keep all records and log your business trips, including where you went and why.
4. Set Up a Small Business Payroll System
Many online stores start with just one person. But as a business owner, you’ll eventually need to hire help. You’ll need to decide if that person is an employee or an independent contractor.
For employees, set up a payroll schedule and make sure you’re withholding the right taxes. Lots of services can help with this, and many accounting software options include payroll features.
For independent contractors, keep track of how much you pay each person. In the US, you might need to file 1099 forms for each contractor at the end of the year, so keep their names and addresses on file.
5. Investigate Import Tax
If your business involves buying and importing goods from other countries, keep in mind that you may have to pay taxes and duties. This is especially important for dropshipping businesses.
Using a duty calculator can help you estimate the costs of importing products. For more details about import taxes, check the International Trade Administration (for US businesses) or the Canadian Border Services Agency.
6. Determine How You’ll Get Paid
As sales start coming in, you’ll need a way to accept payments. If you’re using Shopify in North America, you can use Shopify Payments to accept credit or debit card orders, which simplifies the process by eliminating the need for a separate merchant account or payment gateway.
If you go with a third-party payment processor, be aware that fees can vary. Some charge a percentage plus a fixed fee per transaction, while others have flat fees or monthly subscriptions for unlimited transactions. Check this list to find a payment gateway that fits your needs.
7. Establish Sales Tax Procedures
Selling online makes it easy to reach customers beyond your local area. While this opens up great opportunities for growth, it also brings in complicated sales tax rules.
When someone buys from a physical store, they pay the sales tax based on where the store is located. However, when you sell online, your customers can be in different states, provinces, or even countries.
In Canada, you only need to start collecting Goods and Services Tax (GST) and Harmonized Sales Tax (HST) when your revenue hits $30,000 in a year. You can submit the GST/HST you collect in installments, and if you want, you can start collecting it even if you’re not at that revenue mark.
For US businesses, sales tax can be more complicated. You’ll need to figure out if your state charges sales tax based on where your business is located (origin-based) or where the customer is (destination-based). International purchases are usually exempt from sales tax for US businesses. It can get tricky, so consult with your accountant for details specific to your state.
8. Determine Your Tax Obligations
Your tax obligations depend on how your business is structured. If you’re self-employed (like a sole proprietor or LLC), you’ll report your business income on your personal tax return. Corporations are taxed separately from their owners, and income from the corporation is taxed as if you were an employee.
If you’re unsure about your tax obligations, it’s smart to consult with a tax professional. While it may cost you, it can save you a lot of time and money later.
9. Calculate Gross Margin
Improving your store’s gross margin is the first step to increasing your overall income. To figure out your gross margin, you need to know the costs of producing your products. Let’s define some key terms:
- Cost of Goods Sold (COGS): These are the direct costs of making your products, including materials and direct labor.
- Gross Margin: This is what you keep from sales after covering those direct costs.
Here’s how to calculate your gross margin:
Gross Margin (%)=(Revenue−COGS)Revenue\text{Gross Margin (\%)} = \frac{(\text{Revenue} – \text{COGS})}{\text{Revenue}}Gross Margin (%)=Revenue(Revenue−COGS)
You can also use our free profit margin calculator to make the math easier.
The difference between what you sell a product for and what you actually keep at the end of the day is crucial for keeping your business afloat.
10. Apply for Small-Business Funding
Sometimes, unexpected events can hurt your sales, or you might need extra cash during slow seasons. If your business has big growth plans, you might need funding for new product development, inventory, hiring, or other investments.
To get a small business loan, you’ll likely need to provide financial statements, like a balance sheet and income statement, and maybe even a cash flow statement. Shopify Capital makes it easy for Shopify merchants to get funding based on their previous sales, with repayments coming from future sales.
Before signing for a loan, calculate the return on investment (ROI). Add up all the expenses you need to cover with the loan, estimate the new revenue you expect, and consider the total interest costs. You can use our business loan calculator for help.
11. Find High-Quality Accounting Partners
As a small business owner, it’s good to understand basic accounting principles. While it’s not a strict requirement, it can help you better understand your company’s finances.
If you need extra help with financial planning, consider hiring small business accountants or financial professionals to help you. They can set up your accounting systems, find tax savings, and advise on different growth strategies.
12. Regularly Review Your Methods
When you first start your business, you might use a simple spreadsheet to keep track of your finances. But as your business grows, it’s a good idea to switch to more advanced tools like QuickBooks or Bench. As your business gets bigger, your financial statements can become more complicated.
It’s really important to regularly check how much time you’re spending on bookkeeping and how that time affects your business. That’s why understanding the basics of accounting is so helpful, even if you don’t plan to handle all the accounting yourself.
Finding the right bookkeeping solution can free up your time so you can focus on growing your business. Plus, it can help save you money in the long run!
Also Read: 10 Easy Tips to Reduce Business Costs
Best small business accounting software
Every business owner needs good accounting software to keep track of financial transactions and save time. Small-business accounting software helps you quickly and easily access your financial information. It allows you to check your bank balances, understand your revenue and costs, estimate profitability, predict tax obligations, and more.
When you connect your business bank accounts and credit cards to the software, all your financial transactions will appear in a queue and be organized into categories. You can find everything you need in your chart of accounts.
Once you approve the categories, the transactions automatically update your financial statements. Here are some features to look for in accounting software:
- Platform integrations: Your accounting software should work well with your e-commerce platform and support connections to other tools, like contract management apps.
- Broad reporting: While most software offers basic reports, you’ll want one that provides advanced reports, such as inventory and expenses, so you can quickly monitor your business’s financial health.
- Sales tax configuration: It can be confusing to know how much sales tax you need to pay and collect. The best accounting software makes it easy to manage this.
- Excellent support: Check reviews to see how a software company’s customer support rates. Aim for options that offer 24/7 help and self-service resources.
There are many user-friendly accounting software options for small businesses, ranging from free to paid models. You can even check the Shopify App Store for accounting software that integrates smoothly with your e-commerce store.
Here are a few accounting software options you might consider:
Xero
Xero is a cloud-based accounting system designed for small and growing businesses. It lets you connect with trusted advisers and gives you insight into your financial health. You can access it from any device, and its advanced features allow you to view your cash flow, transactions, and other financial details from anywhere.
Benefits:
- Inventory and stock management
- Affordable pricing
- Connects to major banks
- Customizable reports
- Contact database and segmentation
- Payroll features
- Mobile app
- Bank reconciliation
QuickBooks Online
QuickBooks Online, run by Intuit, is an accounting software for small businesses. You can take pictures of your receipts, track your income and expenses, and more. QuickBooks shows all your costs, like inventory and maintenance, and every sale your business makes over time. It also automates inventory tracking, so your sales and costs update every time you make a sale. Plus, you can integrate QuickBooks with Shopify to keep everything organized.
Benefits:
- Mobile app
- Cloud-based
- Mileage tracking
- Contractor management
- Inventory tracking
- Helps separate business and personal expenses
Wave
Wave is a web-based accounting solution for small businesses. Its bank reconciliation feature lets you link your bank accounts, PayPal accounts, and other sources to see real-time business transactions. You can also generate reports like accounts receivable, balance sheets, profit and loss statements, sales tax reports, and accounts payable.
Benefits:
- Affordable
- Competitive credit card processing fees
- Free accounting and receipt scanning
- No transaction or billing limits
- Unlimited users
- Mobile app
FreshBooks
FreshBooks is a cloud-based accounting and invoice management software for small businesses. It offers expense management, core accounting, and everything you need for basic bookkeeping.
Benefits:
- Easy to use
- Integrates with Shopify
- Simple pricing
- Customizable invoices
- Detailed self-service support
With so many accounting and tax tools out there, it’s essential to choose one you feel comfortable using and can stick with long-term. Of course, you can always switch tools later, but that can be a hassle you might want to avoid.
Know your numbers to grow your business
Starting a business can feel really overwhelming. But if you take the time to learn about banking, managing transactions, fundraising, and other accounting topics, you can set your new store up for success from the start. Whether it’s choosing the right type of business credit card or figuring out how much money you’ll make from each product, these tasks are all important for your business now and as it grows.
