With the launch of your small business, you will need to deal with the accounting tasks that come with owning a store. Although accounting may not be the most interesting part of growing your business, it is essential to get started on the right path.
What is Small Business Accounting?
Small business accounting is a set of financial activities for processing, measuring, and communicating business financial matters. These activities include taxes, management, payroll, acquisitions, and inventory.
Basic Accounting for Small Businesses
Accounting is something you need to learn or hire someone else to do when managing a business. Fortunately, it is possible to learn how to manage your own records, and there are some notable benefits to handling it yourself. Learn how to manage your records 12 basics of small business accounting open a small business bank account track your small business expenses create an accounting system for small businesses set up a small business payroll system explore import taxes determine how to get your money establish sales tax procedures identify your tax obligations calculate your gross margin apply for small business funding find high-quality accounting partners reassess your methods periodically.
1. Open a Small Business Bank Account
A separate business bank account protects your personal assets in the event of bankruptcy, lawsuits, or audits. If you want to seek funding in the future from lenders or investors, strong business financial records can increase the likelihood of approval.
Start by opening a checking account, followed by savings accounts that will help you organize your cash flow and plan for taxes. For example, you can set up a savings account and stash away a percentage of each payment just as you keep your income tax aside while working with your account. A good rule is to set aside 25% of your income, although estimates for high-income individuals may be closer to one-third.
Please note that limited liability companies (see our U.S. guide to LLCs in California, LLCs in Texas, and LLCs in Florida) and partnerships and corporations are required to have a separate business bank account. Individuals who legally own businesses are not required to have a separate account, but it is certainly recommended.
Next, as a new small business owner, you will want to consider a business credit card to start building your credit. Credit is important for obtaining funding, as well as for financing large purchase orders in the future. Businesses and LLCs should use a separate credit card to avoid mixing personal and business assets.
Depending on the type of business transactions you will engage in, different business credit cards come with various benefits. For example, if you plan to spend a lot on travel, a credit card that offers miles may be best.
To open a business bank account, you will need a business name, and registration may be required in your state or county. Check with each bank to find out what documentation is needed.
2. Track Your Small Business Expenses
The main foundation of good business accounting is effectively and accurately tracking expenses. It is a crucial step that allows you to monitor your business’s growth, build financial data, track deductible expenses, prepare tax returns, and keep your files organized.
From the beginning, create an accounting system to organize receipts and other important records. This process can be simple and old-fashioned (use Filofax), or you might opt for a service like Shoeboxed. For store owners in the U.S., the Internal Revenue Service does not require you to keep receipts for expenses under $75, but it’s generally a good rule of thumb to keep them anyway.
There are
Five types of receipts that require special attention: Meals and Entertainment. Holding a business meeting at a café or restaurant is a great option – just make sure to document it. On the back of the receipt, record the people who attended and the purpose of the meal or outing. Travel out of town. The Internal Revenue Service and the Canada Revenue Agency are concerned about individuals claiming personal activities as business expenses. Fortunately, your receipts provide a paper trail for your business activities while traveling. Vehicle expenses. Record the location, time, and reason for using your vehicle for business, then apply the percentage of usage to your vehicle expenses. Gift receipts. For gifts such as concert tickets, it matters whether the giver is attending the event with the recipient. If they do, the expense will be classified as entertainment instead of a gift. Document these details on the receipt. Home office receipts. Similar to vehicle expenses, you should calculate the percentage of your home used for business and then apply that percentage to home expenses.
Starting your business from home is a great way to keep administrative costs low. Additionally, you will qualify for unique tax benefits. You can deduct the portion of your home used for business, as well as home internet, mobile phone, and transportation costs to and from work and for business errands.
Any expenses that are partially for personal use and partially for business should reflect this mixed use. For example, if you have one cell phone, you can deduct the percentage that the device is used for business. Wi-Fi costs can also fall under this category. Gasoline costs are 100% deductible; just be sure to keep all records and maintain a log of your business miles (where you go and the purpose of the trip).
3. Develop an Accounting System
Accounting is the daily process of recording, categorizing, and reconciling business transactions and bank statements.
Accounting is a high-level process that looks at business growth and understands the data compiled by accountants into financial statements. As a new business owner, you will need to determine how you wish to manage your records: follow the do-it-yourself method and use software like QuickBooks or Wave. Alternatively, you might use a simple Excel spreadsheet. You may also borrow or hire a part-time accountant either locally or based in the cloud. If your company is large enough, consider hiring an in-house accountant and/or accountant.
With many paid and free accounting software options available, you are sure to find an accounting solution that suits your business needs.
Small business owners also need to determine whether to use cash accounting or accrual accounting methods. Let’s take a look at the difference between the two: Cash method. Revenue and expenses are recognized at the time they are actually received or paid. Accrual method. Revenue and expenses are recognized when the transaction occurs (even if the money isn’t in the bank yet). This requires tracking accounts receivable and accounts payable.
Technically, Canadians are required to use the accrual method. To simplify things, you can use the cash method throughout the year and then make a single adjusting entry at year-end to account for uncollected receivables and payables for tax purposes.
Business owners in the United States can use cash-based accounting if their revenue is below $5 million; otherwise, they must use the accrual method.
4. Set Up a Small Business Payroll System
It starts…
Many online stores operate as a sole proprietorship. However, as a small business owner, there will come a time when it makes sense to hire external help. To do this, you need to determine whether that person is an employee or an independent contractor.
For employees, you will need to set up a payroll system and ensure that the correct taxes are withheld. There are many services that can assist with this, and many accounting software options offer payroll as a feature.
For independent contractors, make sure to track how much you are paying each person. It may be necessary for small business owners in the United States to issue 1099 forms to each contractor at the end of the year (you will also need to keep their names and addresses for this purpose).
5. Exploring Import Taxes
Depending on your business model, you may plan to purchase and import goods from other countries to sell in your store. When importing products, you are likely to be subject to taxes and fees, which is something to pay attention to if you are running a dropshipping business.
If you are importing goods, a customs duty calculator can help you estimate costs in your own business and plan expenses. For more information about import taxes, visit the International Trade Administration (for U.S. businesses) or the Canadian Border Agency.
6. Determining How to Get Paid
As sales begin to increase, you will need a way to accept payments. If you are a store owner in North America using Shopify, you can use Shopify Payments to accept debit or credit card payments. This solution saves you the hassle of setting up a merchant account or third-party payment gateway.
If you use Shopify Payments, you will need a merchant account, or you can use a third-party payment processor like PayPal, Stripe, or Square. A merchant account is a type of bank account that allows your business to accept credit card payments from customers.
If you use a third-party payment processor, fees vary. Some processors charge a percentage plus a flat fee per transaction, while others charge a flat fee per transaction, and some operate on a monthly membership model for unlimited transactions. You can check this list to help you find a payment gateway that works in your location.
7. Establishing Sales Tax Procedures
Selling to customers outside your state or even outside your country has never been easier thanks to e-commerce. While this is a great opportunity for brands with growth objectives, it introduces complexities in sales tax regulations that can cause headaches down the road.
When a customer enters a brick-and-mortar retail store, they pay sales tax based on the state or county where the purchase occurs, regardless of whether they live in that city or are visiting from anywhere in the world. However, when selling online, customers may be directed to different locations, states, counties, and even countries.
Store owners in Canada only need to start collecting GST/HST when their revenue exceeds $30,000 in a 12-month period. You can remit the GST/HST you collect in installments. If you wish, you can collect GST/HST even if you do not earn that level of revenue, and use it to obtain a tax credit.
Can
selling to international customers is easier than local sales. Business owners in Canada do not need to charge GST/HST on customers who are outside Canada.
For small business owners in the United States, sales tax becomes more complicated. You will need to determine whether you are operating in an origin-based state or a destination-based state. In the former, you must charge sales tax based on the state you conduct your business in. The latter requires sales tax to be applied based on the buyer’s location.
International purchases are tax-exempt for businesses based in the United States. These matters can become somewhat complicated, so check with your accountant for detailed information on your state’s specific international sales tax regulations.
8. Determine Your Tax Obligations
Tax obligations vary depending on your business structure. If you are operating alone (sole proprietorship, LLC, partnership), you will report your business income on your personal tax return. In contrast, corporations are considered separate tax entities and are taxed independently of their owners. Income from the corporation is taxed as employee wages.
If you are unclear about potential tax obligations, it is wise to speak with a tax professional. Despite the cost, it can save you a lot of time and money in the future.
9. Calculate the Gross Margin
Improving your store’s gross margin is the first step toward earning more income overall. To calculate gross margin, you need to know the costs incurred to produce your product. To better understand this, let’s quickly define both Cost of Goods Sold (COGS) and Gross Margin. COGS: These are the direct costs incurred by the company in producing the products it sells. This includes materials and direct labor costs. Gross Margin: This number represents the total sales revenue that the company retains after incurring all direct costs associated with producing the product or service.
Here’s how you can calculate gross margin: Gross Margin (%) = (Revenue – COGS) / Revenue
You can also use our free profit margin calculator to input your numbers for a quick calculation.
The difference between the sale price of the product and the amount the business takes home at the end of the day is what truly defines your ability to keep the doors open.
10. Apply for Small Business Financing
An unexpected decline in sales may occur due to circumstances beyond your control, or you might need a financial boost during slow seasonal business periods. Brand owners with big goals often need to secure funding to invest in developing new products, inventory, retail space, hiring, and more.
Remember, to obtain a small business loan, you will likely need to provide financial documents – a balance sheet and income statement at the very least, and possibly a cash flow statement. Shopify Capital makes it easy for Shopify merchants to secure funding. Loans and advances are based on past store sales and are repaid through future sales from the store.
Before you agree to the debt, it is important to calculate the return on investment for the loan. Gather all the expenses that you need the loan to cover, the expected new revenue you will gain from the loan, and the total interest cost. You can use our business loan calculator to find out the total cost.
11. Find High-Quality Accounting Partners
As a small business owner, you will want to understand Generally Accepted Accounting Principles (GAAP). It’s not a rule, but it helps you measure and understand your company’s finances.
If
I needed help or additional guidance in financial planning, and many small business accountants and financial professionals can assist you in gaining more control over your finances. Here are some individuals you might consider hiring:
Certified Public Accountant (CPA). In the case of audits, a CPA is the only person who can legally prepare audited financial statements.
Accountant. The accountant manages daily records, reconciles accounts regularly, categorizes expenses, and manages accounts payable and receivable.
Tax Preparer. A tax preparer fills out the necessary forms and may submit them on your behalf during tax season. They may also prepare estimated tax payments.
Tax Planner. These professionals help optimize your taxes before filing, assisting you in finding ways to reduce your tax burden.
12. Periodically Reassess Your Methods
When you first start, you might choose to use a simple spreadsheet to manage your records, but as you grow, you’ll want to consider more advanced methods like QuickBooks or Bench. Business financials gradually become more complex with growth.
It’s important to continuously assess how much time you spend on your records and how much that time costs your business. That’s why it’s essential to learn the fundamentals of accounting, even if you don’t intend to always do the accounting yourself.
The right accounting solution means you can invest more time in your work without having to deal with the accounting yourself and potentially save money for the business. A win-win!
Best Accounting Software for Small Businesses
Every business owner needs good accounting software to avoid wasting time on manual data entry. Small business accounting software is something you use to access financial information quickly and easily. It allows you to check bank balances, understand revenue and expenses, forecast profitability, anticipate tax liabilities, and more.
Once you connect your bank accounts and credit cards to the software, financial transactions appear in a queue and are categorized. You can find all this information in your account ledger. Once you approve the categories, transactions automatically settle into your financial statements.
Some features to look for in your accounting software include:
Platform Integration. You want your accounting software to integrate with your e-commerce platform, as well as support integration with third-party applications for contract management tools and more.
Extensive Reporting. Most accounting software provides basic reports. You’ll want one that offers advanced reports, such as inventory and expense reports, so you can quickly monitor your business’s financial health.
Sales Tax Configuration. Knowing whether you’re required to collect sales tax and how much to collect can be confusing. The best accounting software makes calculating sales tax easy.
Excellent Support. Check the reviews and ratings of support to see how good customer support is for the software company. Aim for 24/7 support and self-service centers.
There are many easy-to-use accounting software options for small businesses, ranging from free versions to paid ones. You can also browse the Shopify App Store to find accounting software that integrates seamlessly with your e-commerce store.
Check out the following accounting software that you can use to manage your records. Xero
Xero is a cloud-based accounting system designed for small and growing businesses. You can connect with a trusted advisor and gain insight into the health of your finances. Accessible from any device. Additionally, with Xero’s advanced accounting features, you can view cash flow, transactions, and other financial information from anywhere.
Benefits:
Inventory and stock management reasonable cost connects to major banks easy to use and customizable reports contact and segmentation database payroll application bank match mobile application bank reconciliation QuickBooks Online
QuickBooks Online is accounting software for small businesses run by Intuit. You can use it to capture and store expense receipts, track income and expenses, and more.
QuickBooks displays all your costs, such as inventory and maintenance costs, and every sale your business makes over a period of time. It also provides inventory tracking using continuous inventory tracking, so your sales and inventory costs are updated each time you make a sale. You can also integrate QuickBooks with Shopify to stay organized
Source: https://shopify.com/blog/15334373-small-business-accounting-101-ten-steps-to-get-your-startup-on-track
Leave a Reply