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You can’t tell how your firm is performing until you understand small business accounting. It displays you how your firm is doing financially and how much it is worth. Your capacity to monitor, comprehend, and manage your company’s finances will make or break its future success.


Although there are other alternatives for handling your accounting, such as employing a bookkeeper or accountant or utilising small business accounting software, you must at the very least understand how to set up small business accounting for your company.

How to Set Up Accounting in a Small Business

1. Establish a Business Checking Account

When beginning a company, one of the first things you should do is create a small business bank account.

A company bank account is required for a variety of reasons. A small company bank account helps you separate your business and personal money, lends professionalism and validity to your new firm, gives some personal liability protection, and aids in preventing the corporate veil from being pierced.

The sort of accounts you will need is determined by the nature of your organisation and your unique requirements. Small company checking accounts and small business savings accounts, on the other hand, are among the first accounts you’ll need to create.

We strongly advise you to read our analysis of the top banks for small businesses to assist you in selecting the finest bank account for your company.

2. Decide on an Accounting Method

Choosing an accounting technique is one of the first steps in setting up your small company accounting.

The two accounting approaches are cash basis and accrual basis.

In cash basis accounting, income and costs are recorded when the transaction is complete. If you take payment on credit, for example, you would not record revenue until it was received.

In accrual accounting, revenues and costs are recorded as they occur. This implies that if you take payment on credit or accumulate liabilities owing, they will be recorded regardless of whether you have got money (for accounts receivable) or made payment (for liabilities).

3. Keep track of your income and expenses.

Accurate recordkeeping is the foundation of small company accounting. It is critical to start with a system for recording and organising income and spending.

Whether you intend to handle your small company accounting yourself, purchase small business accounting software, or hire an accountant, you will still need a system in place to monitor revenue and spending and get this information into the hands of the correct people to manage your books.

4. Install a Payroll System

If your company plans to hire anybody, you’ll need to set up a payroll system. Setting up a payroll schedule, monitoring hours, withholding taxes, giving pay to workers, sending out tax payments, and issuing year-end tax information are all part of this process.

While this may seem to be a lot, there are a variety of services and software tools that may assist. To help you choose the finest payroll system for your company, we suggest reading our assessment of the top payroll systems for small businesses.

5. Establish Your Bookkeeping System

After that, you’ll need to get your accounting in order. There are various methods for establishing your accounting system.

You might go old school and use paper diaries and ledgers, but this technique needs a substantial amount of accounting expertise as well as a lot more time and work.

You might make use of a spreadsheet application such as Excel. While some understanding of the accounting process is required, many small firms depend on spreadsheets to manage their financial success.

You might choose from a variety of small company accounting software suppliers, such as Quickbooks and Freshbooks. Small company accounting software automates accounting operations and enables you to simply prepare financial statements.

You might use the services of an accountant. This is the most reliable method of ensuring that your organization’s funds are in excellent hands. Accountants can assist you with bookkeeping, financial reporting, and tax preparation.

Create a balance sheet and a chart of accounts.

The first step in setting up your accounting is to create a chart of accounts.

A chart of accounts is a list of all corporate transactions, as well as how they are organised and classified. In small company accounting, there are five fundamental categories of “accounts”:

Revenue – Revenue, often known as income, refers to any money generated by a business, generally via the sale of goods or services.

Expenses – Expenses are all money moved out of the firm to create revenues and encompass all business expenditures.

Assets are everything that your company has. Land and buildings, equipment, machinery, inventory, accounts receivable, and cash are all examples of assets.

Liabilities – Liabilities are all of the debts that your company owes. All unsettled obligations, including short- and long-term loans, as well as overdue bills, wages, rent, or utility expenditures, are classified as liabilities.

Equity – Equity is the owner(s)’ equity in the firm, including capital investments and retained profits.

You will need to establish sub-accounts inside each of the primary accounts to categorise particular accounts. The sub-accounts will become journal entries, while the main accounts will become ledger entries.

Transactions should be recorded.

Following the creation of a chart of accounts, the next step in getting started with your accounting is to record transactions. Single-entry or double-entry accounting systems are used to record transactions in a journal. While single-entry accounting is used by some of the smallest organisations, double-entry accounting is the standard. In double-entry accounting, each transaction is recorded twice in its related journal: once in a debit account and once in a credit account.

Close and Balance the Books

At the conclusion of each period, the next stage in small company accounting is to balance and close the books. To do this, sum the journal entries for the time and deposit them to the general ledger. In the process, the general ledger balance is being updated. Each period, you account for all revenue, expenditures, assets, liabilities, and equity in the general ledger, also known as the Book of Final Accounts.

You will need to make the necessary journal entries for each account in your general ledger. Remember that since each journal transaction is recorded twice, the debits should match the credits.

The unadjusted trial balance is what remains after all journal entries have been recorded. To put your trial balance to the test, check that your account balances match the accounting equation: assets = liabilities + equity.

If your account balances do not match the accounting equation, you must review your journal and ledger entries to see where the mistakes occurred. Once your inputs have been updated and your accounts have “balanced,” you may complete the adjusted trial balance. You will prepare your financial reports from here.

6. Compile Financial Reports

When your ledgers are finished, you will be able to construct your financial reports. Your financial reports or financial statements are what inform you about your company’s financial health and performance.

The balance sheet, cash flow statement, and income statement are the three most important financial statements. However, various sorts of financial statements are also employed to understand the venture’s finances.

The Statement of Shareholders’ Equity explains any changes in shareholders’ equity. The Note to Financial Statements is another frequent financial statement that details certain categories of income, costs, assets, and liabilities that are not covered in the major financial statements.