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ere at Novo, we know how much time, money, and effort it takes to start and run a business. A large part of this investment is learning how to properly set up and manage accounting for your small business, which 64% of small business owners do themselves.
Through the implementation of a robust and consistent bookkeeping system, you’ll gain a comprehensive awareness of your business’s financial health and trajectory.
In this guide, you’ll learn how to set up and organize your company’s accounting system and how to maintain this infrastructure. We'll also share ten expert accounting tips to keep your small business running smoothly.
Bookkeeping vs. Accounting
The differences between bookkeeping and accounting can often be confusing, so we wanted to clarify before diving into the specifics of accounting. Bookkeeping involves the recording and categorizing of transactions, while accounting involves using that information to make business decisions. This is why business owners often rely on their accountants or accounting software to help navigate financial documents and analyze the business’s health.
Tips for How to Set Up Accounting for Your Small Business
Here are a few of our top tips to help small businesses set up an accounting system and stay on track:
1. Open a small business bank account
Set up a separate business account to make navigating your expenses, costs, and revenue much easier.
Even if it’s not necessarily a legal requirement—for example, a sole proprietorship doesn’t technically need one—it’s still best practice to open a distinct business account to keep your finances separate and organized.
Separating your personal expenses from company financial accounts can also make tax preparation much easier.
Novo Note: Did you know that Novo business checking is the preferred platform for over 200,000 businesses? We have no hidden fees, no minimum balance requirements, and extensive business software integrations!
2. Choose an accounting method
There are three commonly used accounting methods that companies can adopt:
1. Cash Basis Accounting Method: This method records revenue and expenses as they occur in real-time.
- Examples: The business pays for an expense or a customer pays their invoice.
- Pro: Simple and fairly straightforward. Allows you to verify bank balances at any point in time.
- Con: Need to wait for actual receipt of funds before you can record revenue.
2. Accrual Basis Accounting Method: This is the most common method. You record earned revenue and expense transactions even if no payment has been made yet.
- Examples: You record refunds in advance or when an invoice is issued to a customer but not yet paid.
- Pro: This method matches your business expenses to related revenue.
- Con: Companies must regularly monitor and track accounts receivables and payables under this method.
- Novo Note: Generally speaking, according to the IRS, if you produce, purchase, or sell merchandise and keep an inventory, then you must use an accrual method for sales and purchases.
3. Profit First Accounting Method: The general idea behind this method is that businesses should pay themselves first, and let what remains dictate how much they can spend on operating expenses.
- Examples: You make a sale, then take a percentage of the revenue generated as profit, leaving the rest for expenses. Think: Sale - Profit = Expenses.
- Pro: This method will force you to be more disciplined with company spending instead of treating expenses as if they are inevitable.
- Con: Your expenses are limited, so you need to think strategically about how to allocate your remaining funds.
3. Develop a chart of accounts
A chart of accounts organizes all of your business receipts, transactions, and finances in a centralized location. Typically, a chart of accounts should break down your finances into these categories:
Novo Note: You can use this chart of accounts to not only track your finances, but to also create balance sheets and income statements on a regular basis.
4. Get acquainted with your accounting cycle
Time to get up close and personal with your company’s sequence of (financial) events. Here is a common accounting cycle for reference:
1. Record and classify journal entries
Journals are also known as Books of Original Entry. Journal entries are essentially detailed lists of transactions, usually in chronological order. Entries typically include:
- Debit or Credit
- Transaction description
- Reference number (each entry must be unique)
2. Post transactions to the general ledger
A general ledger is also known as a Second Book of Entry, meaning the transaction you just recorded in the journal will then be posted (or moved) to your ledger.
However, your ledger will not be organized like your journal. Instead, it will include less detailed information and may arrange transactions into groups (expenses, assets, liabilities, etc).
3. Prepare an unadjusted trial balance statement
Running a trial balance is a formal way of saying that you’re checking to make sure your debit and credit entries from your ledger match.
4. Review trial balance for errors
Once you run your unadjusted trial balance report, you need to review to account for any errors. Common errors may include:
- Mathematical or calculation errors
- Incorrectly posting a credit as a debit or vice versa
- Omission or doubling of transactions
5. Adjust entries to correct errors
If you do come across an error (which happens!), you’ll need to make a separate adjustment entry. Create a new entry that amends the error (e.g. reducing the revenue) and balances out the books. Then you can run an adjusted trial balance report.
6. Prepare financial statements
These statements include balance sheets, income statements, cash flow statements, and statements of shareholders' equity. These reports give the whole financial picture of your company and should be prepared on a regular basis.
7. Close the books
This is the official way of saying that you are finishing the current accounting cycle to prepare for the next one. At this point, your revenue, expenses, and withdrawal balances should all be at zero and everything else rolled over into the new cycle. Then it’s time to do it all over again!
5. Set up payroll
If you haven’t already, you’ll need to establish your Employer Identification Number (EIN) to begin running payroll and paying your employer taxes. Once you have your EIN, you need to determine your payroll schedule. Typically payroll runs on one of the following schedules:
Novo Note: Some states have specific payroll conditions, so check with your local laws to ensure you are following the necessary requirements.
6. Determine how you’ll accept payments
You’ll need to set up a way to handle incoming payments from your customers and clients. The most common form of payments are made through:
- Credit/Debit cards
- Direct bank transfers, also known as Automated Clearing House (ACH) processing
- Online through platforms like Stripe, Square, and Paypal
- Third-party platforms with built-in payment options like Shopify and WooCommerce
7. Develop a robust bookkeeping system
Regardless of which accounting method you chose, you have to maintain an effective bookkeeping system to keep yourself organized. Set up daily, weekly, monthly, and even quarterly bookkeeping tasks so you can stay on top of your finances.
8. Run your numbers monthly
Even if your accounting cycle is technically on a quarterly basis, it’s always best practice to run reports like financial statements and bank reconciliations on a monthly basis. Not only does it track your current financial health, but it can also help you make larger business decisions.
9. Evaluate your financial statements
Analyzing the figures in these financial records can help you spot sales trends, where you stand on your assets and liabilities, and if you are ready to scale your business.
Also, don’t forget that these reports will be the basis of the taxes you pay each year!
10. Understand your tax obligations
To make tax season less stressful, track expenses throughout the year, keep digital or paper receipts and always stay on top of your business finances.
Tax professionals can help you with your tax requirements including:
- Preparing your estimated quarterly income taxes
- Reviewing Profit & Loss (P&L) numbers
- Confirming your tax obligations
- Determining your tax-deductible costs
File away the following documents throughout the year:
- Business credit card or bank statements
- Proof of payments
- Financial statements
- Previous tax return
As always, be sure to comply with your local existing tax laws to avoid penalties and potential legal issues.
Novo Note: The IRS accepts digital copies of receipts, so take advantage of cloud-based storage for scanned receipts. This will ensure that your receipt records are protected from loss or damage.
Managing your accounts
The process of managing your accounts can seem daunting, especially when much of your bandwidth is dedicated to running and growing your business. So what’s the best way to make sure your accounts are well-managed while keeping within budget?
- Outsource: For those with no experience or who find it too time-consuming, it’s wise to use the services of a professional, like a Certified Public Accountant (CPA). Outsourcing these services can help you focus more on other business concerns and is also less costly than hiring a full-time accountant.
- Use accounting software: Small business owners can save money by doing accounting themselves using accounting and bookkeeping tools. Some popular software options are QuickBooks, Xero, Freshbooks, and Netsuite. These tools can help you manage billing, track expenses, manage inventory, stay compliant, and more.
- Hire an in-house accountant: If you have the budget and your business’s finances are fairly complex, you may want to consider hiring an accountant as a part-time or full-time member of your team. This isn’t imperative for most small to mid-sized businesses but may be necessary as your business grows.
Novo Note: To make bookkeeping even easier, you can link your Quickbooks or Xero account directly with Novo so that your transactions automatically sync. You can add details to every transaction, including adding categories and notes and uploading images and documents. You can also export this data in a CSV file for easier manual bookkeeping.
As a small business owner, it’s important to remain flexible when it comes to your accounting system. With this in mind, continue to revisit and evaluate your accounting setup. You’ll likely want to revise these methods as your business grows.
As the saying goes, "Numbers do not lie." Your financial and accounting statements provide a picture of your business’s financial health. Having these numbers available and knowing how to use them can help you improve the way you manage your small business.
Novo is a financial technology company, not a bank. Banking services are provided by Middlesex Federal Savings, F.A.; Member FDIC.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
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