Accounting for Entrepreneurs: A Quick Accounting Guide for Small Business Owners

Being a successful entrepreneur takes a huge amount of perseverance, dedication, and hard work. You need to be passionate about what you do and ready to prove it – and this applies to every aspect of your business. Even the less glamorous parts like small business accounting!

Business ownership is demanding on every entrepreneur, and there is a constant and ever-growing list of tasks and responsibilities to take care of. 

Without a solid understanding of accounting for beginners, you may soon become overwhelmed with your business’s bookkeeping needs. This can lead to poor financial management over time, which can impact your business’s growth and hinder it from reaching its true potential.

Our complete accounting guide will give you all of the information and steps you need to ensure that you can handle your business’s finances with confidence!

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9 Steps to Mastering Accounting for Entrepreneurs

#1: Open Up a Business Bank Account

You will need a dedicated business bank account for your enterprise after you have legally registered it and started your operations. It may be tempting to use your personal bank account for this purpose. But having a separate business account will help to keep your records accurate and make your life simpler when tax season comes to an end. This will also safeguard your personal assets against litigation, bankruptcy, and audits, and create a strong business financial record history that you can use to secure funding from investors and attract reliable vendors.

It’s important to bear in mind that corporations, LLCs, and partnerships are required by law to have separate bank accounts for their businesses too. Sole proprietors are not bound to the same laws, but it is still recommended regardless.

Begin the process by opening up a new business check account, along with any savings accounts if necessary. Use this savings account to set aside a percentage of each payment you receive as future funds for tax payments. Most experts recommend putting aside around 25% of your income for this purpose. You will need your business’s name and registration with your state or province, along with other documentation that your bank can instruct you on, to open your business accounts.

Establishing a business credit card will help you to start building credit for your enterprise, which will help you to secure funding later down the line. Do some research and find the best business accounts with the most competitive fee structures to ensure that you are getting the best value for your fees.

#2: Start from Home

Starting a small business from home will help you to enjoy as many tax concessions as possible while keeping your overhead expenses low. You can deduct your home office from your tax total, along with your mobile phone, internet and transportation expenses. 

If you incur expenses that are both for business and personal use, you can deduct the percentages of those costs allocated toward business operations. It might also help to have a good tax bracket calculator ready to ensure your income is being taxed appropriately. Be sure to keep all of your records and business miles to ensure that you can file accurate tax returns for your home-run venture.

#3: Track Costs Carefully

Expense tracking is a crucial and unavoidable part of efficient business management. It enables you to trace your business’s growth, build robust financial statements, keep up to date with deductible expenses, craft accurate tax returns, and ensure that your filings are as detailed as possible.

This is why it’s important to create a system for organizing receipts and other essential financial records from the beginning. You can use a simple filing system or a digital expense tracking platform for this purpose.

Remember to hold onto receipts pertaining to business-related travel, meals and entertainment, vehicle-related expenses, gifts, and home office supplies, as these may all be partially or fully tax-deductible.

#4: Create a Strong Bookkeeping System

Bookkeeping is the process of recording, categorizing, and reconciling bank statements on a daily basis, while accounting is a higher-level process that takes this bookkeeping data and uses it to build financial statements. Both processes are essential for proper small business financial management.

There are many ways in which you can handle your bookkeeping. You can use software like Freshbooks, Quickbooks, or Xero, or even a simple spreadsheet document to keep track. You may also want to check ThePayStubs an instant online pay stube generator that will make your life more easier. Or you can outsource your tasks to a bookkeeper or even hire an in-house bookkeeper to take care of them. You’ll also need to decide whether you wish to use the cash or accrual accounting method.

The cash accounting method recognizes expenses and revenues at the time when they are paid or received. The accrual method recognizes revenues and expenses at the time of transaction and requires the tracking of accounts receivables and accounts payable for accurate accounting. Business owners in the US are required to use the cash-based accounting method if their revenues amount to less than $5 million per annum.

#5: Establish a Payroll System

Another crucial part of our accounting guide pertains to paying your employees. You may not need to worry about payroll systems if you’re running your business on your own, but once you grow and hire some employees to help you out, you will need to create a payroll system that distinguishes between employees and independent contractors. You’ll also need to know the answers to questions like, “Which taxes should I pay for employees and contractors?”, “What is net pay and gross pay?”, and other pertinent considerations.

If you have employees on your team, you’ll need to establish a payroll schedule and ensure that you are withholding and paying the correct tax contributions, which you can do with the help of any accounting software with a reliable payroll feature.

If you’ve got independent contractors on board, ensure that you are tracking how much you pay each contractor. This will be important for filing 1099s for each contractor at year-end if you are based in the US.

#6: Pick Your Preferred Payment Methods

Once your business has started to make sales, you will need to offer your clients and customers a range of payment options for this purpose. eCommerce platforms like Shopify offer their own payment gateways like Shopify Payments, and there are plenty of other third-party payment systems available too, including Square, PayPal, Stripe, and others. 

Fees vary for third-party payment processors, as some processors charge interchange fees plus standard rates, while others charge flat fees per transaction or monthly membership fees. Again, it’s important to do your research and find a payment system that works for you and aligns with your business’s needs and goals.

#7: Research Import Taxes

Proper accounting for entrepreneurs hinges heavily on one’s understanding of taxes. Depending on your business’s model, you might plan on buying and importing goods from other nations to sell regionally. 

Bear in mind that these activities will be subject to taxes and import duties. Learn as much as you can about importing goods into your country of operation so that you’re aware of your obligations from the start and can avoid any unwanted surprise expenses later down the line!

#8: Create Sales Tax Processes

It’s never been simpler to sell to a global customer base than it is today. This is a fantastic thing for your overall growth, but it may see you having to navigate a range of diverse sales tax regulations in order to stay compliant and master accounting for entrepreneurs.

Customers that buy from physical retail stores pay the sales taxes of whichever region they happen to be in. However, online shoppers may be located all over the world and will be privy to dozens of different national, federal, and provincial sales tax requirements. 

US-based store owners will need to determine if their businesses are operating in origin or destination-based states. Those in origin-based states must charge sales tax based on the state in which the business is run. Those in destination-based states must apply sales taxes based on the location of each purchaser.

International purchases are exempt from tax for businesses based in the US. The regional laws are complex, so contact a skilled accountant or tax practitioner for more information about your state’s laws and requirements with regard to sales taxes.

#9: Determine Your Gross Profit Margins

The first step for any entrepreneur to boost their business’s income levels is to improve their gross margins. Most accounting guides online will mention this, as it’s crucial to know the costs you incur to produce your product to calculate your gross margin and assess exactly where your business is at. 

Cost of goods sold, or COGS, are the direct costs your business incurs while producing the products it sells, including both direct labor expenses and materials. Your gross margin is your total sales revenue after all direct costs have been incurred. 

You can calculate your gross margin using this formula:

Gross margin (in %) = (revenues – cost of goods sold) / revenues

Alternatively, you can use a profit margin calculator online to assess your margins and your business’s growth within minutes.

The Bottom Line

Accounting for small businesses can certainly be challenging, but it doesn’t need to be. 

Use this simple accounting guide to streamline your accounting for entrepreneurs' processes and manage your business’s finances. Doing so can help you to optimize long-term growth, and remain compliant with local tax laws and requirements.