Small Business Accounting 101: What You Need to Know
Published on: October 30, 2023
These days, the demand for experienced accountants is on the rise—especially as more entrepreneurs are pursuing their dreams of opening their own businesses. Typically, small business owners don’t have a strong background in business accounting, yet they still need help from an experienced professional to keep their finances on track.
Enter the accountant, a seasoned expert who can assist with every aspect of a growing company’s finances. From choosing the right accounting method to tracking cash flow, accountants tackle these complex tasks so that businesses can thrive.
And when you consider that the job outlook for accountants, according to the Bureau of Labor Statistics (BLS), is projected to grow by 6% between 2021 and 2031, it’s easy to see how going into this field can provide you with some job security. If you’re the type of person who enjoys crunching numbers and solving problems, then a career in accounting may be right for you. And if you specifically enjoy helping others succeed, then a focus in small business accounting is even better.
Components of Small Business Accounting
So, what are some small business accounting basics that you should be familiar with before you even pursue a career or degree? Let’s dive into some key concepts, which range from small business funding opportunities to bank account options and more.
Small Business Funding
Sometimes, entrepreneurs will turn to small business accountants for assistance in figuring out how to fund their ventures. After all, it can easily cost between $30,000 and $40,000 to start a business and keep it running through just the first year. Where does that money come from?
There are a few options for small business funding that an accountant may be able to recommend based on the business owner’s unique needs and plan. Bank loans are a popular option and are offered by traditional banks in the form of business lines of credit, business credit cards, term loans and the like. This type of funding will typically have some of the lowest interest rates, but the qualification requirements may be strict.
Another option to consider is a loan through the United States Small Business Administration (SBA). These loans tend to be easier for a small business owner to get approved for, though some basic credit qualifications will still need to be met.
Ideally, a small business will qualify for a grant, which is money that the business owner does not need to pay back. Small business grants are offered by a variety of government agencies, the Economic
Development Administration and some private corporations as well. The right accountant will be able to help a business owner assess their options and figure out the best financing method(s) for their particular needs.
Small Business Bank Accounts
Before launching a small business, it’s also important to open the proper bank accounts. An experienced accountant will be able to help a business owner determine which type of business bank account (or accounts) is best for their needs. Some common options include:
- Business checking accounts – A versatile option that’s essential for business owners who need to withdraw funds, transfer money and have a bank/debit card directly linked to their account.
- Business savings accounts – A type of bank account where business owners can store profits they don’t plan on spending to accrue more interest.
- Business CD accounts – A certificate of deposit account that is similar to a savings account but comes with a fixed term and (typically) a higher interest rate.
- Merchant accounts – A common option for businesses that accept credit card payments. With this type of account, money is held first in a merchant account before it is transferred directly into a business checking account.
Knowing Your Business and Industry
Small business accountants provide many of the same services to business owners regardless of industry. However, the most successful accountants are those who take the time to really get to know their clients and their respective industries. After all, not all businesses have the same accounting and finance needs; a business that operates strictly online is going to have unique needs than a brick-and-mortar business that only accepts cash payments.
If you’re thinking of a career in accounting, and want to focus on small business accounting, you’ll need to be comfortable with asking the right questions to understand your clients’ needs and, in turn, to best serve these needs.
Accounting Terms and Metrics for Small Businesses
One of the most important things you’ll learn as a small business accountant is how to “speak the language.” The accounting field is full of jargon and industry terminology that often only makes sense to other accountants and/or savvy business owners. However, these terms and concepts are vital to grasp because they’ll be used frequently in your work.
Explore some of the most commonly used accounting terms and metrics for small businesses below.
- Accounts Payable – Debts that a business owes to suppliers or other companies.
- Accounts Receivable – Money to which the business is entitled to from other businesses.
- COGs – Cost of goods, or the expenses associated with selling a product (raw materials, packaging, etc.).
- Equity – The specific portion of a publicly traded company that is owned by its shareholders.
- Expenses – All the costs associated with keeping a business running.
- Margin – The difference between the amount of revenue received by a business and the total profit that the company keeps.
- Revenue – Income received by the business.
In addition to understanding this (and other) accounting terminology yourself, it will also be your job to help your clients better grasp these concepts. This can be easier said than done, but it’s critical that your clients have a basic understanding of accounting themselves—even if they’re relying on you for specific services.
Small Business Financial Reports
As you can see, there’s a lot to learn when it comes to the basics of accounting for a small business. In addition to essential terminology, components of small business accounting and other concepts, accountants must also have a solid understanding of the kinds of financial reports that need to be kept and tracked by a business of any size.
The Importance of Payroll Organization
One of the most important types of reports that a small business will generate is that of payroll, which helps to track how much money an employee is owed, how much money needs to be withheld for tax purposes and other key aspects of paying workers. Having a reliable and accurate payroll organization system in place is an absolute must for any small business, as these systems help to cut down on payroll/payment errors and save money/time. The last thing a business owner wants to deal with is an employee whose paycheck was short; the right payroll system helps business owners avoid exactly these types of issues.
Likewise, depending on the industry in which the business operates, a robust payroll management system may be required as a part of industry compliance regulations. As a small business accountant, it will be your responsibility to help business owners choose and implement the right payroll management system.
What Financial Reports Does a Small Business Need?
The right financial reports can help business owners better understand how much money a company is bringing in, how much they’re spending and what their overall bottom line is looking like. An experienced small business accountant will understand which financial reports are best suited to a particular business and how to run those reports.
Some of the more commonly used financial reports among small businesses include:
- Profit and Loss Statements – A report that tracks the difference between business debits and credits for a given period of time. This type of report is useful in providing a broad look at a company’s financial health.
- Balance Sheets and General Ledger – This type of financial report tracks a company’s assets versus its debts at any given time. Like a profit and loss statement, this type of report can help a company get a better perspective on its financial health, its assets and its liabilities. A balance sheet may also come in handy for a business that is looking to take out an additional loan for any reason.
- Cash Flow Statements – Businesses need to know how much cash they have available at any given time, especially when it comes to purchasing supplies and paying employees. A cash flow statement will tell a business just that, tracking where money is coming and going so business owners can spend wisely.
- Accounts Payable/Receivable Reports – Running regular accounts payable and accounts receivable reports is necessary for keeping track of what money the business is still owed and what payments still need to be made.
Keeping Up-to-Date on Taxes
Perhaps any business owner’s least favorite thing is that of handling business taxes. Often, small business owners will turn over their taxes to their accountants in order to save themselves the time, money and hassle.
With this in mind, accountants should familiarize themselves with the basics of small business taxes. This includes understanding the different types of taxes that small businesses often have to pay, as well as any exemptions, deductions or credits for which a small business may qualify. In some cases, a business may also be expected to pay taxes quarterly rather than annually, so this is something an accountant will need to be aware of and prepare for as well.
Bookkeeping System and Tracking Expenses
Effective bookkeeping is at the heart of any successful small business—and many business owners will once again turn to their accountants to handle these tasks.
Transactions, Invoices and More
There are many important components to small business bookkeeping, ranging from tracking transactions and filing invoices to reconciling bank statements and data entry. In general, most business accountants will find it most effective to utilize a dedicated bookkeeping software that will handle most of these tasks on their behalf. Carefully entering and tracking a company’s bookkeeping records is key to making sure that taxes are properly calculated/paid and that records of payments made/received are accurate for reporting purposes, so this isn’t a responsibility to be taken lightly.
Common Accounting Methods for Small Businesses
Accountants will also need to be familiar with two of the most common types of business structures or accounting methods for small businesses. These are known as cash-based accounting and accrual accounting. Both accounting types are important when it comes to getting an accurate idea of a company’s overall financial health, but they differ greatly in terms of when revenue and expenses are reported/calculated.
In a cash-based accounting system, revenue is only reported on an income statement when the cash is physically received from the source. Likewise, expenses are recorded and tracked only after they have been paid out.
In an accrual method of accounting, future payments made and received are accounted for rather than waiting until the transactions occur. For many growing businesses, this type of accounting will make the most sense and provide the most accurate picture of a company’s financial health because it will account for payments that have not yet been made.
Your Accounting Story Starts Here
Working in small business accounting requires a great deal of specialized knowledge but can be extremely rewarding—especially when you’re able to help a business grow and thrive from the ground up.
If you’re interested in launching your accounting career, it all begins with a degree. Park University is proud to offer a Bachelor of Science in Accounting, which can prepare you for a rewarding career in not just small business accounting, but a number of other opportunities as well. From corporate and public accounting to government and non-profit work, our degree program will set you up for success.
Ready to learn more about accounting and similar programs offered by Park University? Get in touch today to request more information or start your application. We look forward to helping you pursue and achieve your long-term career goals!