In business, you must keep records of your transactions on your books. Your ledgers give you a place to review your business income and expenses and see where you stand financially. By keeping your books organized and up to date, you can take control of your finances and make smart business decisions. But before you can do any of that, you need to learn how to set up small business ledgers.
How to Set Up Small Business Ledgers: 7 Steps
The idea of recording all your business transactions may seem overwhelming. But recording transactions doesn’t have to be a difficult task. The more you prepare your books, the easier it will be to keep records.
You are reading: How to set up accounting books for small business
To help ensure your record-keeping runs smoothly and your books are in order, follow these seven steps to setting up small business ledgers.
1. select an accounting method
The first thing to do when setting up your books is to choose an accounting method. These are the accounting methods you can choose from:
- cash-base: less difficult accounting method
- accrual: more difficult accounting method
- modified cash basis: combination of cash basis and accrual
cash-based accounting does not require extensive accounting knowledge. With this method, you record the transaction when the money changes hands. that means you record the income when you receive the payment. the cash method only uses cash accounts (for example, expenses, income, etc.).
Accrual accounting requires the most accounting knowledge and is the most time consuming for small business owners. With accrual, you must record the income when your transaction is made, with or without money transfer. and record the expenses when you are billed. the accrual method uses more advanced accounts and allows you to record long-term liabilities.
Modified cash-based accounting, or hybrid accounting, is a combination of accrual-based and cash-based accounting. Like the cash method, you record income when you receive it and record expenses when you make a payment. modified cash accounting uses cash and accrual accounts.
2. determine how you will record transactions
How do you plan to record the transactions on your books? you might be considering:
- record transactions by hand (e.g. spreadsheet)
- hire an accountant
- use accounting software
Manual entry of transactions by hand is the most time-consuming option to enter transactions. however, it is the most affordable solution for small business owners. when you enter transactions by hand, manually count each transaction and calculate the totals.
Hiring an accountant frees you from managing your own books and making common accounting mistakes. it is the option that requires less time but also the most expensive. if you hire an accountant, he or she will compile the financial statements and calculate the totals for you.
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Accounting software is the best of both worlds when it comes to difficulty and cost. accounting software is a good option if you want to streamline accounting processes and save time without paying the price of having an accountant do everything for you. Not to mention, you don’t have to worry about calculating the totals yourself, as the software does it for you.
3. set up a chart of accounts
Your chart of accounts, or COA, lists all the accounts on your financial statements and divides your money into certain categories. a coa shows you all the money coming into your business, as well as all the money going out.
Your chart of accounts consists of these five sections:
- assets
- liabilities
- equity
- income
- expenses
To further break down accounts, you can use subaccounts (for example, product sales) to organize transactions. As your business grows, you can add other subaccounts to your COA.
4. open a business bank account
Mixing personal and business funds is a huge prohibition. To avoid accounting errors, inaccurate tax returns, and overspending, open a separate business bank account.
Opening a business bank account not only helps you keep your records organized, it can also create a clear audit trail for your business.
To open a business bank account, you typically need the following information:
- social security number
- employer identification number (ein)
- business name
- business license
- organization documents (eg, articles of organization)
Check with your banking institution to find out what documentation you need to provide to open a business bank account.
5. determine how your company will be paid
Your business can’t grow if your customers don’t pay you. To ensure that you get paid for your products or services, establish a clear payment policy for the customer.
Determine what type of payments you will accept from your customers. this may include:
- cash
- check
- credit card
- mobile wallet payment
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If you sell to customers on credit, you’ll need to send invoices at a later date after providing your products or services. and determine bill payment terms, such as acceptable forms of payment, when payments are due, where to send payment, and late fees.
6. keep track of expenses
Tracking expenses is a crucial part of accounting. helps you keep your books in order. Plus, you’ll thank yourself for keeping track of expenses when it’s time to file your taxes.
When keeping track of your spending, be sure to keep the following in mind:
- receipts
- bank and credit card statements
- bills
- bills
- cancelled checks
- proof of payment
- previous tax returns
- forms w-2, 1099-misc and 1099-nec
The more documentation you keep in your records, the better your business and your books will be.
7. make a schedule and set reminders
The last thing you want to do is put off posting transactions to your books. letting transactions pile up can lead to messy logs, errors, and a lot of unnecessary stress.
To simplify your accounting responsibilities, create and adhere to an accounting schedule or cycle. Your hours start with your opening account balances and end when you close your books.
write the steps of your program or cycle and set aside time each week, month, etc. to review and update your records. To take things a step further, consider setting reminders for yourself so you know when to go through your cycle and update your books.
tips to keep your books organized
If you want your company’s accounting books to be accurate, keep them organized and up to date.
Aren’t you the most organized person? without worries. Use these tips to keep your books in tip-top condition:
- have basic accounting knowledge before recording transactions on your books
- leverage accounting software to streamline processes
- keep business and personal finances separate
- track all transactions as soon as possible or on a regular basis (for example, once a week)
- find a way to organize accounting receipts and other documents
- check your books frequently to stay up to date on finances
- don’t put off recording transactions until the last minute
This article has been updated from its original publication date of February 14, 2017.
This is not intended to be legal advice; for more information, click here.
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