Small Business Accounting: How to Set It Up and Keep It Simple

Start by separating business and personal money

Open a dedicated business bank account and, if you use one, a business credit card. Never pay business costs from a personal account.

Mixed finances make every later task harder: taxes, loan applications, and any review of your records. Separate accounts also protect the legal separation of an LLC or corporation.

See the benefits of a business account for what to look for.

Choose cash or accrual accounting

Cash accounting records income and expenses when money moves. Accrual records them when earned or incurred. Many small businesses start with cash.

Cash is simpler and matches your bank balance. Accrual gives a truer picture if you invoice customers or buy on credit, because it matches revenue with the costs of earning it. Your accountant can tell you which is allowed and best for your business. Read cash vs. accrual accounting for details.

Set up a chart of accounts

A chart of accounts is the list of categories where every transaction is filed: assets, liabilities, equity, income and expenses.

Keep it short at first. A dozen expense categories are usually enough: rent, payroll, supplies, software, insurance, marketing, vehicle, professional fees, taxes and so on. Add detail only when you need it. See the guide to business expense categories and general ledger accounts.

Build a weekly and monthly routine

Weekly, categorize transactions and send invoices. Monthly, reconcile accounts and review reports.

1. Weekly: record sales and expenses, send and chase invoices, save receipts.
2. Monthly: reconcile bank and card accounts, review the income statement and balance sheet, check what is owed to you and what you owe.
3. Quarterly: review estimated tax payments and sales tax.
4. Yearly: close the books and prepare for tax filing.

A routine takes less time than catching up once a year.

Know the three reports that matter

The income statement shows profit, the balance sheet shows what you own and owe, and the cash flow statement shows where cash came from and went.

Profit and cash are not the same thing. A profitable business can still run short of cash if customers pay slowly. Learn each report: income statement, balance sheet and cash flow statement.

When to hire help or buy software

Bring in an accountant or bookkeeper when time spent on books costs you more than their fee, or when taxes and payroll become complicated.

Software handles transaction capture and reports. A professional handles judgment: tax strategy, entity choice, and clean-up. Compare options in bookkeeping software and how to hire bookkeeping help.

Common accounting mistakes to avoid

The most frequent mistakes are mixing personal and business spending, falling behind on entries, and ignoring cash flow while watching profit.

• Letting the books go for months and then catching up in one painful weekend.
• Skipping reconciliation, which hides errors and fraud.
• Not saving receipts or storing them where they cannot be found.
• Forgetting to set aside money for taxes.
• Watching profit and missing a cash shortage coming.

A one-hour weekly habit prevents all five. Block the time on your calendar and treat it as seriously as a customer appointment.

How good books help you get funded

Clean records let you answer questions quickly, prove revenue and spot cash needs before they become emergencies.

ROI Funder asks for an application and 3 months of business bank statements. If your books are clean, you can see what revenue and expenses look like before applying, and you can run payback math on a funded project. We consider 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Learn about working capital if a short-term gap is your problem.