5 Accounting Tips for Small Business Owners in 2023
Reema Rajani, EA
Running a small business is not a small task. However, good accounting practices can help small business owners to manage their finances, stay organized and keep a good record of expenses and revenues.
If you are a small business owner wondering how to get started on the right track with your accounting in 2023, look no further! Here are five of our favorite accounting tips to get you started
1. Choosing the Proper Business Structure
The secret to scalability lies in choosing the right business structure. Small businesses can choose from four main types of business structures: sole proprietorship, partnership, Limited Liability Company (LLC), and corporation. Each of these structures has different benefits, responsibilities, and tax obligations that you should understand before deciding.
To understand in brief, sole proprietorship means you are the sole owner of your business and have complete control over it. The partnership involves two or more people working together, each with its roles and responsibilities.
LLCs are a hybrid between sole proprietorship and partnership, where the business owners have limited liability. When it comes to a corporation, it is a separate legal entity from its owners.
2. Picking the Suitable Accounting Method
After you pick the suitable company structure and open a bank account, the next step is to choose the best accounting method. Accounting methods can be classified into two main types: accrual and cash-basis accounting.
Accrual accounting is based on the revenue recognition principle, which means that you record all revenue and expenses when they are incurred, regardless of when the money is received or paid.
On the other hand, cash-basis accounting records revenue and expenses only when cash flow actually happens. Both methods are accepted by the Internal Revenue Service (IRS), and you should choose whichever works best for your business.
3. Integrating a Professional Accounting Software
Instead of going for manual accounting, which can be both time-consuming and error-prone, it is better to invest in professional accounting software. It will help you automate manual processes and simplify financial management.
Also, most accounting software platforms are cloud-based, which means you can securely access them from anywhere in the world. Before you buy and integrate new accounting software, ask for a quick demo or take the free trial period to ensure it meets your business needs.
4. Setting Up a Chart of Accounts
A chart of accounts refers to the list of an organization’s financial accounts. It is important to set up a chart of accounts as it helps you categorize your finances and make accurate financial statements.
When setting up your chart of accounts, you need to consider different aspects, like the nature of transactions and industry standards. It is also important to ensure your accounts are organized and easy to use. Some essential and commonly used account types used in the chart of accounts are:
Assets: These are resources owned by the company and are used to generate revenue.
Liabilities: These are obligations that have to be paid by the company, such as debt and taxes.
Revenue: This includes all money earned by the company through sales and services.
Expenses: This includes costs incurred to run operations, such as rent and utilities.
Equity: This is the owner’s investment into the company, also known as capital. Equity can be increased by reinvesting profits and decreased with losses.
5.Managing Income and Expenses
When running a small business, keeping track of your income and expenses is essential. It helps you identify areas where you can cut costs and maximize profits. In addition, you can use financial management tools like budgeting and forecasting to manage income and expenses. This helps you plan your finances to make more informed decisions and stay on track.
Last but not least, it is crucial to pay taxes for small businesses on time. In addition to filing income tax returns, you will also have to pay payroll taxes for employees and other applicable taxes, depending on the nature of your business. Paying taxes on time helps you stay compliant and avoid any legal hassles.
To sum up, the five accounting tips for small business owners in 2023 are: picking the suitable accounting method, integrating professional accounting software, setting up a chart of accounts, managing income and expenses, and paying taxes on time. These tips can help you develop better financial management practices for your small business and ensure smooth operations.
Moreover, you can also hire a professional accountant or bookkeeper to take care of your accounting needs. They can help you develop financial models and analyze data to make smart decisions and plan for the future.