Small Business Accounting 101: 12 Important Lessons for Business Owners

Carey Wodehouse, Contributor, Business2Community
June 21, 2018

Two of the smartest things you can do as a business owner are to (a) invest in accounting software, and (b) get the help of an accounting professional from day one.

That said, when it comes to accounting there are a few valuable lessons you don’t necessarily have to learn the hard way. We asked Dan Steiner of Steiner Business Solutions—who specializes in accounting for small businesses—to tell us the top things he wished his clients knew.

1. What you don’t know about your finances can be your own worst enemy.

It’s not uncommon for small business owners to look at accounting as a necessary evil. But the truth is, when it comes to accounting what you don’t know can hurt you. Understanding your financials is empowering—not just to help you avoid fines, but to help you make smarter decisions and be more strategic.

2. Identify when you should move from cash accounting to accrual accounting.

This is a fundamental accounting concept, but one many growing businesses don’t pay attention to. Accrual accounting is required for businesses with employees, or those grossing over $1 million in receipts a year, but it’s also a natural progression to move from cash to accrual accounting as your business grows. According to QuickBooks, “Accrual accounting is widely considered to be the standard (and oftentimes more accurate) accounting method for most companies.”

There are other circumstances when your business should file taxes under the accrual method, so check with your CPA or tax advisor to see which method is most beneficial for your particular business.

If you’re not regulated to use accrual accounting, you can do your books either way, but note that accrual accounting might impact a few things.

  • The skill level and/or experience of the financial professional you need
  • Accrual accounting is less about what your cash flow looks like (if you’re recording income but it hasn’t been paid yet, your bank account won’t reflect that) and more about what your overall financial position looks like
  • How you do your books will change
  • How you file your taxes will change (you can delay paying taxes on an advance payment in accrual accounting, for example)

3. Find a financial professional that can help you scale your business.

A lot of factors will help you determine what sort of financial professional you require, including if you’re using cash or accrual-based accounting. The following are listed from most basic—think, data entry—to most advanced.

  • Bookkeeper
  • Accountant
  • Controller
  • Chief Financial Officer (CFO)

It’s common for business owners to assume “I can do this myself,” or to only engage the bare minimum help in order to cut costs, but that’s potentially ignoring the kind of help you’ll need down the line. Small business owners often miss out on the strategic benefits of controllers and CFOs. Bottom line: You want someone to grow with you as your business scales.

4. Remember your bank account won’t always reflect your available cash.

It’s important to know that your bank account isn’t always an accurate reflection of your actual cash position—especially if you’ve just sent out some large checks. Making decisions based on your bank account alone can be risky, and potentially send you into the red. Get a better look at your cash position with monthly bank reconciliations, something a bookkeeper or accountant can help with.

To perform a bank reconciliation, you’ll adjust your books’ balance and your bank balance then compare the two adjusted balances. If, after comparing the two, the amounts don’t reconcile, look for errors—but know you’ll have a much clearer view of your cash flow regardless.

5. Don’t make assumptions about the accuracy of your journal entries.

If there’s one time- and money-wasting mistake small business owners make, it’s assuming that just because they’re using accounting software to create entries, those files are clean and correct. Chances are you’ll make mistakes that your accountant or bookkeeper will have to spend time cleaning up, but you won’t know what those are (and keep from making the same mistakes twice) if you don’t ask.

Ask how your entries looked when you submitted them, or request copies of the fixed files. If you hand over files and don’t ask any questions, you’re more likely to make the same mistakes twice. Bottom line: Stay involved. You won’t know how you’re doing with your entries unless you ask.

6. Know what payroll notices and zero returns are.

Pro tip: The day you request an Employer Identification Number (EIN) from the IRS, many business owners answer “YES” to the question “Are you going to have employees?” That starts the clock with the IRS. Even if you haven’t hired your first employee yet, the IRS is going to be looking for a zero return (Form 941) to be filed by the deadline date. The EIN notice should tell you what returns are going to be due. If you don’t, you risk getting fines—something Dan says many businesses aren’t aware of.

The same goes for sales tax. If you want to sell merchandise, you’ll get a sales tax certificate when you start your business. Even if you haven’t sold a single thing yet when it’s time to file, be sure to see if you’re required to file a zero return or risk getting a fine.

7. Pay close attention to how line items are categorized.

Not every payment you make as a company is classified as an expense, so be careful where you file certain line items on your income statement. Take loan payments, for example. Paying down the principal of a loan is not considered an expense, so has to be written to the right place. This may not seem critical, but it’s actually quite important—especially when it comes to deductions and taxes.

8. Know what expenses are tax deductible.

As a small business owner, your mindset should be that everything is deductible—period. Whatever you charge in the course of doing business, deduct it. Chances are there are more things that are deductible than aren’t deductible. Your CPA or tax preparer will make the final decision on what’s allowable at tax time.

9. Know what qualifies as “write-offs.”

It’s common to confuse “deductions” with “write offs,” but they’re not the same thing. Write offs are “bad debt,” meaning money you’ll never get back. A write off is an accounting term for money that was counted as income, but it’s income the business doesn’t ever see.

10. Understand that even if you’re paying someone to handle your financials, you’re still the only one ultimately responsible.

At the end of the day, only you—the business owner—are responsible for issues with your finances. Even if you had a CPA prepare your return, you’re the party responsible for anything fraudulent. That’s why it’s so important to take responsibility for your financials. Just because you’re paying a professional doesn’t mean it’s guaranteed to be accurate, and also doesn’t mean you’re not responsible for issues.

11. Be aware of the compliance laws that might affect your business.

Compliance falls into a few different categories. When it comes to hiring-related compliance issues, it’s best to get the help of a professional to make sure you’re correctly classifying employees, contractors and freelancers. For example, if you’re paying anyone $600 or more in a calendar year, you’ll need to provide a Form 1099 at the end of the year. For employees, you’ll have to take care of things like withholding.

Tax compliance is another important issue. Sales tax and income tax (estimated payments, self-employment taxes, etc.) will depend on how you’re set up as a business.

12. Know the difference between paying yourself a draw vs. paying yourself a salary.

With draws, an owner can pay themselves a non-tax deductible amount. A draw is non-deductible because it’s not a salary, but be careful with the size and frequency of draws. For example, you can set yourself up for an audit if the IRS notices an unreasonably small salary but also notes larger draws posted. They might think you’re trying to pay yourself while skirting payroll taxes.

Also be careful not to record a draw as a payroll expense. That draw won’t end up on your W-2, which will misstate your financial statements and potentially set you up for a big tax bill at the end of the year.

Another note about salaries: If your business is set up as an S-Corp, you have to prove that you’re paying yourself a reasonable and affordable salary. An accountant can help you estimate your salary so it won’t raise any red flags. While you can make draws as an S-Corp, you’re required to post a salary as an owner. However, with an LLC or sole proprietorship, there’s no requirement to pay yourself a salary. It will all depend on how your business is set up on day one.

This article was written by Carey Wodehouse from Business2Community and was legally licensed through the NewsCred publisher network.

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