15 Secrets of Best Accounting Practices for Small...

Do you know the best accounting practices for your small business?

When starting a small business, many entrepreneurs don’t think about the financial (or legal) aspects of running it.

Even though it doesn’t involve the most fun tasks and can be time-consuming, it’s a critical part of your success.

Your business finances can present various challenges, such as financial discrepancies caused by inefficient or inaccurate accounting practices.

And, in the worst-case scenario – legal troubles, costly penalties, and fines.

(Don’t worry; I’ll discuss how to avoid this.)

Like any skill, you can learn how to manage your business finances and budget by understanding the best accounting practices to improve your efficiency.

Along with efficiency, you should also create a streamlined process for paying your bills and yourself.

In this post, we are discussing the accounting principles and practices you need to know for accurate financial accounting, the best business financial health, and stress-free money management.

Table of Contents

About the Best Practices of Accounting

It’s important to understand basic accounting practices.

These practices are critical so that your small business can produce the legally required, annual financial statement.

So, what are the essential business financial records to create? They include:

A Comprehensive income statement
An income statement
A cash flow statement (see this blueprint)
A statement of stockholders’ equity
The balance sheet

If you’re scratching your head right now, a professional accountant can help you understand these financial statements and their meaning.

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Generally Accepted Accounting Principles and Practices for Small Businesses

Generally Accepted Accounting Principles (GAAP) provide a standardized framework to guide financial reporting and ensure consistency, reliability, and transparency in financial statements.

Adhering to GAAP helps your small businesses maintain credibility with investors, lenders, and regulatory agencies.

Unlike larger companies, most small business owners don’t have an accounting department with an accounting team dealing with payroll processing, taxes, tracking expenses, and revenue.

However, contrary to popular belief, you don’t need a bachelor’s degree in accounting to properly manage your financial information.

Implementing GAAP in Small Business Accounting

To effectively implement GAAP, small businesses should invest in reliable accounting software and financial management tools that support GAAP standards.

Your accounting personnel should also be trained and educated about GAAP principles to help maintain adherence and identify areas of improvement.

Top 15 Best Accounting Practices for Small Businesses

If your bank statements and accounting processes seem overwhelming, these accounting best practices can help with your financial reporting and making strategic decisions to ensure smooth sailing when managing your finances.

Follow these 15 best accounting practices to ensure success for your small business:

Hire a Bookkeeper

The need for an accountant or bookkeeper grows as your business finances get more complicated.

Bookkeepers and accountants perform similar tasks but have a different set of skills.

Accountants provide consultation and analysis and are qualified to provide advice on your taxes.

These financial advisors can help you with any business decision about finances.

A bookkeeper’s main role is to keep you financially organized and record transactions.

Whichever you choose, verify the bookkeeper’s training and qualifications and that you choose a certified public accountant if you go that route.

While I recommend you find a bookkeeping system like QuickBooks, Gusto, or FreshBooks, a bookkeeper or accountant can provide professional help to manage everything for you.

For example, I use this accounting software and my accountant has access to it, which makes it easy for him to prepare for taxes.

The right bookkeeping system also makes it easier to file taxes so that you get the most deductions and pay less in United States taxes.

Tax regulations and laws change and are notoriously complicated. If not followed explicitly, you could end up paying more in fees and taxes.

Check out these books on taxes to learn more.

A bookkeeper can help you track expenses and annual revenue and pull your monthly financial statements, such as your income statement, reports for your bank accounts, statements for your credit cards, and your balance sheet.

Some accounting software, like QuickBooks, allows you to add him or her to your account so they have direct access to manage your finances.

An accountant or bookkeeper can prove an invaluable resource and make financial management much easier.

Determine Which Accounting Method to Use

There are two standard accounting methods you can use for your finances – accrual and cash basis accounting.

Both methods have their own advantages and disadvantages, so it’s important to understand how they work in order to determine which one is best for your business.

Cash-Basis Accounting

Cash-basis accounting is the simplest method and records transactions only when cash actually changes hands.

This means that revenue is recorded when it is received and expenses are recorded when they are paid.

Advantages

Easy to understand and implement.
Gives an accurate representation of cash flow.
Requires less record keeping compared to accrual accounting.

Disadvantages

Does not provide an accurate picture of a business’s financial health.
May result in incorrect reporting of income and expenses, especially when transactions are recorded at varying times.
Not suitable for businesses that extend credit to their customers or take on debt.

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Accrual Accounting

Accrual accounting records transactions when they occur, regardless of whether cash has been exchanged.

This means that revenue is recognized when it is earned and expenses are recognized when they are incurred.

Advantages

Provides a more accurate representation of a business’s financial health.
Allows for better tracking of revenues and expenses over time.
Required by law for businesses that exceed a certain threshold.

Disadvantages

Can be more complex and time-consuming to implement and maintain.
May not accurately reflect cash flow, as revenue can be recognized before payment is received.
Requires careful tracking of accounts payable and accounts receivable.

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Deciding the Best Accounting Method

When deciding which accounting method to use, you should consider your business’s size, industry, and financial goals.

If you are a small business with simple transactions and want an easy way to track cash flow, then cash-basis accounting may be a better option.

However, if you have a larger business with more complex transactions and want a more accurate picture of your financial health, then accrual accounting may be the way to go.

Start a Budget

One of the best accounting practices for any business is to start a budget.

The smartest business owners create a budget each year.

To budget efficiently, you must proactively address challenges in your budgeting process and manage your money well.

No business or company can operate without enough money coming in each month and year.

The key accounts to pay attention to are inventory management, expenses or debt payments, and monthly cash inflows.

If you do nothing else, make sure you manage these accounts so you can determine how much money you need to bring in to cover your expenses and make profits.

It’s also helpful to understand sales of your product income.

Keep Your Personal and Business Finances Separate

As your business grows and you legitimize it by forming an LLC, you will want to open a business bank account.

That way, you can separate your personal accounts from your business expenses and income.

Separating your accounts also proves to tax authorities that you have a legitimate business rather than a hobby.

Separate banking allows for proper business financial accounting without mixing up personal and business expenses and revenue.

It simplifies things and clearly shows what you earn and spend in your business.

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Following these best accounting practices will make the whole accounting process less complicated.

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Update Your Chart of Accounts

The accounting process starts with updating your chart of accounts, which lists and describes all your accounts.

The key is creating meaningful account categories for more accurate financial records.

When you set these up, you want to define accounts that align with financial reactions, such as expenses, revenue, assets, equity, etc.

You also want to review and optimize your chart of accounts regularly to keep track of how much you spend on customer acquisition, your break-even point, and ROI.

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Eliminate Your Spreadsheets

I know this one will be hard for many of you, but if you use spreadsheets, you’re wasting A LOT of time on your accounting tasks than using automated methods that streamline the process.

You also risk making mistakes because of human error, which can throw all your numbers off.

Using accounting software like FreshBooks, Gusto, and QuickBooks is much more efficient.

It requires fewer basic steps and less work.

Automate Your Invoicing

Along with eliminating your spreadsheets, accounting software can help automate invoicing, reconciliation, and tracking expenses.

When I set up my accounts in QuickBooks or FreshBooks, it automatically tracked my expenses and income (another good reason for separating your personal accounts from your business ones).

Automating simplifies invoice processing if you have regular customers whose information remains the same.

It automatically fills in the customer and product information, or you can save templates, verify the information quickly, and send the invoice in no time at all.

Both QuickBooks and FreshBooks are really the best most essential tools for any small business.

Use Accounting Software

You can see a pattern here: Accounting software makes dealing with finances much easier.

I have used both FreshBooks and QuickBooks, and they are both great options.

They can automatically track your expenses and income so you can reconcile the information and categorize all your financial transactions with hardly any work.

Even if you’re a solopreneur, it’s worth investing in software to eliminate mistakes and avoid fees and fines.

These tools help you find errors easily and resolve issues quickly. You can use your financial statements to reconcile and validate your information.

FreshBooks is perfect for beginners as it is simpler to use, and QuickBooks works for new and experienced business owners.

Gusto is a great tool for hiring, paying, and managing team members all in one platform. You will need it if you are an S corp or have employees.

Regularly Download Your Banking Transactions and Reconcile Your Financial Statements

To make managing your finances easier, download your business transactions (bank statements) and reconcile financial and bank statements regularly.

You can even link your bank accounts in this software so all your transactions automatically transfer there.

The longer you wait, the more financial errors and discrepancies go unchecked.

Things like unauthorized withdrawals and disbursements can take a huge toll on your finances.

Pay Your Taxes Quarterly

Self-employment taxes add up over time, so I recommend paying your taxes quarterly or throughout the year.

If you don’t, you’ll have a large payment to make when you file your tax returns. Plus you’ll end up owing a penalty too.

Paying quarterly eases the tax burden a little.

Also, keep accurate tax records of all the payments you make so your accountant won’t get any surprises.

*Note: Although I’m a business lawyer, I am not a tax professional or accountant, and things like taxes are another reason to hire one.

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Block Out Time for Business Finances at Least Once a Week

I personally choose a specific day of the week to work on taxes and block out time in my calendar.

Every Friday, I review my Quickbooks online.

Some of my tasks is reconciling my accounts, checking for errors, and reviewing my income and outgoing money to verify I’m on track to achieve my weekly, monthly, and yearly financial goals.

Evaluate Your Financial Data Monthly to Stay on Track

Similar to blocking out time each week to work on your banking, use your bank statements to do a financial analysis.

This includes a monthly report, to understand your key financial performance indicators (KPIs) and the primary drivers of income in your business.

Your accountant can do this for you, as an accurate analysis requires several techniques, including trend and cash flow analysis and financial forecasting based on historical data.

Track Contractor or Employee Time to Understand Profitability

If you have independent contractors or employees, have them track their work time with a tool like Toggl.

This will show you where employees may need more support and see how much employee time and project-related expenses cost you.

Sometimes, employees are simply inefficient, and other times, they may struggle with specific tasks.

If your project or job costs are high, you can find ways to reduce expenses, such as finding less expensive tools, promoting more of your offers or services, or finding other solutions to reduce costs.

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Keep Accurate Records

Most importantly, to have a successful business, keep thorough records.

Your record-keeping practices can make or break you.

This is another area where accounting software can save you time and help you streamline your financial operations.

It can also help during tax time if you get audited.

An IRS tax audit is no joke, and not having detailed finance records can make this a nightmare.

It can cost you a lot of money if you need to hire an accountant, not to mention the incredible amount of time you will waste going through financial statements, bank records, tax write-offs, and other documents.

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FAQs on the Best Accounting Practices

Below are answers to common questions about small business best accounting practices.

What are the 5 basic accounting principles?

While there are more than five basic accounting principles, the top five generally accepted accounting principles (GAAP) issued by the Financial Accounting Standards Board are:

The Matching Principle: Your expenses should match the revenues in the same accounting period, and you should report them during the time you incurred the expense.

The Cost Principle: Recording your assets and their depreciation as well as your expenses using the acquisition price of anything you spend money on

The Revenue Recognition Principle: The period you recognize revenue through your company income statement

The Objectivity Principle: Keeping your finances and accounting information accurate and free of any personal opinions

The Full Disclosure Principle: The data on your financial statements should be complete and not misleading.

Note: Public companies must follow GAAP compliance with their accountants. Check with your accountant or bookkeeper for clarification.

What is the best accounting practice?

See above for the best accounting practices. Here’s a recap of some of the most important accounting practices examples:

Separate your business and personal finances with an LLC or any other business entity.
Create processes and SOPs and document them.
Keep your finances organized. This is much easier with accounting software.
Track your income and expenses.
Reconcile your accounts regularly.
Protect your sensitive financial data.
Be sure to comply with all tax rules and legal regulations.

What are the top three accounting principles?

Here are the top three accounting principles:

1. Accrual Accounting Principle:

This principle states that all financial transactions should be recorded when they occur, rather than when cash is exchanged.

This means that revenue and expenses are recorded in the period they are earned or incurred, even if payment has not been made yet.

2. Going Concern Principle:

This principle assumes that a business will continue to operate for the foreseeable future. Therefore, assets and liabilities are recorded with this assumption in mind.

3. Matching Principle:

This principle states that expenses should be matched with the revenue they generate in a specific period.

For example, if a business sells goods in one month, but the customer will not pay until the following month, the revenue and related expenses should still be recorded in the same month.

What are the 5 major things in accounting?

The five main account categories to keep track of are equity, assets, liabilities, income, and expenses.

While there seem to be many account types, they all generally fall under these five categories.

Final Thoughts on Best Accounting Practices

Maintaining sound accounting practices is pivotal for the success and longevity of your small business.

While the financial side of running a business might not be the most thrilling part, mastering these principles can save you from potential headaches and ensure your business stays on a solid financial footing.

Having the right financial and accounting systems in place can mean the difference between running a profitable business and returning to a traditional 9-5.

I would argue that managing your finances well is the most important thing indicative of business success.

Since finances are so critical, every smart business plan should cover financial reporting, a budget, how you’ll make money, and the accounting method you choose.

Keeping accurate financial reports and managing your money well ensures a thriving business and puts on you in a good financial position.

By implementing these best practices, you can improve efficiency, streamline processes, and make informed financial decisions to help your business thrive.

Remember, consistency is key, and taking the time to regularly review and manage your finances will pay off in the long run.

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