It may make sense to do your bookkeeping until your cash flow increases.
This cannot be very comforting to those unfamiliar with managing their books. It’s easy once you have the basics and tools to help.
We’ll get right into it. We will cover the basics of small business accounting and the best software.
Open a business account
After officially incorporating your company, you must open a business bank account. Open a separate bank account for your business to avoid confusion between personal and business finances.
You can also protect your assets in the event of a lawsuit, an audit, or bankruptcy. Vital financial records will increase your chances of getting additional funding from creditors or investors.
Open a business account and then a separate account for savings to organize your finances and plan for taxes. Open a savings account, and set aside at least 25 percent of your income to pay your self-employed tax withholding. High earners must set aside more revenue because they fall under higher rates brackets.
You can get a business credit card once you have a bank account. Shop around to find the best deals. Some business accounts have monthly fees; others offer better benefits, such as free airline miles or special services.
Establish your bookkeeping system
The accounting process that involves recording, organizing, and reconciling financial statements is called bookkeeping. You can manage your books using a simple Excel sheet if you choose the DIY route. You can also hire a local or cloud-based bookkeeper to do your readers.
Are you based in the US or elsewhere? Decide whether you want to use cash or accrual accounting. Each method is explained below:
Cash Method: Recognizes income and expenditure when they are received or paid.
Accrual Method: Recognizes revenue and expenses as soon as the transaction occurs (even if your bank has not yet received cash). This method requires you to track payables and receivables.
You can keep it simple by using cash for the entire accounting period. At the end of the year, you will need to make one adjusting entry to account payables and receivables. Canadians, however, must use the accrual system since they must report their income during the same fiscal year that they earned it.
Keep track of your expenditures
Tracking expenses is an essential step in building financial statements, preparing tax returns, and monitoring your company’s growth. Keep receipts, tax returns, and other records in a folder or store them electronically using Shoeboxed.
Some of the most common costs you will need to include are:
Business travel. Keep receipts of all expenses incurred while on business travel, including accommodation, airline, bus, or train costs.
Meals, entertainment, and travel. Business meals can be claimed as expenses if they are adequately documented.
Vehicle expenses. Fuel and maintenance expenses for vehicles are often classified as business expenditures when correctly recorded.
Receipts of gifts. Gifts given to clients may be classified as business expenses. If the recipient is present when the gift-giver enjoys their reward (such as a concert), it would be considered entertainment, not a gift.
Home Office Receipts. You can claim tax relief for some of your bills if you use it for your business.
You can reduce your overhead costs by running your business at home. In addition, you may be eligible for tax breaks. You can, for example, deduct the cost of your home Internet, cell phone, and other services you use to run your business.
Create a payroll system
Your business may start with only you as the sole employee, but it could quickly grow to include other essential team members. You’ll have to decide whether you’re hiring an independent contractor or an employee.
You’ll have to keep track of how much each contractor is paid. US business owners may be required to file 1099 forms for each contractor at the end of each tax year. You’ll also need to store the names and addresses of all contractors on your computer for this purpose.
You’ll also need to create an employee schedule and ensure you withhold the correct taxes. Many accounting solutions include payroll features.
Tax obligations
Your business structure determines the tax amount you are required to pay.
You can claim your business income if you are self-employed. You’ll also need to withhold tax from your payment and remit it to the government by the amount a business would typically deduct.
In contrast, corporations are taxed separately from their owners. You are taxed on your business income as an employee when you have a corporation.
Discover the sales tax and import duty
Consider additional costs, such as sales or income taxes, when calculating your tax obligations. You may import items from abroad if you run a dropshipping company.
It’s also a difficult concept to grasp. Determining whether your business is based on origin or destination is essential. In an origin-based State, tax is charged based on your business’s location. If you sell in a destination-based state, the tax will be based on where the customer lives.
Companies based in the US are not taxed on international purchases. If it seems confusing, check with your accountant to determine the specifics of your state’s international sales tax laws.
How will you be paid?
You can only make money once you accept payments. Small business owners have various payment processing tools, including Paypal, Stripe, and GooglePay.
You can accept credit or debit card payments if you own a Shopify store in North America. You can avoid the hassle of setting up a third-party account. Users of third-party payment processors must pay an interchange fee plus rate (approximately 2.9% + $0.30 for each transaction).
You’ll need to use a POS system if you accept payments offline. Payment processing costs can vary depending on which method you choose.
