Accounting for Small Business

Accounting is a complex discipline. But if you’re not an accountant yourself, you don’t need to know everything about accounting — only the practices and parts that have to do with your financial operations, legal obligations, and business decisions.

Whether you’ve just launched your business or are a veteran, the following section is important. These steps will introduce you to the accounting process (if you’re not yet familiar) and set you up to scale your business in a sustainable way.

Note: This is simply an overview of the discipline of accounting. We recommend conducting more research and potentially hiring a professional accountant to ensure you don’t miss any financial or legal obligations.

1. Open a bank account.

For your first order of business, decide where to keep your money. This may vary based on your business’s legal structure. If you’re a Sole Proprietor, you don’t have to — but we still recommend it.

Having a separate bank account for your business income and expenses will make your accounting easier. You’ll only have one account to monitor for bookkeeping and tax purposes, and your personal income and expenses won’t get entangled with your business ones. Believe me — only having to look at one set of bank statements is a lifesaver during tax season.

Look for a bank that has a local branch as well as robust online banking. Also, be sure the bank can integrate with your point-of-sale (POS) system and other technological needs. Business bank accounts typically charge more than personal accounts. Check these numbers before committing to a bank and a business account.

We recommend opening two accounts — one checking account and one savings account, the latter in which you’ll stash money for taxes and unforeseen expenses.

2. Track your expenses.

Raise your hand if you’ve heard anyone say, “Hey, I can write that off!” I heard my parents say that a lot when I was younger — they’re both entrepreneurs — and I had no idea what it meant.

It wasn’t until I became an accountant that I came to understand tax deductions: they are a wonderful yet pesky benefit of owning a business.

Many business expenses are tax deductions — expenses that deduct from what you owe in taxes. The catch? In order to claim a deduction, you need to keep a record of that expense.

Historically, keeping, filing, and reviewing paper receipts was a time-consuming task. (My mom used to pay 10-year-old me to organize receipts by date and highlight the vendor and total amount … now I understand why.)

Today’s entrepreneurs have it much easier. Software, apps, and cloud-based bookkeepers have made it a breeze to track expenses and not have to keep hundreds of receipts lying around.

Now, let’s discuss the expenses and supporting documentation you’ll be managing. While we can’t cover every possible deduction, here are a handful you should definitely keep a record of. (Why? Because they’re easy to mix up with personal expenses … and SARS knows it.)

Advertising and marketing expenses, such as paid social media ads, website hosting fees, and business cards
Business travel, such as plane tickets, hotels, and rental cars
Home office expenses, such as Wi-Fi, equipment, and mobile phones
Vehicle-related expenses, such as mileage and petrol
Meals and entertainment, such as trips to coffee shops, cafes, or concerts (unless you don’t attend these events … then they’d be considered Gifts)

In case you need to support these expenses, we recommend that you keep the following documents. (Rule of thumb: When in doubt, keep everything.)

Receipts (paper and digital)
Bank and card statements
Bills (for utilities, phone, internet, etc.)
Invoices and documents showing proof of payment
Financial statements from your bookkeeper or bookkeeping software
Tax returns from previous years

3. Choose a bookkeeping method.

Ah. If only bookkeeping meant hoarding the paperbacks I overbuy from my local bookstore … I’d be really good at that.

Unfortunately, bookkeeping isn’t always as fun. It’s another important accounting term that refers to the day-to-day recording, categorizing, and reconciling of transactions. Basically, bookkeeping keeps you from spending and making money without tracking it.

Bookkeeping is an ongoing task. Technically, you should be doing it every day, but we all know life can get in the way. Ideally, you should complete your bookkeeping every month so you can keep a thumb on the pulse of your income, expenses, and overall business performance.

Before we dive into how to do your bookkeeping, let’s cover the two main bookkeeping methods.

Cash Method

The cash method recognizes revenue and expenses on the day they’re actually received or paid. This method is the simplest for small businesses because it doesn’t require you to track payables or receivables and reflects whether or not your money is actually in your account. (Only Sole Proprietors and Partnerships are allowed to use this method, if they meet certain criteria.)

Accrual Method

The accrual method recognizes revenue and expenses on the day the transaction takes place, regardless of whether or not it’s been received or paid. This method is more commonly used as it more accurately depicts the performance of a business over time. The only thing it doesn’t show, is cash flow — a business can look profitable but have zero in the bank.

Now, let’s talk about how you can do your bookkeeping.

You could keep your own books with a spreadsheet (like Excel). This method is best for individuals or small businesses with low budgets.
You could outsource your bookkeeping to a bookkeeping service.
You could hire a full-time bookkeeper — if your budget allows.
You could use bookkeeping and accounting software.

4. Set up a payroll system (if necessary).

Do you plan on hiring employees or contractors? Perhaps you’re managing on your own for now but are considering expanding in the future. Regardless, you’ll need to understand and secure a payroll system.

Payroll is another tedious yet required part of accounting. Thankfully, there’s plenty of software that can help you. (Hallelujah for modern day technology, right? 🙌🏼)

5. Educate yourself on your tax obligations.

Taxes are inescapable. Thankfully, they’re easy to prepare for. The best way to do so is to educate yourself on your business’s tax obligations, keep accurate records.

Paying taxes as a small business is slightly more complicated than it is as an individual. The amount and type of taxes you file will depend on a few things: your business’s legal structure, if you have employees (and how many), and if you are registered for VAT.

This part of accounting — tax obligation and collection — is particularly tedious. We highly recommend that you work with a professional to at least ensure your business is following the proper procedures and laws.

6. Learn and practice the basics.

Regardless of how frequently you do your own business accounting, it’s wise to understand accounting basics. If you can read and prepare these basic documents, you can understand your own business’s performance and financial health.

Here are the documents and calculations that we recommend mastering, even if you work with or have hired an accountant. Why? These all provide valuable snapshots and measures of your business performance. Being able to create and read these documents will give you greater control of your company and financial decisions.

An income statement, which shows your company’s profitability and tells you how much money your business has made or lost.
A profit and loss (P&L) statement, which is a snapshot of your business’s income and expenses during a given time period (e.g. quarterly, monthly, or yearly).
A balance sheet, which is a snapshot of your business’ financial standing at a single point in time.
A balance sheet will also show you your business’s retained earnings, which is the amount of profit that you’ve reinvested in your business (rather than being distributed to shareholders).
A cash flow statement, which analyzes your business’s operating, financing, and investing activities to show how and where you’re receiving and spending money.
A bank reconciliation, which compares your cash expenditures with your overall bank statements and helps keep your business records consistent.
Your gross margin (or gross income), which is your total sales minus your Cost of Sales — this number indicates your business’s sustainability.

7. Consider a professional service.

As important as it is to understand how business accounting works, you don’t have to do it alone. That’s where professional accounting services come in.

If your budget allows, we highly recommend hiring a professional to help with your accounting.