What are the most common accounting practices for small businesses?

1 Accounting methods

The first accounting practice you need to decide on is your accounting method. This is how you record your income and expenses for tax purposes. There are two main methods: cash and accrual. Cash accounting means you record transactions when you receive or pay cash. Accrual accounting means you record transactions when you earn or incur them, regardless of when cash changes hands. Each method has its pros and cons, depending on your business size, industry, and cash flow. Generally, cash accounting is simpler and more suitable for small businesses with low inventory and predictable income. Accrual accounting is more complex and more suitable for businesses with high inventory, long-term contracts, or fluctuating income.

4 Financial statements

The fourth accounting practice you need to master is preparing and analyzing your financial statements. These are the reports that summarize your business financial activities and results. The three main financial statements are the income statement, the balance sheet, and the cash flow statement. The income statement shows your revenue, expenses, and profit or loss for a period of time. The balance sheet shows your assets, liabilities, and equity at a point in time. The cash flow statement shows your cash inflows and outflows from operating, investing, and financing activities for a period of time. You should prepare your financial statements regularly, either monthly, quarterly, or annually, and use them to assess your profitability, liquidity, solvency, and efficiency.

5 Budgeting and forecasting

The fifth accounting practice you need to implement is budgeting and forecasting. These are the processes of planning and estimating your future income and expenses. Budgeting is setting your financial goals and allocating your resources accordingly. Forecasting is projecting your expected financial outcomes based on your current and historical data and assumptions. You should create a budget and a forecast for your business at the beginning of each year and update them as needed throughout the year. You should also compare your actual results with your budget and forecast and identify any variances and causes. Budgeting and forecasting can help you control your spending, optimize your cash flow, and adjust your strategies.

6 Tax compliance

The sixth and final accounting practice you need to adhere to is tax compliance. This is the obligation to file and pay your taxes on time and accurately. As a small business owner, you may have to deal with various types of taxes, such as income tax, sales tax, payroll tax, and property tax. Each tax has its own rules, rates, and deadlines, depending on your business structure, location, and industry. You should consult a tax professional to help you understand and comply with your tax obligations. You should also keep track of your tax deadlines, calculate your tax liabilities, and file your tax returns and payments on time. Tax compliance can help you avoid penalties, interest, and audits, and reduce your tax burden.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?