Are you completely lost when it comes to bookkeeping and accounting?
Starting an online small business can be both exciting and daunting. Becoming your own boss with a product or service you created, along with unlimited income potential, is a place many people would like to be in. That said, you will have an ever increasing to-do list to launch your business, and one of the first things you will need to take care of is setting up your accounting method. Keeping track of your finances will help you run your business more effectively.
In this beginner accounting guide, we will teach you just that – how to set up accounting for your online small business.
Deciding on an Accounting Method for Your Business
Businesses can use one of two types of accounting methods, and the only difference between the two is the way in which incoming and outgoing cash are recorded.
With cash-basis accounting, you only record financial transactions when you actually receive or make a payment, and it is reflected in your business bank account.
On the other hand, if you use accrual accounting, you keep a record of financial transactions even though you still have not received a payment for your work or your business bank account has not been credited for payments, and will only be later.
Deciding which method to use will depend on how your business is set up. If you are a sole proprietor or an independent contractor, then using cash-basis accounting may be the best option because it is easy to keep track of the money without having to use an accounting firm. You have no choice but to use the accrual accounting method if your business needs to comply to the generally accepted accounting principles (GAAP).
Business Bank Account for your Online Business
After you establish your business, you will need to set up a business checking account. This is required if you have a Corporation or Partnership, but if you are a sole proprietor, you do not necessarily have to have a business checking account, but it is still highly recommended. This account should only be used for business transactions to make it easier for you to keep track of your business finances and for setting aside a percentage of the money in the account to pay taxes.
If you have a Corporation or Partnership, you should not to mix your personal assets with your business assets. Many entrepreneurs run into tax or financial problems when they use their business funds to pay for personal items and vice versa. If you need help paying for business expenses, then look into getting a business loan, a business line of credit, or a business credit card so that you can establish business credit that is separate from your personal credit.
How to Use FreshBooks to Run Your Online Business
FreshBooks syncs to the cloud and uses 256-bit SSL encryption, which is a high quality encryption for Internet security. FreshBooks’ services help you create professional looking invoices, keep track of expenses and billable hours, and collect payments from clients. FreshBooks can also generate reports such as profit and loss statements, collected payments, tax summaries, and expense reports. It can be used anywhere since FreshBooks is compatible with any electronic device.
Keeping Track of Different Accounts
At this point, you will need to keep your accounts and transactions organized for tax and accounting purposes. Here are a few items you will need to keep a record of:
- Cash – This is a simple record of all incoming cash from customers and other cash receipts. Also, keep a separate record for every time you make basic payments to places like office supply stores, paying for a business lunch or paying travel expenses.
- Inventory – Your business may or may not require you to carry inventory, but if it does (for instance, if you run an ecommerce store), then any inventory that is sitting on the shelves and not being sold is lost revenue. You will need to keep track of what is being sold, how much of it is being sold, and discontinue the items that are not selling in order to raise your revenue.
- Sales/Accounts Receivable – In some cases, your customers may pay you once the job is completed. In other cases, you provide your customers with an invoice for a payment to be made at a later date that is usually within 30 days. Make sure you keep a separate record for closed sales and accounts receivable so that you are not collecting on clients who have already paid.
- Loans/Accounts Payable – You will need to have a clear idea of where your money is going in order to keep track of expenses. This account is a record of paid bills, taxes, vendors, and loan payments. You should also have a separate account for the goods you purchase and sell to help calculate your gross profits.
- Payroll – You may not have to worry about this if you are a sole business owner, but if you have one or more employees, then you are required to keep this account accurate and up-to-date for taxes.
- Retained Earnings – Any profits you make that is reinvested back into your business is retained earnings. Having a record of retained earnings is important for investors and lenders to look at if they are interested in funding your business.
- Equity – Keeping a record of equity is not important if you are the sole owner, but if you are in a partnership, then this record is essential so that each partner has a record of their ownership in the business. This information is also useful for investors and lenders to know.
Online Business Accounting 101 Reminder
Do not make your business accounting method more complicated than it needs to be. Moreover, stay on track with your accounting from day one. Falling behind on your accounting can create confusion and extra unnecessary work. Keep your business accounting organized so that you can focus on expanding your business and increasing your revenue.