-
Commitment to our readers
18 years
Helping you save money
Reviewed
by experts
Cited by
major publications
Finder maintains full editorial independence to ensure for our readers a fair assessment of the products, brands, and services we write about. That independence helps us maintain our reader's trust, which is what keeps you coming back to our site. We uphold a rigorous editorial process that ensures what we write and publish is fair, accurate, and trustworthy — and not influenced by how we make money.
We're committed to empowering our readers to make sound and often unfamiliar financial decisions.
We break down and digest information information about a topic, product, brand or service to help our readers find what they're looking for — whether that's saving money, getting better rewards or simply learning something new — and cover any questions you might not have even thought of yet. We do this by leading with empathy, leaning on plain and conversational language that speaks directly, without speaking down.
What is small business accounting?
Small business accounting tracks all the money that moves through your business. It includes all financial activities within your company, such as sales, expenses, payroll, tax preparation and more.(1) Effectively managing your business’ accounting can make it easier to attract investors and funding and avoid tax penalties and fees.
Small business accounting can also help you make informed decisions about the direction of your business, such as when you can afford new equipment or need to cut back on spending. Spotting trends is another benefit of strong accounting records, like which products are your best-sellers or what seasons make you the most money.
While pencil and paper were once popular, many businesses now use online accounting software to streamline their expenses and access their records from anywhere.
3 types of financial reporting
As part of your basic accounting, you’ll need to keep track of financial statements, including these three crucial reports:
- A balance sheet indicates what a company owns in assets and owes in debt at a specific time. It helps business owners understand immediate and near-future budgetary needs.(2)
- An income statement shows generated revenue over a specific time, like a month, quarter or year. It also includes costs and expenses and represents the company’s profit or loss.(3)
- A cash flow statement details the inflows and outflows of cash. While an income statement represents total revenue, a cash flow statement documents when the cash was collected.(4)
Small business accounting vs. bookkeeping
Small business bookkeeping focuses on recording daily transactions and includes tracking expenses, sales and payments.(5) It is essential for maintaining financial records, which lay the groundwork for accounting. That’s why bookkeeping software focuses on documenting customer and vendor transactions, like recording sales and paying bills.
Small business accounting includes bookkeeping as well as all other financial aspects of a company, such as payroll, marketing budgets, real estate expenses and more. Accounting software for small businesses encompasses a wide range of features, like financial analysis and tax preparation.
So, while small business bookkeeping sets the foundation by recording daily transactions, small business accounting includes all financial aspects of a company and builds on this information to offer insights and strategies for the business.
6 steps to set up your business accounting system
How you set up your business accounting system depends on your type of business, the products or services you sell and if you operate wholly online or in person. Here’s what the process might look like.
1. Choose your accepted payment methods
How will your clients pay for your goods or services? Consider your customer base and type of store. While in-person businesses may accept cash, online services will be fully electronic. Selecting your accepted payment methods impacts how you’ll manage transactions, and a smooth transaction process is essential for accurate bookkeeping.(6)
2. Set up business bank accounts
Opening a dedicated business bank account helps separate business transactions from personal finances. Many top business checking accounts can also integrate with accounting software to help streamline your expense tracking, tax saving and invoice management. For example, Novo's Small Business Checking account connects with Quickbooks, Xero, and more. While, Grasshopper gives access to Autobooks, a free accounting and bookkeeping service available to all account holders.
Unlimited Cashback Rewards with Grasshopper Business Account
Earn up to 3.55% APY on savings and 1% cash back. Plus, unlimited transactions with no monthly fees.
- Unlimited 1% cashback rewards.
- Up to 3.55% APY on savings and up to 1.80% APY on checking.
- Instantly deposit checks, pay bills, and get access to instant virtual cards with 24/7 mobile and online banking.
- Open an account online today in as little as 5 minutes.
3. Organize bookkeeping, accounting software and payroll systems
Evaluate whether you’ll track records manually or need accounting software, which can help with inventory management, invoicing and tax prep. Research and compare accounting software that offers the features you need for your small business. Opt for platforms that offer trial periods to test their functionality and ensure they meet your business’ needs.
4. Determine tax obligations
Start by familiarizing yourself with the local, state and federal tax requirements relevant to your business type and industry. Heavily regulated industries, like selling cannabis products, will have different legal and tax obligations than a freelance writer or graphic designer, for example. Consult with a tax professional annually about the specific requirements of your business to reduce your risk of errors and penalties.
5. Develop invoicing and payment procedures
If you’re selling goods or services with established milestones, such as a construction project, you’ll need to establish clear payment terms and deadlines. Develop invoicing that shows when payments are due and implement a system to track the payments, due dates and unpaid or overdue invoices to maintain consistent revenue. Have a plan of action in place if a client refuses to pay and understand your legal recourse if you run into trouble.
6. Conduct financial reviews
Reviewing your accounting regularly is essential for maintaining good records and identifying growth opportunities or areas needing attention. If your business accounting is straightforward, you may be able to do this yourself. However, a financial expert or accounting software may better assess your financial statements and provide insights into your business’ financial health.
Should I DIY or use an accounting software?
Deciding between doing it yourself or using accounting software depends on various factors. Here are some things to consider:
- Complexity. Businesses with limited transactions, inventory and expenses may get by doing it themselves. However, those with large sales volume, international transactions or in heavily regulated industries will probably need bookkeeping software.
- Budget. Doing it yourself is usually cheaper upfront. However, purchasing accounting software may save you more in the long run with accuracy and automation.
- Time. Learning how to use accounting software for small businesses takes time, but can be more efficient than doing it yourself, especially as your business grows.
- Legal obligations. Most accounting software comes with tax preparation and legal compliance for small businesses. Failing to understand these complex laws yourself may result in fees, penalties or legal action against your company.
- Strategic financial advice. Accounting software can offer insights into your business’ financial health and help with budgeting, forecasting and decision-making. If you need this type of insight, accounting software can help.
As your business evolves, your accounting needs may change. While doing it yourself may work for some years, if your finances become complex or tax laws change, using accounting software may become beneficial. Consult a financial expert to understand more about your business’ specific needs.
5 popular online accounting software
Choosing the best online accounting software depends on your business’ specific needs, such as your budget and feature requirements, like third-party software integration. Here are five top small business accounting software to compare.
- Quickbooks. One of the most popular accounting software on the market, Quickbooks users say it’s easy to learn and integrates smoothly with third-party apps. However, it lacks industry-specific features, like lot tracking and QR code scanning.
- Xero. Cloud-based software is the key advantage of using Xero for your accounting, as you can access your data from anywhere. However, it comes with a steeper learning curve than most competitor products and may overwhelm some users.
- Zoho Books. If you need a cost-effective solution, Zoho Books offers a free plan, plus a range of paid plans to fit your budget. But while it offers a wide range of features, its third-party integrations are somewhat limited.
- Freshbooks. If you always have your phone on hand, Freshbooks allows you to view and send invoices, answer customer questions and more through its mobile app. However, its highest-tier plan only comes with access for two employees, and it charges a fee to add more.
- Wave Accounting. Unlimited users, unlimited invoicing and custom templates — all for free — make Wave Accounting appear hard to beat. But there’s no live support unless you pay for an additional service, like Wave Payroll. And it doesn’t allow any third-party integrations.
Bottom line
Understanding and maintaining the financial health of your business is crucial. By keeping your books up-to-date and accurate, you gain insights to make informed decisions about marketing, expansion and more. To help manage your finances, consider the best free business checking accounts that integrate with accounting software.
Ask a question
More guides on Finder
-
33 Boring Businesses That Make Money in 2025
Find out which boring businesses generate steady income and how to fund your path to success.
-
What is a sole proprietorship?
Run your own business and keep all the profits through a sole proprietorship.
-
What is an LLC?
An LLC can provide certain tax benefits and liability protection to its members.
-
How to do payroll
Processing payroll can be done on your own or with the support of software or accounting professionals. See a step-by-step guide here.
-
How to start a franchise
To start a franchise business, you’ll need to evaluate costs and financing options, write a business plan, hire employees and more.
-
How to hire an employee
Learn how to hire employees for your business in 13 steps, from writing the job description to finalizing your new hire.
-
How to write a business plan
Your business plan should include a mission statement, goals and strategies. See a step-by-step guide to writing a successful business plan.
-
How much does it cost to start a business?
Startup costs can be steep, but there are various funding options to help make launching your business more affordable.
-
New business statistics: 2005 to December 2024
Data related to the number of business applications lodged in the US each year, along with how many of those may turn into fully fledged businesses.