How to Do Accounting: A Guide For Small Businesses

If you run a small business, you know that accounting is one of the most important aspects of managing your finances successfully. However, it can seem like an overwhelming task if you’re not familiar with accounting jargon and basic principles.

A solution to this problem is to delegate your accounting to a professional, but if the cost of outsourcing accounting to a firm is out of budget, you can still manage your finances yourself using basic accounting principles and accounting software.

To help you and your business succeed, we’ve broken accounting down into an easy step-by-step guide to help you become an accounting expert in your own right.

If you do think outsourced accounting is right for you, you can use our free quote-finding tool if you’re ready to start receiving tailored quotes from professionals. Just give us a few brief details, and we’ll match you up with trusted accounting firms, who’ll be in touch with tailored, no-obligation quotes for you to compare.

Accounting Terms Explained

Accounting often includes terms that might be unfamiliar to you if you’re new to the process. So, before we get int our step-by-step guide to accounting for small businesses, here’s an explanation of what basic accounting terms mean:

Accounts receivable and accounts payable

Accounts receivable is the money your business is owed for goods or services. On your balance sheet (more on this below), this is considered an asset.

Accounts payable is the money you owe to other businesses or suppliers for goods or services. This is considered a liability on your balance sheet.

Accounting period

The time period in which financial statements are prepared. This period could be based on the month, quarter, or year.

Assets

Everything your business owns. This includes tangible assets, like tools, property, or cash, and intangible assets like copywrites and trademarks.

Balance sheet

A sheet sums up the assets, liabilities, and capital of a business at a particular point in time. It’s essentially a financial summary of what your business owns, owes, and what its net value is.

Burn rate

Your burn rate is how quickly your business spends money. It’s an important factor to measure because it helps you manage your cash flow and business decisions.

To measure your burn rate, pick a time period, and subtract your cash at the end of that period from your cash at the beginning of the period, to be left with how much you’ve spent. Then divide this number by the number of months (or weeks, or days) in your chosen period. You’ll then be left with how much you spent each month (or week, or day) in that period.

Capital

This is the money you have to spend on or invest in your business. This amount doesn’t include assets and liabilities (more on this term later).

Cash flow statement

This shows where and how your business is receiving and spending money.

Corporation tax

The tax your company needs to pay, based on the taxable profits of the period.

Equity

This refers to the owner of a business has invested in the business. The amount is essentially the difference between assets (what the business owns) and liabilities (what the business owes).

Expenses

Expenses refers to money you spend that contributes to running your business or generating revenue for your business. This includes things such as rent, employee salaries, and purchases of equipment or materials.

Income statement

This is a financial document that shows how much money your business has made or lost during a given accounting period.

Liabilities

Liabilities are what your business owes. This can include credit debt, loans, payroll (employee salaries), and taxes.

Profit

Profit is the amount your business makes in a given period, minus all your expenses. It’s important to know this amount since this is what your business will be taxed on.

Revenue

Revenue is slightly different from profit, since it’s the total amount of money your business makes, without subtracting expenses (the money you’ve spent).

How to Do Accounting: Step-by-Step

We’ve laid out a step-by-step guide covering how to do accounting for your small business. These steps are:

1. Open a business bank account
2. Track expenses
3. Get tax educated
4. Set up payroll
5. Set up payment processes
6. Decide if you need to outsource

1. Open a business bank account

If your business is a registered limited company or corporation, having a separate business bank account is a legal requirement. If you’re a sole trader, you don’t legally have to open a business bank account, but we strongly recommend doing so.

Having a business bank account will keep your business transactions and your personal transactions separate, and so make it easier to track your expenses, and ensure your books are accurate. Having organised financial records will also make it easier for you if you want to look for funding in the future, as you’ll be able to present your numbers clearly.

2. Track and itemise your expenses

The easiest way to track your expenses is to keep documents proving your outgoing amounts. This includes:

• Receipts
• Bank and card statements
• Bills
• Invoices
• Tax returns

You can digitally scan and store these so you’re less likely to lose them. This can be easily done using an accounting software platform such as Xero, Quickbooks, or Freshbooks, which have tools for logging expenses and uploading document scans.

Alongside keeping your personal and business financial transactions separate, it’s a good idea to itemise your receipts by category so you can accurately track them. Once again, this can be done using accounting software. Categories expenses can fall into include:

• Business travel
• Advertising and marketing
• Meals and entertainment
• Home office

3. Get tax educated

It’s important to get educated on the taxes your business needs to pay. The most straightforward way to ensure you stay compliant is by keeping an accurate record of your expenses, setting aside money to pay your taxes, and ensuring you know how and when you need to pay your taxes.

Your business’s taxes depend on its legal structure, which determines what your business needs to pay, and what, if any, deductions your business may be eligible for:

• If you’re registered as a sole trader, you need to file out HMRC’s online Self Assessment tax return form by 31 January each tax year.
• If your business is a registered limited company or corporation, you need to pay corporation tax, and you need to calculate and report it to HMRC. You can file your tax return via the gov.uk website.

Understand VAT

If your business makes over £90,000 in taxable income each year, you also need to register for VAT (Value Added Tax). You’re also obligated to charge VAT on all goods or services your business sells and keep your VAT records for at least six years.

You can read the government’s full guide to VAT compliance to get a better understanding of what’s expected of you.

Keeping detailed VAT records is another task that accounting software can make easier since most platforms have built-in functions for creating VAT invoices. That’s why, if you’re doing your own accounting, we strongly recommend using one.

4. Set up payroll

Setting up payroll means you can pay yourself and your employees accurately and on time. You also need to ensure that deductions are made, such as tax and pension contributions.

This can be done using payroll software, which helps calculate payroll correctly each month and can also automate payroll tasks. A lot of payroll software platforms integrate with accounting platforms, and some providers, such as Sage, offer accounting and payroll tools in one platform.

You can find recommendations in our guide to the best payroll and accounting software.

5. Set up payment processes

Getting paid is one of the more exciting parts of running a business, but how you set this up depends on the nature of your business.

If you offer services, then you could take payment through PayPal or accounting software that allows you to invoice clients, such as Xero or Wave. These software platforms often integrate with payment gateway providers, such as Stripe or Square. You can also collect payments through a bank transfer.

If you’re selling goods online, you should look at an ecommerce platform that has a built-in payment gateway, or a platform that allows you to integrate a third-party payment provider. You can read our recommendations for the best small business e-commerce platforms on our page.

If you have a brick-and-mortar business, you should opt for an EPOS (electronic point of sale) system. An EPOS system will allow you to take payments and includes other functions to help run your business. Lots of EPOS systems integrate third-party accounting software, making it much easier to keep an accurate record of your books. You find recommendations in our guide to the best EPOS systems.

6. Decide if you need to outsource accounting

Outsourcing some or all of your tax and accounting tasks to an accountant or accounting firm can make it a lot easier to run your business. Tax and accounting can get complex, and the more expertise you have on hand, the more accurate and efficient this aspect of your business will be.

If you don’t feel your business is quite ready or big enough to outsource everything, you can make accounting easier by using accounting software, or, you can choose to outsource only the more complex jobs, such as tax or payroll.

This way you don’t need to worry about getting anything wrong, especially as doing so can mean you face penalties or fines. Getting it right the first time around will prevent a ton of hassle.

A good place to start outsourcing is by taking a look at our list of the best accountants in the UK. We explore accounting firms, and who they’re best for.

Tips to Improve Your Accounting

Here are our expert-approved top tips to stay on top of your accounting:

• Stick to deadlines: being aware of and sticking to tax deadlines will make things so much easier and stress-free. Missing a tax deadline can cause a major hassle, and you may face a monetary fine. We suggest looking up tax deadlines, and making a note of them in your calendar, with regular reminders.
• Track and separate expenses: as well as tracking every expense, you also want to keep your business and personal expenses separate, to save you time and effort.
• Automate: we recommend using accounting software that includes automation. This way you don’t have to spend as much time doing manual work, and the software will generally be more accurate as it won’t allow for human error.
• Set aside time for accounting: set aside a dedicated amount of time each month to go through any necessary paperwork and payroll, and avoid letting receipts and invoices pile up.
• Outsource: outsourcing some or all of your tax and accounting can free up your time and energy. It also gives you access to an accounting professional, who can offer you advice and present you with more efficient solutions.

Is Accounting Software Worth It?

Some business owners will use accounting software if they want to keep accounting in-house and avoid paying for an outsourced accounting service. It’s typically a good option for start-ups and small owner-managed businesses that have relatively simple financials.

Most accounting software will have core accounting functions, just as invoice and expense tracking, and even profit reports. We also recommend choosing accounting software that can easily integrate with your other business software, such as payroll software or your payment gateway.

Another important aspect is pricing. Most software providers offer a monthly package, making it affordable even for new businesses. Shop around for a provider that offers software packages at a price suited to your budget.

Our recommended accounting software includes Quickbooks Online, which is scalable, and offers third-party integration. Meanwhile, Xero is a good choice for start-ups or small businesses that want straightforward software.

Read more about Xero’s pricing on our page.

Does Your Business Need To Outsource Accounting?

Outsourcing to an accountant means you will have more time, energy, and resources to put into other aspects of your business. Tax and accountancy are complex and time-consuming – outsourcing gives you experts on hand who can make the process a lot easier.

However, keeping it in-house makes sense for some businesses. For example, if you have sufficient knowledge in accounting, doing accounting yourself allows you to retain more control over how your accounting is done, and have oversight over your finances.

If you run a micro business that has very straightforward finances, doing accounting yourself can also make sense, since it can be cheaper to use a simple accounting software package than to outsource. In this case, you can also still choose to outsource a more complex task such as managing taxes, or get advice from a professional accountant to ensure you’re on the right track.

As your business grows and your finances get more complex, you should consider outsourcing your accounting. It’ll save you time, since the more expenses and invoices your business has, the longer accounting will take. This increased complexity paired with time constraints on your part also increases the risk that you’ll make a mistake.

If that’s you, outsourcing accounting will save your business time, and ensure financial records are mistake-free. It’ll also save your business money compared to hiring, training, and keeping an in-house accounting team.

Outsourcing is suited to most businesses, as you can never go wrong by relying on expertise – especially when it comes to confusing areas of the law.

How much does accounting outsourcing cost?

Basic accounting services cost around £25 to £90 an hour, and specialist services tend to cost around £120 to £150 an hour. A small business can expect to pay around £500 per year, although this depends on your business’s needs.

For a full breakdown, read our guide to outsourced accounting costs.