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How to Setup a Bookkeeping and Accounting System for Small Business

Updated on August 12, 2015

Accounting and Small Business

For a small business or sole proprietor, accounting has two basic components:

  1. Data collection and organization
  2. Data analysis and decision-making

The first often falls under the heading "bookkeeping," and the second falls under the traditional definition of "accounting." However, for a small business with a tight budget, few personnel and not much time, an accounting system should tie both together seamlessly and efficiently. Here are some ideas on setting up an effective accounting system for your business.

Popular Bookkeeping Products

Bookkeeping Setup

Maintaining the books is the most important part of your accounting system. It is one of the most valuable activities in business in general. It is also required by law in some places.

The raw information comes from a variety of sources: bank statements, contracts with vendors, invoices, receipts, bills, credit card statements, internal memos and even word-of-mouth communication within the company. The bookkeeping system must incorporate all of this raw data to create usable information.

For most businesses, the information in your books will fall under one of five categories*:

1. Revenue and money you receive

2. Expenses and money you pay

3. Accounts Receivable--money others owe to you

4. Accounts Payable--money you owe to others

5. Assets--including tangible and intangible property

Your company may have much more of one type than another. For instance, a service company will likely have few tangible assets, but may have a significant amount of receivables and payables.

*Note: These terms may differ in formal accounting methods. For instance, "Accounts Receivable" is often considered a component of "Assets." But for a business just creating its accounting system, this is the easiest way to think of it.

Bookkeeping Tools

There are a number of programs available for bookkeeping that you might find useful. Some are more complicated than others, and some more comprehensive than others. Many include accounting-related features, which can make your life a lot easier. Personally, I have even had success using Microsoft Excel for various bookkeeping activities. Excel is a highly versatile program that is familiar to many.

Whichever option you use, your bookkeeping system should be easy, and should get the job done. You should not need to spend a lot of money on this. If one program is too expensive, a simpler option can be just as good.

Bookkeeping Schedule

Your bookkeeping system is only useful if it is updated regularly with the latest information. It will help to create a schedule for updating the books. Depending on the volume and frequency of transactions in your business, updating the books at the end of each day, each week or each month will be necessary. The important thing here is consistency over time. Bookkeeping should be easy, convenient and fit into your schedule. Bookkeeping work should not take up more of your time than running your business.

Accounting, Analysis and Interpretation

Now for the fun part: actually using the data to learn about your business and make decisions! The purpose of all this is to get a better idea of what is going on in your business. I have worked with clients who, before my creation of a decent accounting system, were in the dark on a lot of important areas.

Analyzing your business by the numbers enables you to uncover trends and patterns that are otherwise invisible. You can begin to make forecasts and projections. For instance, if you notice seasonal variations in your revenue or costs, you can determine months or even years ahead how to construct your budget. You will be able to see the biggest drivers of your costs and sales. Do some products and services pay for themselves? Are others losing you money? Would switching vendors have an impact on profit?

These and countless other insights will be revealed by a regular analysis of your bookkeeping data. Just as with bookkeeping itself, you should study the data on a regular basis. Again, sticking to a reasonable schedule that supports your main business activities (instead of taking over them) is key.

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    • profile image

      Karie Chapel 

      2 years ago

      It's fantastic to see such a useful post. I recently had to fill out a form and spent an enormous amount of time trying to find an appropriate I mostly use to edit my PDFs. I think it also allows you to to create fillable pdfs and esign them.

    • secularist10 profile imageAUTHOR

      secularist10 

      4 years ago from New York City

      You are a CPA yourself, so your experience is of a different kind. If one can afford to hire a professional, by all means, do it. But based on my years of experience in small business, trying to make sales and turn a profit month after month, it's not always feasible. Sometimes you have to wear multiple hats, including the accountant hat, to pay the bills.

    • csmiravite-blogs profile image

      Consolacion Miravite 

      4 years ago from Philippines

      Accounting is the same for both countries, as we follow AICPA as a matter of policy. There are CPA's who concentrate on small business start-ups, and set-up the accounting system for small businesses that may include licensing. The fees charged are not comparable to audit engagements or management fees charged to big corporations. It is much, much lower. It is oftentimes better to hire professionals to do the start up operation than contemple on doing the system yourself. The mistakes may not be worth it. It would be cheaper in the long run if you let a professional come up with the systems that you can do by yourself later on. This is just my one cent..... based on 30 years of public practice.

    • secularist10 profile imageAUTHOR

      secularist10 

      4 years ago from New York City

      CSM:

      Unfortunately for many small businesses hiring an expert is not an option, for financial reasons. I don't know what the laws are in your country, but in the United States, it is perfectly legal for a small business to do their books in-house.

      For many businesses, their financial situation is simple enough that they do not need an outside professional, nor do they need to worry about GAAP or other standards that are often more applicable to large corporations.

      They just need clear, simple rules and guidelines, and smart management of money and information.

    • csmiravite-blogs profile image

      Consolacion Miravite 

      4 years ago from Philippines

      Most small businesses have this uncanny notion that they can put up their own accounting/bookkeeping system, so they can save money. This is a fallacy since the process is not as simple as A-B-C-. There are rules in setting up books of accounts and even the chart of accounts that you will use.

      There is such thing as GAAP, or procedures that you will adhere to in order to make your operations legal and not contrary to industry standards. I have always suggested to clients to hire a CPA who has the track record in creating small businesses. Once it has been set-up and running, they can make arrangement of paying a retainer fee to the CPA to ensure that they are always on the right course.

      You cannot cut corners by doing the accounting processes yourself. It is like being your own lawyer when you have a car accident. Experts should do it. You can talk about fees with these professionals, but never attempt to do accounting procedures on your own without needed assistance.

      Nonetheless, this is nice write-up about the bookkeeping . Easy to understand and a great hub!

    • profile image

      BUVANAA CHANDRA SEKAR 

      5 years ago from ERODE

      nice article

    • secularist10 profile imageAUTHOR

      secularist10 

      5 years ago from New York City

      Great to hear, I'm glad you found it useful. Best of luck with your venture.

    • pringoooals profile image

      Karina 

      5 years ago from Edinburgh

      Excellent advice! I have little knowledge on this topic and I'm developping small business now. I found it very useful! Thank you for sharing.

    • secularist10 profile imageAUTHOR

      secularist10 

      5 years ago from New York City

      Thanks, SAS, glad you liked it.

    • SAS-ACCOUNTING profile image

      SAS-ACCOUNTING 

      5 years ago from Philippines

      Good Articles!! well done

    • secularist10 profile imageAUTHOR

      secularist10 

      6 years ago from New York City

      Thanks, I appreciate it. Glad you found it useful. Every small business can set up an effective system that gets the job done.

    • CZCZCZ profile image

      CZCZCZ 

      6 years ago from Oregon

      Great accounting for small business overview. Enjoyed reading through this hub and it is certainly great advice for anyone getting into starting a business without much idea of where to go for setting up some basic rules for managing the companies financial aspects.

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