Small Business Accounting 101

Keeping on top of the books helps you see your profits, manage cash flow, collect payments, pay people on time and set future budgets.

But as a growing company, small business accounting can be a bit of a minefield. There is a lot to think about, and it’s easy to let the financials lapse when you’re caught up trying to get your business off the ground.

As your company grows, you may well hire an accountant and bookkeeper to look after your numbers. But when you’re starting out, this might not be possible: you simply might not be able to afford to do it. And as you know, running a business effectively does require you to have some understanding of how your company operates financially.

Here’s an introduction to small business accounting.

Accounting helps you to:

  • Manage cash flow
  • Keep a formal record of profit and loss
  • Pay suppliers and employees
  • Make business decisions
  • Pay the right tax

Key accounting statements

Understanding the different types of accounting statements is a key part of running your accounting effectively. Here’s a run-down of the common accounting statements, what they are used for and how they are structured.

Income statement

This statement takes in sales, cost of sales and expenses to give you a measure of your financial performance.

A typical income statement is structured like this:

  • Income – the cash you earn from selling something.
  • Cost of sales – any costs associated with selling something – such as shipping and labor costs.
  • Gross margin – the income figure minus the cost of sales figure. This gives you a gross margin, or gross profit.
  • Expenses – an inventory of any business expenses, such as utilities and salaries.
  • Net profit – the gross margin figure minus the expenses figure. This gives you a net profit figure.

Balance Statement

The balance statement is seen as giving you a ‘snapshot’ of your business’s financial health because it records your financial condition at a specific point in time.

It usually contains:

  • Assets – the things you own. These are usually split into 2 categories: current and fixed. Current assets are cash or assets that can be turned into cash, fixed assets are things like property and equipment.
  • Liabilities and equities – this helps you designate what you own and what you owe to others. Liabilities represent what you owe to someone else, equity represents what you own.


Cash Flow Statement

The cash flow statement helps you keep track of money coming in and out of your business. It can be structured like this:

  • Starting cash balance – the beginning amount of cash in your business.
  • Plus cash in-flows – money from selling things, borrowing.
  • Minus cash out-flows – like buying equipment, paying for expenses, repaying borrowing.
  • Ending cash balance – arrive at this figure by taking your starting cash balance, adding in-flows and subtracting out-flows.

Free small business accounting software

Using software can help make the small business accounting process a lot easier – and more accurate.

Using an online platform to handle some or all of your accounting:

  • reduces the risk of human error
  • speeds-up the whole process
  • allows you to collect complex financial data.

Here are some free small business accounting tools that may be useful:

  • Brightbook – this popular bit of software allows you to invoice, manage cash flow, track bank statements and lots more.
  • Quick File – a cloud-based accounting platform that’s intuitive and easy to use. Covers all the basics as well as more sophisticated features and comes with apps so you can manage things from your smartphone.
  • GnuCash – fuss-free accounting software that allows you enter transactions, track suppliers and manage bills and invoices.