Basics of Small Business Accounting: 10 Steps to Get Your Company

on Track
If you’ve just launched or are about to launch your online store, congratulations! It
takes uncommon passion and perseverance to get to where you are today.

However, as you know, business ownership is a constant flood of satisfying

milestones coupled with expanding to-do lists. With your launch, you’ll need to get on
top of the accounting tasks that come along with owning a store.

This list of small business accounting steps will give you the confidence to know
you’ve covered your bases, and are ready to move on to the next item on your
business to-do list.

1. Open a bank account

After you’ve legally registered your business, you’ll need somewhere to stash your
business income. Having a separate bank account keeps records distinct and will make
life easier come tax time. Note that LLCs, partnerships, and corporations are legally
required to have a separate bank account for business. Sole proprietors don’t legally
need a separate account, but it’s definitely recommended.

Start by opening up a business checking account, and then any savings accounts that
will help you organize funds and plan for taxes. For instance, set up a savings account
and squirrel away a percentage of each payment as your self-employed tax
withholding. Next you’ll want to consider a business credit card to start building
business credit. Corporations and LLCs are required to use a separate credit card to
avoid commingling personal and business assets.
 Before you talk to a bank about opening an account, do your homework. Shop around
for business accounts and compare fee structures. Most business checking accounts
have fees that are higher than personal banking, so pay close attention to what you’ll
owe.

In order to open a business bank account, you’re required to have a business name,
and usually be registered with your state or province. Check with the individual bank
for what documents to bring to the appointment.

2. Track your expenses

The foundation of solid business record keeping is learning to track your expenses
effectively. It’s a crucial step that allows you to monitor the growth of your business,
build financial statements, keep track of deductible expenses, prepare tax returns, and
support what you report on your tax return.

Right from the beginning, you should establish a system for organizing receipts and
other important records. This process can be simple and old school (bring on the
FiloFax), or you can use a service like ShoeBoxed. For American store owners, the
IRS doesn’t require you to keep receipts for expenses under $75.00, but it’s a good
habit nonetheless.

There are five types of receipts that you should pay extra attention to:

 Meals and entertainment: Conducting a business meeting in a cafe or restaurant is a

great option, just be sure to document it well. On the back of the receipt, record who
attended and the purpose of the meal or outing.
 Out of town business travel: The IRS and CRA are wary of people claiming
personal activities as business expenses. Thankfully, your receipts also provide a
paper trail of your business activities while away.

 Vehicle related expenses: Record where, when, and why you used the vehicle for
business, and then apply the percentage of use to vehicle related expenses.

 Receipts for gifts: For gifts like tickets to a concert, it matters whether the gift giver
goes to the event with the recipient. If they do, then the expense would be categorized
as entertainment, rather than a gift. Note these details on the receipt.

 Home office receipts: Similar to the vehicle expenses, you need to calculate what
percentage of your home is used for business and then apply that percentage to home
related expenses.

Starting your business at home is a great way to keep overhead low, plus you’ll
qualify for some unique tax breaks. You’re able to deduct the portion of your home
that’s used for business, as well as your internet connection, cell phone, and
transportation to and from work sites and for business errands.

Any expense that’s used partly for personal life and partly for business must reflect
the mixed use. For instance, if you have one cell phone, you can deduct the percentage
you use the device for business. Gas mileage costs are 100% deductible, just be sure
to hold on to all records and keep a log of your business miles (where you’re going
and the purpose of the trip).

3. Develop a bookkeeping system

Before we jump into establishing a bookkeeping system, it’s helpful to understand

exactly what bookkeeping is, and how it differs from accounting. Bookkeeping is the
 day-to-day process of recording transactions, categorizing them, and reconciling bank
statements.

Accounting is a high level process that looks at business progress and makes sense of
the data compiled by the bookkeeper by building financial statements. As a new
business owner, you’ll need to determine which bookkeeping method to use:

1. You can choose to go the DIY route and use software like Quickbooks or Wave.
Alternatively, you could use a simple Excel spreadsheet.

2. You have the option of using an outsourced or part-time bookkeeper that’s either local
or cloud-based.

3. When your business is big enough you can opt to hire an in-house bookkeeper and/or
accountant.

With so many options out there, you’re sure to find a bookkeeping solution that will
suit your needs.

Canadian and American business owners need to determine whether they’ll use the
cash or accrual method of accounting. Let’s take a look at the difference between the
two methods.

 Cash Method: Revenues and expenses are recognized at the time they are actually
received or paid.

 Accrual Method: Revenues and expenses are recognized when the transaction occurs
(even if the cash isn’t in or out of the bank yet) and requires tracking receivables and
payables.
Technically, Canadians are required to use the accrual method; but to simplify things,
you can use the cash method throughout the year and then make a single adjusting
entry at year end to account for outstanding receivables and payables for tax purposes.

American business owners can use cash based accounting if revenues are under USD

$5M, otherwise they must use the accrual method. 


4. Set up a payroll system

As a new online store owner, you’ll likely be a one-person show. However, maybe
you’ll hire a part-time employee to help you out, or a freelancer to design your logo.
Right away, you need to establish whether that individual is an employee or an
independent contractor.

For employees, you’ll need to decide on a payroll schedule and ensure that you’re
withholding the correct taxes; there are lots of services that can help with this. For
independent contractors, be sure to track how much you’re paying each person.
American business owners may be required to file 1099s for each contractor at year
end (you’ll also need to keep their name and address on file for this!).

5. Investigate import tax

Depending on your business model, you may be planning to purchase and import
goods from other countries to sell in your store. When importing products, you’ll
likely be subject to taxes and duties. These are fees that your country imposes on
incoming goods. Take the time to learn about importing goods into the
US and Canada, and the associated taxes, so that you know the rules from the get-go.
Also, if you are importing goods, a duty calculator can help you estimate the fees in
your own business and plan for costs.

6. Determine how you’ll get paid

When sales start rolling in, you’ll need a way to accept the payments. If you’re a
North American store owner on Shopify, you can use Shopify Payments to accept
credit card payments. This saves you the hassle of setting up a merchant account or
third party payment gateway.

If you want to accept credit card payments without using Shopify Payments, you’ll
either need a merchant account or you can use a third party payment processor like
PayPal. A merchant account is a type of bank account that allows your business to
accept credit card payments from customers. If you use a third party payment
processor, the fees are generally around 2.9% + $0.30 per transaction. You can
consult this list to help you find a payment gateway that will work for your location.

7. Establish sales tax procedures

The world of ecommerce has shaken up sales tax regulations and they are admittedly a
bit confusing due to location issues. When a customer walks into a brick and mortar
retail shop, they pay the sales tax of whatever state or province they make the
purchase in, no matter if they live in that city, or they’re visiting from across the
world. However, when you sell online, you’re often selling to customers who live in
different states/provinces, and even countries.

As a Canadian store owner, you only need to start collecting GST/HST when you
have revenues of $30,000 or more in a 12-month period. If you want, you can collect
GST/HST even if you don’t earn this much in revenue, as you can put it towards Input
Tax Credits.

Selling to international customers can be easier than domestic sales because you often
don’t need to charge sales tax when selling to out-of-country customers. Canadian
store owners don’t need to charge GST/HST to customers who are outside of Canada.
For American store owners, international purchases are tax exempt as well. However,
this can get a bit complicated depending on the state you live in, so check in with your
accountant for detailed information about your specific state’s regulations regarding
international sales tax.

8. Determine your tax obligations

Tax obligations vary depending on the legal structure of the business. If you’re self-
employed (sole proprietorship, LLC, partnership), you’ll claim business income on
your personal tax return. Corporations, on the other hand, are separate tax entities and
are taxed independently from owners. Your income from the corporation is taxed as
an employee.

Self-employed people need to withhold taxes from their income, and remit these to the
government in lieu of the withholding that an employer would normally conduct. For
American store owners, you’ll need to pay estimated quarterly taxes if you’ll owe
more than $1,000 in taxes this year. Canadians have it a little easier; if your net tax
owing is more than $3,000 you’ll be required to pay your income tax in installments.

9. Calculate gross margins

Improving your store’s gross margin is the first step towards earning more income
overall. In order to calculate gross margin, you need to know the costs incurred to
 produce your product. To understand this better, let’s quickly define both Cost of
Goods Sold (COGS) and gross margin.

 Cost of Goods Sold (COGS): These are the direct costs incurred in producing
products sold by a company. This includes both materials and direct labor costs.

 Gross margin: This number represents the total sales revenue that’s kept after the
business incurs all direct costs to produce the product or service.

Here’s how you can go about calculating gross margin:

Gross Margin (%) = (Revenue - COGS) / Revenue

The difference between how much you sell a product for, and how much the business
actually takes home at the end of the day is what truly determines your ability to keep
the doors open.

10. Periodically re-evaluate your methods

When you first start out you may opt to use a simple spreadsheet to manage your
books but as you grow you’ll want to consider more advanced methods like
Quickbooks or Bench. As you keep growing, it’s good to continually reassess the
amount of time you’re spending on your books, and how much that time is costing
your business.
The right bookkeeping solution means you can invest more time in the business with
bookkeeping no longer on your plate, and potentially save the business money. Win-
win!

Know your numbers to grow your business

Starting a business can be an overwhelming process, but if you follow this list, you’ll
have your new store’s finances in order from the beginning. From opening the right
type of bank account to determining how much you’ll bring in per product, these tasks
will all contribute to your business’s success, now and as it grows.