How to Be My Own Accountant in 5 Steps
Perhaps you’ve got a small business going and now you’re wondering if you can handle the accounting all by yourself. Follow these 5 steps as a guide to accounting success.
- Open a Business Bank Account
- Establish a Bookkeeping System
- Categorize Your Expenses
- Establish a budget
- License Accounting Software for Invoicing and Payroll
1. Open a Business Bank Account
You want to keep your personal and business banking separate. This may not seem critical at the beginning, but down the road, it will save you a lot of time when you have more business transactions to manage. Banks offer a wide range of accounts specifically for business, some are designed for very small companies that have few or no employees.
Before you visit a bank to open an account, best to consider your finance needs first. Look at how many transactions you’re going to have in a month and compare that with what the bank will charge you. If you’re a small business with few deposits or expenses, it may be worth considering an account that charges you per transaction. Some banks have business accounts that will waive the monthly fee if you carry a minimum balance from month to month. You’ll also want to make sure you choose the overdraft protection option for when you need it.
In your meeting with the bank representative, don’t get distracted by offers of business credit cards with rewards or other incentives that are designed to get you to sign up. You can consider them but decide if they are worth the extra costs involved. What you really want to know is if this bank will offer a convenient service with easy online tools, at a reasonable price, and will be able to help you in the future with loans or extra credit if you need it.
2. Establish a Bookkeeping System
Are you going to go with a single entry system of accounting or a double entry?
A Single Entry System of accounting is a form of bookkeeping in which every one of a company’s financial transactions is recorded as a single entry in a log. This process is usually used by new small businesses because of its simplicity, cost effectiveness, and the fact that it requires no formal training.
A double entry system requires a much more detailed bookkeeping process, where every entry has an additional corresponding entry to a different account. Consider the word “double” in “double entry” to stand for “debit” and “credit”. The two totals for each must balance, otherwise there is an error in the recording.
A double entry system will provide complete records and allows for the creation of proper financial statements. There are many software options available today that make a double entry system of bookkeeping easier to manage.
3. Categorize Your Expenses
Categorizing expenses will be helpful in keeping your company organized, for budgeting purposes as well as totaling the expenses that can be written off at tax time.
Popular category headings you can create include:
Meals & Entertainment Expenses
Rent, Utilities & Phone
Due to the introduction of the Tax Cuts and Jobs Act by the Trump administration in late 2017, the laws regarding tax deductions for meals and entertainment expenses for businesses in the United States have changed. Business owners can still deduct 50% on meals if the expense meet certain conditions. Entertainment expenses, such as sporting events or concerts, no longer qualify. The act went into effect on January 1, 2018.
4. Establish a Budget
Now that you’ve categorized the expenses for your business, determine your budget for the year. This is particularly important if you have employees authorized to make purchases on behalf of your company. This is so that they understand your expectations and don’t overspend.
Determine a total figure, then break it down and assign amounts to the categories listed in the previous section. It is very likely that in the first year or two of business these numbers will need to change a lot. But establishing a budget at the outset gives you a great place to start, informs your staff of spending limits and allows you to better plan for the future.
5. License Accounting Software for Invoicing and Payroll
Invoicing and Payroll are two of your most important accounting processes. Let’s have a look in detail.
You will want to ensure that you have a proper system in place for invoicing. The cash your business will generate from invoices paid by clients is what will keep your company going.
Today there are software and app solutions that will allow you to build a templated invoice with your company’s standard information. This software will automatically generate a new invoice number every time you create an invoice, set payment terms and notify you when a client’s payment is overdue. The top ones offer online or phone support too. Read over the first invoice you issue a few times before you submit it to the client, to make sure it’s a good template going forward.
Payroll is simply the process by which you pay your employees. A reliable payroll process is important for two reasons. The first is that depending on the size of your business, it could be your largest regular expense. The second is that a proper payroll system will keep the employees you hire satisfied. If you do not pay consistently and accurately, employees will look for work elsewhere. Getting a payroll system in place at the outset can save you years of grief.
Typically, a payroll system will deduct taxes from each check before the employee is paid. These taxes include Social Security, Medicare and federal and state income taxes (some states, like Florida, do not deduct income tax).
Because payroll can be a time-consuming process, most businesses today use a software system that handles the tax deductions and directs the net amounts into employees’ bank accounts automatically. Depending on the software, some systems can also calculate wages for hourly paid staff, and generate summaries based on the business owner’s needs.
Other Considerations for Doing My Own Accounting
The tasks of an accountant vary but typically they oversee and work in the following areas: data management, financial analysis and consultation, financial reports and regulatory compliance. What we have outlined above is the basics for being your own small business accountant, but you may find you will need to contact and enlist the help of a professional accountant as your business grows.
You will need to open a business bank account, establish a bookkeeping process, categorize expenses, establish a budget and license accounting software.