How to Set Up Accounting for Small Business

Posted by Pierre de la Fortune on August 10, 2015 @ 12:01 a.m.

Written by Jeremy Slaughter

Starting a small business can be as simple as registering a trade name and selling a service or product. Although specific details on business licensing and entity formations vary by state and industry, one common process required by all businesses is an accounting system. An accounting system is a compilation of monetary transactions entered into a ledger that is used to record financial records.

Step 1

Choose the specific software you will use to set up your accounting system. Accounting software like QuickBooks or Peachtree comes with pre-defined charts of accounts for various industries. Spreadsheet software such as Microsoft Excel or Open Office Calc does not have a built-in chart of accounts, so you must create one manually.

Step 2

Review your business model and financial statement reporting needs to assist in finding the best-suited chart of accounts. The chart of accounts is a list of the assets, liabilities, equity, income and expenses. Users of spreadsheet software can get a sample chart of accounts from After creating the chart of accounts, consider numbering the accounts. Although numbering is not required, it serves a purpose, and it is to help you locate accounts quickly and easily. If you choose to assign numbers to the chart of accounts, proceed to step three, otherwise move to step four.

Step 3

Assign a series of 1000 for each account type. For example, assets could be 1000 through 1999, liabilities could be 2000 through 2999, and equity could be 3000 through 3999. The first number in the chart of accounts represents the account type and each digit after can represent any pattern you choose. Step 4

Create your purchase order and invoice templates. Accounting software users will find templates within the software program. Spreadsheet users can download a variety of templates from the software manufacturer. Invoices should include the date, business information, customer information, amount due, payment terms or due date and a description of the services or goods provided. Begin using purchase orders for your purchases and invoices to record customer sales.

Step 5

Choose an accounting method--typically either cash or accrual. Cash method accounting requires users to record income received and expenses when paid. Accrual method accounting records income when earned and expenses when incurred. Due to the simplicity of record keeping and data entry, most small businesses report using cash basis accounting; however, an enrolled agent can help you determine which method best suits your accounting and tax needs.

Step 6

Record your transactions in the accounting system using bank statements and invoices. Expenses and purchases should decrease the bank balance. Income and loans should increase the bank balances.

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Amortize -- to charge a regular portion of an expenditure over a fixed period of time. For example if something cost $100 and is to be amortized over ten years, the financial reports will show an expense of $10 per year for ten years. If the cost were not amortized, the entire $100 would show up on the financial report as an expense in the year the expenditure was made. (See entries on Expenditure and Expense.)

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