How to Set Up an Accounting System for a Small Business
 Many entrepreneurs consider accounting a necessary evil forced on them by the government. Small business owners often fear getting trapped in a mire of paperwork and spending hours pushing numbers around. They worry about being unable to exercise their talents and interests in product development and marketing.
Accounting is an essential part of the business, and evil or not, something that can’t be avoided. The accounting system is how a business tracks revenues and expenditures to establish if the company is financially successful. It is the record keeping function used to determine taxes owed. It is an information system that should be embraced by entrepreneurs as a means of providing a “state of the business” status report.
It’s also one of the most important management decision making tools used in any business.
In the Beginning
There are different approaches that can be taken to set up an accounting system.
- Do your own bookkeeping and let an accountant prepare statements and tax filings
- Hire an accountant to work part or full time to do both bookkeeping and statements
- Let a bookkeeping service maintain records and input data into software program and an accountant prepare the statements
- Subcontract only one portion of the accounting system such as payroll while records are maintained in the business and an accountant prepares the statements
- Assemble your own supporting records but let a bookkeeping/accounting service do the actual data input and an accountant prepare statements
 This is not a complete list but is intended to only give an idea of the various arrangements that can be established. The fact is most new small business owners do their own bookkeeping. They let an accountant prepare financial and tax statements.
If you anticipate using the statements to obtain loans then you might even pay for the preparation of audited financial statements.
One of the main reasons business owners maintain their own bookkeeping systems is precisely because they need to know every day where the business stands financially. There is no better way to:
- Keep a handle on the financial condition of the business
- Identify and resolve problems that arise
- Control expenses
- Evaluate profitability
- Establish a budget
- Assure accurate record keeping
- Manage accounting fees and expenses
The business owner is the one ultimately responsible to banks, lenders, and the government for the accuracy of the records. It would be nice if every small business could afford to hire an accountant to do all the work. But it is often too expensive of a proposition for a small business.
Some business owners that hire employees will let a payroll service or accounting business prepare their payroll. This is because there are payroll taxes and complex tax reporting statements involved. Accurate tracking of the payroll is critical and it is also a job function that cannot be postponed. People like to get paid on time and they expect their checks to be accurate.
Almost all bookkeeping software programs will have a payroll module if you decide to prepare the payroll in-house.
Accounting Software
You will notice that at some point you will need an accountant unless you happen to be a CPA starting a new accounting business. That is why an accountant should be included on the business team before the company is even up and running. But most likely you will be doing most of the actual bookkeeping.
Not so long ago small businesses used manual bookkeeping systems and made handwritten general ledger and subsidiary entries in ledger books. But in the world of the personal computer that is no longer necessary and not advisable. Even the smallest new business can take advantage of the bookkeeping and accounting software available. The software systems today offer a lot of information and services needed to properly manage a business no matter how small it may be.
- Subsidiary ledgers for tracking specific revenues and expenditures
- General ledger summary accounts
- Payroll
- Checking details
- Bank account reconciliation
- Sales figures
- Loan tracking
- Purchasing
- Shipping and inventory systems
- Asset tracking
- Financial statements (monthly and annual)
- Income tax reporting
- Special reports as needed such as revenue or expense trends
The Right Package
There are accounting packages for small businesses sold that are affordable, easy to use, and comprehensive. Following are a few of the most popular programs.
- Intuit’s Quickbooks Pro (Intuit)
- Accpac’s Simply Accounting
- Peachtree’s Complete Accounting
- Microsoft Dynamics
There are others too, though these are products that are well tested and able to be integrated with other products such as Excel. In addition, you need to consult carefully with your accountant and look ahead to the days when your small business will grow to the point you will need more sophisticated add-ons.
Many of the most popular small business accounting packages can be easily expanded to integrate additional functions. For example, you can add a point of sale system that will automatically feed sales figures to the subsidiary and general ledger functions. You may decide you need a product inventory system that includes order and shipping features.
Integrating Your Online and Offline Accounting Needs
There is another consideration too. If you are selling through a website and accepting payments online then you will probably want to be able to easily feed the information into your accounting system. This can be accomplished in a number of ways.
- Manual posting of data into the accounting system from vendor supplied reports
- Automatic feed of sales revenue into accounting system
- Ability to download reports from online that can then be uploaded to the accounting system
In all cases, you need to consult with your accountant. The ideal accounting software choice is one that is compatible with the accountant’s system. You don’t want to create a whole set of accounting records that must be re-entered into the accountant’s system to be useful for tax reporting, trend analysis or financial statement preparation.
Keeping It Relevant
A good accounting system should have certain qualities in order to be most useful to the small business owner.
- Software should be relevant to the business, i.e. offers cost accounting for a manufacturing firm
- Software should produce accurate information
- Accounting system should be user-friendly
- Accounting system should produce everything needed for preparation of accurate tax statements
Most accounting software is either web based or relies on internet access for updates and access to tutorials. If you are not computer literate, it is still advisable to use computerized software. There are many learning tools available today and all programs come with tutorials. You can take a class or attend one of the vendor sponsored seminars.
There are two main points to keep in mind when it comes to small business accounting.
- Use an automated bookkeeping and accounting system
- Choose the system after consultation with your accountant
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