What Is Business Accounting? (And How to Manage Yours)

Business accounting is integral to the operation of small and medium-sized businesses. To better manage finances, business owners can use business accounting principles to keep track of inventory, profit and loss, and cash flow, so they catch problems early and maintain profitability or improve when needed. Business owners can choose to manage their own finances, hire a bookkeeper, or outsource accounting duties.

In this article, learn more about business accounting, how to manage your business accounting, and several accounting software to choose from.

What is business accounting?

Business accounting refers to bookkeeping and managerial accounting to manage a company’s daily financial activities, while also setting long-term financial goals. From forecasting to invoicing, business accounting works with bigger decision-making and granular level of operations through financial tracking, analysis, recordkeeping, budgeting, and more. 

Business accounting is typically for smaller businesses rather than large corporations. Small businesses may conduct their business accounting in-house or with an accounting firm, depending on the size and needs of the company. The core of business accounting is management, so most of the core elements involve steps to monitor things like cash flow, expenses, and inventory. 

Financial advisors can use the financial data gathered by business accounting to help small business owners make important financial decisions about the future and day-to-day operations. 

Read more: Your Guide to Small Business Accounting

Business accounting vs. financial accounting Business accounting differs from other types of accounting in a few ways, especially in that there are no compliance regulations. It does not focus on long-term financial decisions but on internal tasks within the company. Financial accounting, on the other hand, is focused on meeting external financial standards.

Read more: 8 Types of Accounting: Careers, Degrees, and Salaries

How to manage your business accounting

Small businesses must adhere to effective and accurate business accounting practices. Some common steps to manage your business’ accounting include a few processes involving a company’s overall record-keeping methods, taxes, forecasting, budgeting, and more. 

1. Record your transactions.

How a company chooses to record transactions depends on the business owner. However, for government regulations and tax purposes, it is wise to always keep track of everything, including receipts and invoices.

A good record-keeping system for business transactions should include items such as: 

• Check disbursement journal 

• Business checkbook 

• Employee compensation records 

• Summary of cash receipts (daily and monthly) 

• Depreciation worksheet 

Tip: Organize your documents

The IRS recommends that you organize supporting documents by year and type of transaction.

Choose a methodology for recording business transactions that works well for your company’s needs. Expense tracking software is an efficient, paperless method to ensure the accuracy of transaction recording. Popular software options include QuickBooks Accounting and Expensify.

2. Document your receipts and invoices.

Proper documentation of financial transactions is important for preparing financial statements like balance sheets, preparing tax returns, and monitoring a company's financial health.

When documenting receipts and invoices, have an organization system that tracks taxable and non-taxable transactions, the source of the purchase, and whether you can take that purchase as a company deduction. If you’re already using expense tracking software, you can document receipts and invoices in the same platform.

3. Manage cash flow.

Cash flow refers to the total amount of cash that comes in (revenue) and out (expenses) of a company. The company can use this financial data for budgeting, forecasting, and making financial decisions. It can be recorded using a cash flow statement. Cash flow statements include internal and external cash inflows and outflows over a certain period, which may include investments, financing, and operational costs. 

Maintaining a positive cash flow system is vital to a company's success. A company should organize and track when and where cash goes at all times. Too much debt or having income in overdue accounts receivables can put a company in a negative cash flow.

Tips to manage cash flow

Have a strategic plan for paying all bills. Stagger bill payments and have a system or methodology behind when and how you pay certain bills. Allow electronic payment systems, which is more convenient and faster in many cases. Finally, structure payroll in billing cycles that flow well with the company's income stream. This means timing the frequency and amount of payouts in congruence with other business expenses and payouts. 

4. Oversee payroll.

Payroll involves the payouts to a business's employees, including benefits, salaries, taxes, garnishments, and other deductions. Companies will use payroll processing software to streamline the process or outsource the task entirely.

In many small businesses, a payroll manager is in charge of oversight of the payroll. Some tasks involved in payroll management are ensuring compliance with state and federal regulations, preparing financial reports for audits, and having accurate and timely payout of payroll salary and benefits. 

5. Make projections.

Financial projections should closely align with a company's goals and objectives. Small businesses should position themselves in a way that helps them achieve long-term financial goals.

To do this, companies make hypothetical scenarios that may involve predicting future financing needs, allocating funds and organizing spending around cash flow, or creating budgets. Business accounting provides companies with the financial insight and records to make strategic and smart projections and budgets. 

6. Understand your taxes.

The taxes a company pays is dependent on the type of business. The IRS outlines these different business taxes as income, excise, employment, and self-employment taxes. All businesses pay income tax unless the company is considered a partnership. Small businesses would not have to pay self-employment tax since it’s an organization with employees, but the company will have to pay employment taxes.

Employees and tax documents needed

All employees must fill out an I-9 and W-4 form upon employment for tax purposes. These documents provide accurate wage reporting, along with Social Security and Medicare benefits. Excise taxes are specific to certain industries and uses outlined by the IRS. Check with state tax laws as well. 

7. Manage profits and losses.

Managing profit and loss in business accounting involves calculating revenue and finding ways to cut costs. Profits are earnings or cash in, and loss refers to anything the company has to pay for or money out—record profits and losses on a profit-and-loss statement or income statement. 

Many small businesses use software like QuickBooks to log and track income and expenses. The purpose of managing revenue, costs, and expenses are so that it’s easy to see how much the business earns and how to adjust if needed. Some businesses keep profit-and-loss statements monthly, quarterly, or yearly. 

8. Review inventory.

Companies hold a certain amount of inventory, or finished products/goods, that have not yet been sold. Inventory is considered an asset to a company. It’s important that a company does not hold too much or too little of an unsold product or service. To ensure that doesn’t happen, a component of business accounting is managing and reviewing inventory. 

Many small businesses use a cloud-based inventory management system that provides real-time data when needed. Beyond the tools a company may use, it’s also critical to have a consistent system to track all inventory. Common methods include batch tracking, demand forecasting, and bulk shipments.

Read more: Supply Chain Management: Definition, Jobs, Salary, and More

9. Submit tax returns and financial reports.

A company must make federal tax deposits before submitting a tax return to the IRS. An accountant can do this via electronic funds transfer (EFT) or outsource the task. 

The tax forms filed by a small business depend on the type of business and whether it's a partnership, a partner in a partnership, a sole proprietorship, an S Corp shareholder, a C corporation, or an S corporation. Financial reports are required if the company files business deductions or depreciation. 

Do I need an accountant?

Small businesses may benefit from an accountant as the company grows and the need for more financial tracking, recording, forecasting, and budgeting accrues. Bookkeeping involves the day-to-day administrative tasks of recording sales and financial transactions.

Accountants are certified to file taxes, while bookkeepers are not. Taxes and government compliance to certain rules and regulations may be best managed by a certified accountant professional (CPA).

Some companies may use an accountant or the services of an accounting firm only to do taxes. Others only analyze data gathered during bookkeeping a few times a year to assist in financial budgeting and projections. It’s not a requirement to have an accountant on staff, but it’s a requirement to properly file taxes per the IRS and state tax laws. 

Accounting software to choose from

Accounting software can help a business manage finances more efficiently, prepare for tax filing, and provide a clearer sense of the company’s financial health and needs. You can choose from many accounting software systems with varying features and prices. The type of business or industry and number of employees are two major factors to consider when choosing the best accounting software system.

This list includes some of the top accounting software systems:

• QuickBooks Online: This accounting tool is popular for most small business owners and freelancers. A few features include invoicing, payment tracking, payroll, receipt capture, report generation, project management tools, and assistance in finding tax deductions. The features will vary depending on the plan you choose. 

• FreshBooks: FreshBooks is known for its mobile app and online-friendly system that allows a company to link online payments to the app, which can be fully customizable and customer-centric. Other features include time tracking, project management tools, report generation, payment tracking, and the ability to turn an estimate into an invoice. 

• Xero: With three plans to choose from, this cloud-based accounting software offers small and medium-sized companies features that include expense manager tools, bank connection, and online payment options. Xero also allows companies to track projects, manage payroll, and track inventory. 

• Zoho Books: Zoho Books has a free version that can help you file and prepare your taxes as a small business and calculate how much you may owe. As with other similar systems, Zoho Books can help companies track spending, manage inventory, pay employees, accept online payments, organize receipts and other supporting documents, and track projects. 

• Wave: Designed for smaller businesses, Wave can generate invoices, track payments automatically, run payroll, as well as calculate payroll tax (depending on your state). This software system does not offer as many features as similar accounting software, but you can use Wave’s accounting services for free.

Learn business accounting today

Get your small business on track and move forward toward the goals and financial objectives you have for your company with business accounting principles. The Introduction to Financial Accounting from UPenn will help you learn how to read the three most common financial statements (income statements, balance sheets, cash flow statements). Or learn the basics of bookkeeping with Intuit's professional certificate.