How to Develop Your Small Business Accounting System

Developing the right accounting system for your business can make the difference between success and failure. If you know your expenses and revenues and can keep track of your profit margins, you will always be aware of how your business is performing. In addition, you will know what your tax liability is and you can make plans to meet payroll, inventory costs and tax obligations. Follow simple guidelines and you can develop the kind of accounting system that will help you keep track of your business.

Choose your accounting method. You basically have two choices. The cash method records income when you actually receive it and counts expenses when you actually pay them. The accrual method counts income when you make a sale, even if you don't receive the money at that time. The accrual method also counts expenses when you receive the item or service, even if you already paid for it. Many small businesses use the cash method. The accrual method suits large corporations with vast transactions.

Select software. Many companies offer small business and payroll accounting software. You can get an overview of small business software at Quickbooks, Simply Accounting, Peachtree, Cougar Mountain and MYOB are names you can start with. More advanced software lets you track inventory and manage customer relations, along with point-of-sale features. Everest and NetSuite offer such programs. You may also consider Web-based applications in which you use an online company to keep all your data. This is known as cloud computing. Determine which style fits you and your business. If you feel unsure, begin with small business software that can give you an easy start and let you expand later.

Make a Chart of Accounts. Business software typically offers this function. It is a list of all the types of accounts for your business, such as income, expenses and assets. This chart gives you an overview of the kinds of records you should keep.

Enter all transactions. The best way to continue developing your accounting system is to use it. Enter transactions for expenses, income, asset purchases and inventory valuation, and you will slowly customize your accounting system to suit your operation.

Reconcile your bank statement with your accounting system. For each expenditure or deposit on your bank statement, you should find a matching figure in your accounting system. Balance your bank statement with your accounting system, and you will not only develop better bookkeeping habits but you will also keep track of your money.