Small Business Accounting

Good accounting keeps your business compliant, minimizes taxes, and helps you make better decisions. Whether you DIY or hire a professional, understanding the basics is essential.

Accounting Methods

Cash Basis: Record income when received, expenses when paid. Simple. Required for sole proprietors with less than $25M revenue (as of 2024 — threshold was $25M in prior years; recent rules increased it to $30M for 2025+). Best for service businesses.

Accrual Basis: Record income when earned (not received), expenses when incurred (not paid). More accurate for businesses with inventory. Required for corporations and businesses with more than $30M revenue. Also required if your business has inventory and $1M+ in gross receipts.

Hybrid: Use cash for income, accrual for expenses — not permitted unless IRS specifically approves (generally not).

Chart of Accounts

A categorized list of all accounts used by your business. Standard categories: Assets (bank accounts, receivables, equipment), Liabilities (credit cards, loans), Equity (owner contributions, retained earnings), Revenue, Cost of Goods Sold, Expenses (rent, utilities, software, marketing, professional fees). Most accounting software creates this automatically.

Financial Statements

• Income Statement (P&L): Revenue - Expenses = Net Income. Shows profitability over a period.
• Balance Sheet: Assets = Liabilities + Equity. Snapshot of financial position.
• Cash Flow Statement: Operating + Investing + Financing activities. Shows how cash moves.

Bookkeeping Options

• DIY (software): QuickBooks ($30-200/month), Xero ($13-45/month), FreshBooks ($17-55/month), Wave (free for basic accounting, paid payroll).
• Bookkeeper: $200-500/month for monthly clean-up. Handles categorization, reconciliation, and reports.
• Full-service CPA: $1,000-5,000/year for tax planning, filing, and strategic advice.

Record Retention

• Tax returns: 7 years (IRS can audit up to 6 years for substantial understatement, generally 3).
• Business records: 7 years.
• Employment records: 4 years after termination.
• Property records: Until disposition + 7 years.
• Bank statements: 7 years.

When to Hire a CPA

• Your business structure changes (e.g., from sole prop to S Corp).
• You're audited or face a tax notice.
• You hire your first employee.
• You start selling in multiple states (sales tax nexus).
• You're approaching $30M in revenue and need to switch to accrual accounting.
• You want tax planning, not just tax preparation.