Launching your small business means taking on new accounting responsibilities. While managing your finances might not be the most exciting part of running your store, it’s essential for long-term success.
Good accounting practices help you track how your business makes and spends money, calculate taxes accurately, and file returns on time. Understanding your finances lets you make smarter decisions to increase your profits.
This guide covers everything you need to know about small business accounting, including the best accounting tools to help you manage your finances effectively.
Ready to start your business? Create your website today or learn more about Shopify’s tools for selling online and in person.
What is small business accounting?
Small business accounting involves tracking, measuring, and organizing your business finances. These activities include recording transactions, reconciling bank statements, managing payroll and inventory, and handling taxes.
How to do small business accounting in 13 steps
- Open a small business bank account
- Build your business credit score
- Develop a small business accounting system
- Track your small business expenses
- Set up a small business payroll system
- Investigate import tax
- Choose your payment methods
- Set up sales tax procedures
- Know your tax obligations
- Calculate gross margins
- Get business funding
- Find high-quality accounting partners
- Periodically review your accounting methods
1. Open a small business bank account
A separate bank account for your business protects your personal assets if you face bankruptcy, lawsuits, or audits. Having strong business financial records also makes it easier to get funding from creditors or investors.
To open a business bank account, you’ll need:
- A registered business name
- State or provincial registration, if required
- Appropriate business licenses
- Additional documents (check with your chosen bank)
Start with a checking account, then add savings accounts to organize your cash flow and plan for taxes. Set aside 25% of your income for taxes—high-income businesses may need to save up to one-third.
Note: LLCs (particularly California LLCs, Texas LLCs, and Florida LLCs), partnerships, and corporations must legally maintain a separate bank account. While sole proprietors aren’t legally required to have a separate account, it’s strongly recommended.
2. Build your business credit score
As a new business owner, getting a business credit card helps you build credit—which you’ll need for future funding or financing large purchase orders. If you run a corporation or LLC, you must use a separate credit card to keep personal and business finances separate.
Choose a business credit card that matches your business transactions. If you travel frequently, look for cards offering travel rewards. Some cards, like Shopify Credit, give cash back on your highest spending category.
3. Develop a small business accounting system
Ecommerce accounting helps you understand your business’s progress by analyzing the data in your financial statements. You have two main options for managing your books:
- Handle it yourself using software like QuickBooks, Wave, or a spreadsheet
- Work with a bookkeeper or accountant (full-time or contract)
You’ll also need to choose between two accounting methods:
- Cash method: Record revenues and expenses when money changes hands
- Accrual method: Record transactions when they occur, even before money changes hands—this requires tracking receivables and payables
US businesses with revenues of less than $5 million can use either method. Larger businesses must use accrual accounting. Canadian businesses must technically use accrual accounting, but can simplify by using cash accounting throughout the year and making one adjustment at year-end for outstanding receivables and payables.
4. Track your small business expenses
Tracking expenses helps you monitor business growth, create financial statements, track deductions, and prepare accurate tax returns. While US store owners don’t need receipts for expenses under $75, keeping records of all spending helps you understand your business’s financial health.
Keep detailed records for these five important expense types:
- Meals and entertainment: When meeting for business at a restaurant, note who attended and the meeting’s purpose on the receipt.
- Out-of-town travel: Keep receipts to document business activities while traveling—tax agencies look closely at travel expenses.
- Vehicle use: Record when and why you used your vehicle for business. Gas mileage is fully deductible if you keep detailed logs of business trips, including destinations and purposes.
- Business gifts: If you give tickets to an event, note whether you attended. This determines if the expense is classified as entertainment or a gift.
- Home office: Starting your business at home is a great way to keep overhead low. You can deduct the percentage of your home used for business, plus portions of internet, phone, and transportation costs for business errands.
5. Set up a small business payroll system
As your online store grows, you’ll eventually need to hire outside help. First, determine whether to hire employees or independent contractors.
For employees:
- Create a payroll schedule
- Set up tax withholding
- Consider payroll software or services (many accounting tools offer this feature)
For independent contractors:
- Track payments carefully
- Keep contact information for tax forms
- US businesses may need to file 1099s for each contractor at year end
6. Investigate import tax
If you import products or sell internationally, you’ll need to handle taxes and duties—particularly important for dropshipping businesses. Use Shopify Markets to:
- Estimate import fees
- Calculate duties at checkout
- Create a paper trail for customs
- Help customers avoid surprise fees
For more details, check the International Trade Administration (US) or Canadian Border Services Agency.
7. Choose your payment methods
As orders come in, you’ll need reliable ways to get paid. Shopify Payments lets North American merchants accept credit and debit cards without setting up separate payment processing.
If you use other payment processors, compare their fee structures:
- Percentage plus flat fee (typically 2.9% + 30¢ per transaction)
- Flat transaction fees
- Monthly subscription for unlimited transactions
With Shopify Payments, you can accept online payments or sell in person through Shopify POS. Offer contactless payments, digital wallets, and even interest-free installments with Shop Pay. All data is available in your Shopify admin for easy accounting.
“Shop Pay Installments is now 6.5% of our GMV [gross merchandise volume],” says Will Beck, director of business development at Pillow Cube. “We’ve also seen a consistent increase in our average order value rate.”
8. Set up sales tax procedures
Sales tax rules differ for online and in-person sales. While brick-and-mortar stores charge tax based on their location, online stores need to consider where their customers live.
US businesses must first determine if they operate in an origin-based or destination-based state. Origin-based states require you to charge sales tax based on your business location, while destination-based states require tax based on the customer’s location.
Canadian businesses need to start collecting goods and services tax (GST) and harmonized sales tax (HST) after reaching $30,000 in revenue within 12 months. You can submit these collected taxes in installments.
Selling to international customers can be simpler than domestic tax, but rules vary by region. Talk with your accountant about specific regulations for your location.
9. Know your tax obligations
Your tax obligations depend on your business structure. If you’re self-employed through a sole proprietorship, LLC, or partnership, you’ll claim business income on your personal tax return and file annually by April 15.
Corporations file taxes separately from owners, since they’re considered separate tax entities. You’ll need to pay corporation tax by the 15th day of the fourth month after your tax year end, and you’ll report any personal income from the corporation as an employee. Working with a tax professional can save you time and money in the long run, especially when you’re unsure about your tax obligations.
10. Calculate gross margin
Your gross margin shows how much money you keep after paying direct costs to produce your product or service. This key metric helps you understand if your business can sustain itself.
To find your gross margin percentage, subtract your cost of goods sold (COGS) from your revenue, then divide by revenue. COGS includes both materials and direct labor costs.
Gross margin (%) = (revenue - COGS) / revenue
💡 Pro tip: Use our free profit margin calculator to quickly run these numbers.
11. Get business funding
Growing your business often requires additional funding. You might need capital to develop new products, buy inventory, open retail locations, hire staff, or manage seasonal changes and unexpected sales downturns.
Most lenders require financial statements, including a balance sheet, income statement, and sometimes a cash flow statement. Shopify Capital offers a simpler option for Shopify merchants to secure funding, providing funding based on your store’s sales history, with repayments made through future sales.
Before taking any loan, calculate your return on investment by comparing your expected financing expenses, projected new revenue, and interest costs. You can use our business loan calculator to make sure the funding will benefit your business in the long run.
12. Find high-quality accounting partners
A skilled financial planner can help you better manage your money and plan for growth. Consider working with the following:
- A certified public accountant (CPA) is essential if you face an audit—they’re the only professionals legally qualified to prepare audited financial statements.
- A bookkeeper handles your day-to-day records, reconciling accounts, categorizing expenses, and managing accounts receivable and payable.
- Tax professionals come in two forms: preparers who file your tax returns and set up estimated payments, and planners who help reduce your tax burden before filing.
💡 Pro tip: Shopify Partners connects you with sales tax experts to simplify your accounting process.
13. Periodically review your accounting methods
You might start with a simple spreadsheet to manage your books, but your financial needs will grow with your business. As you scale, consider more advanced solutions like QuickBooks or Bench.
Regularly reassess how much time you spend on bookkeeping and what it costs your business. The right solution can free up your time and potentially reduce expenses.
Best small business accounting software
Good small business accounting software helps you track your finances efficiently. Once connected to your bank accounts, it categorizes transactions automatically and displays them in your chart of accounts. You can check balances, understand revenue and costs, estimate profits, and plan for taxes.
When choosing accounting software, look for:
- Platform integrations with your ecommerce platform and third-party tools
- Advanced reporting for inventory and expenses to monitor financial health
- Sales tax configuration to help with collection and payment
- Reliable customer support, including 24/7 options and self-service resources
You’ll find many user-friendly options in the Shopify App Store that integrate seamlessly with your store. Here are some popular choices:
Xero
Xero is a cloud-based accounting system designed for small and growing businesses. You can connect with trusted advisers and gain visibility into your financial health from any device. Its advanced features help you track cash flow, transactions, and other key financial data.
Benefits:
- Inventory and stock management
- Affordable pricing
- Connects to major banks
- Easy to view and customizable reports
- Contact database and segmentation
- Payroll
- Mobile app
- Bank reconciliation
- Integrates with Shopify
QuickBooks Online
QuickBooks Online, from Intuit, helps you track income and expenses while managing receipts and invoices. It shows all your costs—like inventory and maintenance—alongside your sales over time. The software updates your sales and inventory costs automatically using perpetual inventory tracking, and integrates with Shopify to keep your data organized.
Benefits:
- Mobile app
- Cloud-based
- Mileage tracking
- Contractor management
- Inventory tracking
- Separating business and personal expenses
- Integrates with Shopify
Wave
Wave is a web-based accounting solution built for small businesses. Link your bank accounts, PayPal accounts, and other data sources to see real-time transactions. The platform generates essential reports including accounts receivable, balance sheets, profit and loss statements, and sales tax reports.
Benefits:
- Affordable
- Competitive credit card processing fees
- Free accounting and receipt scanning
- No transaction or billing limits
- Unlimited number of users
- Mobile app
FreshBooks
FreshBooks is cloud-based accounting and invoice management software that handles expense management, core accounting, and basic bookkeeping for small businesses.
Benefits:
- Easy to use
- Simple pricing
- Customizable invoices
- Detailed self-service support
- Integrates with Shopify
Know your numbers to grow your business
Taking control of your business finances from the start sets you up for success. From choosing the right business credit card to calculating revenue per product, each financial decision shapes your business’s future. Taking time to understand banking, transaction management, and fundraising helps build a strong foundation for growth.
Read more
- How to Start a Dropshipping Business- A Complete Playbook for 2024
- The Ultimate Guide To Dropshipping (2024)
- How To Source Products To Sell Online
- 6 Tips for How To Be a Successful Dropshipper (Full Playbook)
- 25+ Ideas for Online Businesses To Start Now (2024)
- Amazon Dropshipping Guide- How To Dropship on Amazon (2024)
- What Is Affiliate Marketing and How to Get Started
- The 13 Best Dropshipping Suppliers in 2024
- 8 Steps to Prepare Your Ecommerce Store for Tax Filing
- How To Prepare for Shipping Rate Changes
Small business accounting FAQ
How do I do accounting for my small business?
While you can track basic accounting in a spreadsheet, it’s more efficient to use small business accounting software. At minimum, track your expenses and income in a secure cloud-based platform to avoid manual errors and save time.
How much should I pay an accountant for my small business?
In-house accountants earn around $70,000 annually according to the Bureau of Labor Statistics. Outsourced accounting services range from a few hundred to several thousand dollars monthly, depending on your needs.
What is the best accounting method for a small business?
Cash basis accounting works well for most small businesses. You only need to record money when it enters or leaves your bank account, which simplifies record keeping.
What does a bookkeeper do for a small business?
Bookkeepers manage day-to-day accounting tasks like reconciling accounts, recording transactions, managing accounts receivable and accounts payable, and preparing financial statements. They often handle payroll and invoicing, and help keep your small business compliant with financial regulations.
What are some common mistakes to avoid in small business accounting?
Many new businesses make the mistake of not getting professional help through either accounting software or financial advisers. Other common pitfalls include poor record keeping (including receipts), missing tax deadlines, or mixing personal and business finances.