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Page 1: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

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Small Business Accounting 101: TenSteps to Get Your Startup on Track

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How to start a business (/blog/topics/how-to-start-a-business)25 comments (https://www.shopify.com/blog/15334373-small-business-accounting-101-ten-steps-to-get-your-startup-on-track#disqus_thread)

by Richard Lazazzera (//twitter.com/RichardABLS)

Page 2: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

This is a guest post by Kendra Murphy from Bench Accounting (http://www.bench.co?utm_source=Shopify&utm_medium=GuestPost&utm_campaign=10StepsBlog).

You’re about to launch your online store (or maybe you just launched) – congratulations! Ittakes perseverance and passion to get to the point you’re at. However, as you know,business ownership is a constant flood of satisfying milestones coupled with expanding to­do lists. With your launch, you’ll need to get on top of the accounting tasks that come alongwith owning a store. This list of 10 small business accounting steps will give you theconfidence to know you’ve covered your bases, and are ready to move on to the next itemon your business to­do list!

1. Open a Bank Account

After you’ve legally registered your business, you’ll need somewhere to stash your businessincome. Having a separate bank account keeps records distinct and will make life easiercome tax time. Note that LLCs, partnerships, and corporations are legally required to have aseparate bank account for business. Sole proprietors don’t legally need a separate account,but it’s definitely recommended.

Start by opening up a business checking account, and then any savings accounts that willhelp you organize funds and plan for taxes. For instance, set up a savings account andsquirrel away a percentage of each payment as your self­employed tax withholding. Nextyou’ll want to consider a business credit card to start building business credit. Corporationsand LLCs are required to use a separate credit card to avoid commingling personal andbusiness assets.

Before you talk to a bank about opening an account, do your homework. Shop around forbusiness accounts and compare fee structures. Most business checking accounts havefees that are higher than personal banking, so pay close attention to what you’ll owe.

In order to open a business bank account, you’re required to have a business name, andusually be registered with your state or province. Check with the individual bank for whatdocuments to bring to the appointment.

2. Track Your Expenses

The foundation of solid business record keeping is learning to track your expenseseffectively. It’s a crucial step that allows you to monitor the growth of your business, buildfinancial statements, keep track of deductible expenses, prepare tax returns, and supportwhat you report on your tax return.

Page 3: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

Right from the beginning, you should establish a system for organizing receipts and otherimportant records. This process can be simple and old school (bring on the FiloFax), or youcan use a service like ShoeBoxed (https://www.shoeboxed.com/). For American storeowners, the IRS doesn’t require you to keep receipts for expenses under $75.00, but it’s agood habit nonetheless.

There are five types of receipts that you should pay extra attention to:

Meals and Entertainment: Conducting a business meeting in a cafe or restaurant is agreat option, just be sure to document it well. On the back of the receipt, record whoattended and the purpose of the meal or outing.

Out of Town Business Travel: The IRS and CRA are wary of people claiming personalactivities as business expenses. Thankfully, your receipts also provide a paper trail ofyour business activities while away.

Vehicle Related Expenses: Record where, when, and why you used the vehicle forbusiness, and then apply the percentage of use to vehicle related expenses.

Receipts for Gifts: For gifts like tickets to a concert, it matters whether the gift givergoes to the event with the recipient. If they do, then the expense would be categorizedas entertainment, rather than a gift. Note these details on the receipt.

Home Office Receipts: Similar to the vehicle expenses, you need to calculate whatpercentage of your home is used for business and then apply that percentage to homerelated expenses.

Starting your business at home is a great way to keep overhead low, plus you’ll qualify forsome unique tax breaks. You’re able to deduct the portion of your home that’s used forbusiness, as well as your internet connection, cell phone, and transportation to and fromwork sites and for business errands. Any expense that’s used partly for personal life andpartly for business must reflect the mixed use. For instance, if you have one cell phone, youcan deduct the percentage you use the device for business. Gas mileage costs are 100%deductible, just be sure to hold on to all records and keep a log of your business miles(where you’re going and the purpose of the trip).

3. Develop a Bookkeeping System

Before we jump into establishing a bookkeeping system, it’s helpful to understand exactlywhat bookkeeping is, and how it differs from accounting. Bookkeeping is the day­to­dayprocess of recording transactions, categorizing them, and reconciling bank statements.

Accounting is a high level process that looks at business progress and makes sense of thedata compiled by the bookkeeper by building financial statements.

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As a new business owner, you’ll need to determine which bookkeeping method to use:

With so many options out there, you’re sure to find a bookkeeping solution that will suit yourneeds.

Canadian and American business owners need to determine whether they’ll use the cash oraccrual method of accounting. Let’s take a look at the difference between the two methodshere:

Cash Method: Revenues and expenses are recognized at the time they are actuallyreceived or paid.

Accrual Method: Revenues and expenses are recognized when the transaction occurs(even if the cash isn’t in or out of the bank yet) and requires tracking receivables andpayables.

Technically, Canadians are required to use the accrual method; but to simplify things, youcan use the cash method throughout the year and then make a single adjusting entry atyear end to account for outstanding receivables and payables for tax purposes.

American business owners can use cash based accounting if revenues are under USD$5M, otherwise they must use the accrual method.

4. Set up a Payroll System

As a new online store owner, you’ll likely be a one­person show. However, maybe you’ll hirea part­time employee to help you out, or a freelancer to design your logo. Right away, youneed to establish whether that individual is an employee or an independent contractor(https://bench.co/blog/employees­independent­contractors/). For employees, you’ll need todecide on a payroll schedule and ensure that you’re withholding the correct taxes; there arelots of services (http://www.inc.com/guides/2010/05/choosing­a­payroll­service.html) that

You can choose to go the DIY route and use software like Quickbooks(http://www.quora.com/What­is­the­best­accounting­solution­for­an­eCommerce­store)or Wave (https://www.waveapps.com/). Alternatively, you could use a simple Excelspreadsheet.

1.

You have the option of using an outsourced or part­time bookkeeper that’s either localor cloud­based like Bench Accounting (https://bench.co/).

2.

When your business is big enough you can opt to hire an in­house bookkeeper and/oraccountant.

3.

Page 5: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

can help with this. For independent contractors, be sure to track how much you’re payingeach person. American business owners may be required to file 1099s for each contractorat year end (you’ll also need to keep their name and address on file for this!).

5. Investigate Import Tax

Depending on your business model, you may be planning to purchase and import goodsfrom other countries to sell in your store. When importing products, you’ll likely be subject totaxes and duties. These are fees that your country imposes on incoming goods. Take thetime to learn about importing goods into the US (www.sba.gov/community/blogs/importing­goods­us­%E2%80%93­introductory­guide­small­business­owners) and Canada(www.cbsa­asfc.gc.ca/import/guide­eng.html), and the associated taxes, so that you knowthe rules from the get­go. Also, if you are importing goods, the Duty Calculator(www.dutycalculator.com/) can help you estimate the fees in your own business and planfor costs. Check out these additional articles on importing into Canada(www.dutycalculator.com/country­guides/Import­duty­taxes­when­importing­into­Canada/)and the US (www.dutycalculator.com/country­guides/Import­duty­taxes­when­importing­into­the­United­States/) if you have any more questions.

6. Determine How You’ll Get Paid

When sales start rolling in, you’ll need a way to accept the payments. If you’re a NorthAmerican store owner on Shopify, you can use Shopify Payments(http://docs.shopify.com/manual/more/shopify­payments) to accept credit card payments(Visa, American Express, and Mastercard). This saves you the hassle of setting up amerchant account or third party payment gateway.

If you want to accept credit card payments without using Shopify Payments, you’ll eitherneed a merchant account (www.shopify.ca/faq/what­is­a­merchant­account) or you can usea third party payment processor like PayPal. A merchant account is a type of bank accountthat allows your business to accept credit card payments from customers. If you use a thirdparty payment processor, the fees are generally around 2.9% + $0.30 per transaction. Youcan consult this list to help you find a payment gateway (www.shopify.com/payment­gateways#Gateways) that will work for your location.

7. Establish Sales Tax Procedures

The world of eCommerce has shaken up sales tax regulations and they are admittedly a bitconfusing due to location issues. When a customer walks into a brick and mortar retailshop, they pay the sales tax of whatever state or province they make the purchase in, no

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matter if they live in that city, or they’re visiting from across the world. However, when yousell online, you’re often selling to customers who live in different states/provinces, and evencountries.

As a Canadian store owner, you only need to start collecting GST/HST when you haverevenues of $30,000 or more in a year (submit the GST/HST you collect in installments(www.cra­arc.gc.ca/mkpymnt­eng.html)). If you want, you can collect GST/HST even if youdon’t earn this much in revenue, as you can put it towards Input Tax Credits(https://bench.co/blog/gst­hst­basics/).

Selling to international customers can be easier than domestic sales because you oftendon’t need to charge sales tax when selling to out­of­country customers. Canadian storeowners don’t need to charge GST/HST to customers who are outside of Canada. ForAmerican store owners, international purchases are tax exempt as well. However, this canget a bit complicated depending on the state you live in, so check in with your accountantfor detailed information about your specific state’s regulations regarding international salestax.

8. Determine Your Tax Obligations

Tax obligations vary depending on the legal structure of the business. If you’re self­employed (sole proprietorship, LLC, partnership), you’ll claim business income on yourpersonal tax return. Corporations, on the other hand, are separate tax entities and are taxedindependently from owners. Your income from the corporation is taxed as an employee.

Self­employed people need to withhold taxes from their income, and remit these to thegovernment in lieu of the withholding that an employer would normally conduct. ForAmerican store owners, you’ll need to pay estimated quarterly taxes(https://bench.co/blog/Estimated­Quarterly­Payments/) if you’ll owe more than $1,000 intaxes this year. Canadians have it a little easier; if your net tax owing is more than $3,000you’ll be required to pay your income tax in installments (www.cra­arc.gc.ca/tx/ndvdls/tpcs/ncm­tx/pymnts/nstlmnts/wh­eng.html).

9. Calculate Gross Margins

Improving your store’s gross margin is the first step towards earning more income overall. Inorder to calculate gross margin, you need to know the costs incurred to produce yourproduct. To understand this better, let’s quickly define both Cost of Goods Sold (COGS) andgross margin.

Page 7: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

Cost of Goods Sold (COGS): These are the direct costs incurred in producing productssold by a company. This includes both materials and direct labor costs.

Gross Margin: This number represents the total sales revenue that’s kept after thebusiness incurs all direct costs to produce the product or service.

Here’s how you can go about calculating gross margin:

Gross Margin (%) = (Revenue ­ COGS) / Revenue

The difference between how much you sell a product for, and how much the businessactually takes home at the end of the day is what truly determines your ability to keep thedoors open.

10. Constantly Re-evaluate Your Methods

When you first start out you may opt to use a simple spreadsheet to manage your books butas you grow you’ll want to consider more advanced methods like Quickbooks or Bench. Asyou keep growing, it’s good to continually reassess the amount of time you’re spending onyour books, and how much that time is costing your business. The right bookkeepingsolution means you can invest more time in the business with bookkeeping no longer onyour plate, and potentially save the business money. Win­win!

Conclusion

Starting a business can be an overwhelming process, but if you follow this list, you’ll haveyour new store’s finances in order from the beginning. From opening the right type of bankaccount to determining how much you’ll bring in per product, these tasks will all contributeto your business’s success, now and as it grows.

About the Author: This post is brought to you by Bench (http://www.bench.co?utm_source=Shopify&utm_medium=GuestPost&utm_campaign=10StepsBlog), the onlinebookkeeping service that pairs you with a professional bookkeeper and uses simple,elegant software to do your books for you.

Page 8: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

215 shares

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• Reply •

Tejaswi Raghurama • a year ago

What an amazing comprehensive guide! I couldn't agree more on the importance ofunderstanding Sales Taxes and getting the process right early.

Just to add, always good to keep track of Inventory. COGS reports should be run regularly. 6

• Reply •

Kendra Murphy • a year ago> Tejaswi Raghurama

Thanks, Tejaswi. And we appreciate the additional thoughts! 2

• Reply •

Carole @ Emu Bliss • a year ago

I didn't know that the IRS doesn't require me to keep receipts for purchases under $75.00 Ihave a question: do I need to keep receipts for items that will also appear on my credit cardstatement, and are itemized in my GoDaddy bookkeeping system? I've been saving onlinereceipts in an Evernote folder every time I receive one.

4

• Reply •

Richard Lazazzera • a year agoMod > Carole @ Emu Bliss

The answer generally is always yes. Even if you don't, having those receipts canonly help you one day if you do get audited.

1

• Reply •

Kendra Murphy • a year ago> Richard Lazazzera

Very true, thanks Richard! It's always best to hold on to your receipts as asafeguard for yourself and your business.

2

• Reply •

taxifyhq • a year ago

Love #7 and #8! It's so important for businesses to get their sales tax in order. We offer alot of free resources on our website to help. http://www.taxify.co

3

Kendra Murphy • a year ago> taxifyhq

It really is important! Thanks for the resource.2

Recommend 7

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Page 9: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

• Reply • 2

• Reply •

Tal • 6 months ago

This is rather a technical checklist for starting an online shop. I would suggest adding themost important step: find a real valuable product.That means you first need to be familiar with your market in a very interment level. Second you need to find the a product market fit ­ that is the most important products thatyour market is desperate to have. and Third you need to build a strategy for go­to­market.

1

• Reply •

Adam • a year ago

Great article.

In addition to the Gross Margin, I'd also suggest using the NET Margin [Net Profit / SalesRevenue] to measure expense control. This profitability indicator will let you know howmuch of your total Sales Revenue is being lost to ALL expenses for the period (not justCOGS).

Stock Turnover [Ave. Stock On Hand * 365 / COGS] is also worth looking into. It's aliquidity indicator that let's you know how long (on average) your stock is idle for beforebeing sold. If it seems high, you should consider lowering your order/manufacturingfrequency. The formula is interpreted in days (eg ­ 43 days).

Adam. 1

• Reply •

Mundial Treasures • a year ago

Very well written! When www.mundialtreasures.com first opened we were paying obscenefees for a business bank account that had similar features as a personal account. ManyCanadian banks allow you to open a second personal bank account free of charge.Secondary personal bank accounts can easily be used in the same manner as businessaccounts. You can still pay your business taxes online and keep accurate records of yourspending vs your earnings. This of course only applies to Sole proprietors.

1

• Reply •

Kendra Murphy • a year ago> Mundial Treasures

@Mundial Treasures thanks for adding this tip! That could be a good solution forsole proprietors.

• Reply •

Joyce Knight • a month ago

Reading this article can give you ideas how to improve your business. The #8 and #9 is themost important part having your business in track. Cheers!

Avady Clothing Company • 2 months ago

This is a great guide; however, if I could suggest talking to your tax guy before trying towrite off part of your home as a deduction. If I'm correct, when you try to sell your home,you then need to do paperwork and might have to pay money. It is most likely not worth itfor many people.

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Page 10: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

• Reply •

for many people.

• Reply •

Heather Wright • 3 months ago

Shopify doesn't track COGS. You have to install other apps that don't sync that info withquickbooks/ecc webgility. A complete disconnect with this info. Great advice, but we reallydo need that as a standard option on shopify. It's ecommerce 101 to track your costs.

• Reply •

Sital Thomas • 5 months ago

Amazing write up Richard!!! Being a dreamer and a upcoming entrepreneur (limited to mythinking...LOL), I keep on looking out for tips and suggestions. Not as an entrepreneur butas an individual I would like to suggest one more tip here.

Expenses are of two kinds, one is hard core expense and the other is miscellaneous. Mostof the places people just skip of mentioning the miscellaneous expenses. What happens iswhen the hard core expense and miscellaneous gets mix up, there is huge sort ofambiguity and finally the hard core expense merges the miscellaneous where in thecompany investment has an unusual figure comes up with.

Just a thought!!!

• Reply •

heidy valdes • 6 months ago

Do you include shipping costs in the direct cost? for example, the materials cost $4 butshipping for the products was $55. How do I include that cost?

• Reply •

Olivia Smith • 7 months ago

What do you suggest on how to get started in developing a contrat bookkeeping company?I would like to work on my time, therefore contract myself out as a bookkeeper. I have 35years experience and am considered a corporate accounant.

• Reply •

Krissy • 7 months ago

I'm getting 404s from the section on import tax. Do you have some updated links for this?

• Reply •

Virgo Te'Quiro • 8 months ago

im business student, the info was really use full.. any way i want to ask something aboutthe project scope for an accountant when we start our new business.. just for eg. 1st whatdoes accountant have to do is to create the budget, then to review our funding objective,and what else does the accountant do?

• Reply •

MUBARIK NAGRA • 9 months ago

NICE

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Page 11: Small business accounting 101  ten steps to get your startup on track — ecommerce marketing blog   ecommerce news, online store tips & more by shopify

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• Reply •

Kèitümètsè Kèy­Twø Lehari • a year ago

I wish a lot of people who have small businesses or are interested in starting one up knewall this because most businesses fail due to lack of knowledge and information by businessowners and the management. I'm certain that with this kind of information, a lot ofbusinesses will succeed and grow nationally and maybe internationally.Thank you for thisinteresting information,I'll one day look back at it when I'm starting up my own business.

KJ Lehari 14172527

• Reply •

Lout • a year ago

Better, just throw all your receipts in a shoe box. Give them to your accountant April 13.Revenue? Call me after you've got the numbers.

• Reply •

Lifelongwellness • a year ago

Just to double check: I am an online store in Canada and if I sell to the US I do not chargethem GST/HST or any taxes at all??? Thanks!

• Reply •

Kendra Murphy • a year ago> Lifelongwellness

Correct! You don't charge sales tax to customers who are outside of Canada.

• Reply •

Mundial Treasures • a year ago> Lifelongwellness

@Lifelongwellness, no you charge no sales tax to anywhere outside of Canada.

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