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Small Business Accounting 101: Ten
Steps to Get Your Startup on Track
215 shares
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)

2. 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! It
takes 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 to­
do lists. With your launch, you’ll need to get on top of the accounting tasks that come along
with owning a store. This list of 10 small business accounting steps will give you the
confidence to know you’ve covered your bases, and are ready to move on to the next item
on your business to­do list!
1. Open a Bank Account
After you’ve legally registered your business, you’ll need somewhere to stash your business
income. Having a separate bank account keeps records distinct and will make life easier
come tax time. Note that LLCs, partnerships, and corporations are legally required to have a
separate 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 will
help you organize funds and plan for taxes. For instance, set up a savings account and
squirrel away a percentage of each payment as your self­employed tax withholding. Next
you’ll want to consider a business credit card to start building business credit. Corporations
and LLCs are required to use a separate credit card to avoid commingling personal and
business assets.
Before you talk to a bank about opening an account, do your homework. Shop around for
business accounts and compare fee structures. Most business checking accounts have
fees 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, and
usually be registered with your state or province. Check with the individual bank for what
documents to bring to the appointment.
2. Track Your Expenses
The foundation of solid business record keeping is learning to track your expenses
effectively. It’s a crucial step that allows you to monitor the growth of your business, build
financial statements, keep track of deductible expenses, prepare tax returns, and support
what you report on your tax return.

3. Right from the beginning, you should establish a system for organizing receipts and other
important records. This process can be simple and old school (bring on the FiloFax), or you
can use a service like ShoeBoxed (https://www.shoeboxed.com/). For American store
owners, the IRS doesn’t require you to keep receipts for expenses under $75.00, but it’s a
good 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 a
great option, just be sure to document it well. On the back of the receipt, record who
attended and the purpose of the meal or outing.
Out of Town Business Travel: The IRS and CRA are wary of people claiming personal
activities as business expenses. Thankfully, your receipts also provide a paper trail of
your business activities while away.
Vehicle Related Expenses: Record where, when, and why you used the vehicle for
business, 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 giver
goes to the event with the recipient. If they do, then the expense would be categorized
as entertainment, rather than a gift. Note these details on the receipt.
Home Office Receipts: Similar to the vehicle expenses, you need to calculate what
percentage of your home is used for business and then apply that percentage to home
related expenses.
Starting your business at home is a great way to keep overhead low, plus you’ll qualify for
some unique tax breaks. You’re able to deduct the portion of your home that’s used for
business, as well as your internet connection, cell phone, and transportation to and from
work sites and for business errands. Any expense that’s used partly for personal life and
partly for business must reflect the mixed use. For instance, if you have one cell phone, you
can 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 exactly
what bookkeeping is, and how it differs from accounting. Bookkeeping is the day­to­day
process of recording transactions, categorizing them, and reconciling bank statements.
Accounting is a high level process that looks at business progress and makes sense of the
data compiled by the bookkeeper by building financial statements.

4. 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 your
needs.
Canadian and American business owners need to determine whether they’ll use the cash or
accrual method of accounting. Let’s take a look at the difference between the two methods
here:
Cash Method: Revenues and expenses are recognized at the time they are actually
received 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 and
payables.
Technically, Canadians are required to use the accrual method; but to simplify things, you
can use the cash method throughout the year and then make a single adjusting entry at
year 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 hire
a part­time employee to help you out, or a freelancer to design your logo. Right away, you
need to establish whether that individual is an employee or an independent contractor
(https://bench.co/blog/employees­independent­contractors/). For employees, you’ll need to
decide on a payroll schedule and ensure that you’re withholding the correct taxes; there are
lots 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 Excel
spreadsheet.
1.
You have the option of using an outsourced or part­time bookkeeper that’s either local
or cloud­based like Bench Accounting (https://bench.co/).
2.
When your business is big enough you can opt to hire an in­house bookkeeper and/or
accountant.
3.

5. can help with this. For independent contractors, be sure to track how much you’re paying
each person. American business owners may be required to file 1099s for each contractor
at 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 goods
from other countries to sell in your store. When importing products, you’ll likely be subject to
taxes and duties. These are fees that your country imposes on incoming goods. Take the
time to learn about importing goods into the US (www.sba.gov/community/blogs/importing­
goods­us­%E2%80%93­introductory­guide­small­business­owners) and Canada
(www.cbsa­asfc.gc.ca/import/guide­eng.html), and the associated taxes, so that you know
the 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 plan
for costs. Check out these additional articles on importing into Canada
(www.dutycalculator.com/country­guides/Import­duty­taxes­when­importing­into­Canada/)
and the US (www.dutycalculator.com/country­guides/Import­duty­taxes­when­importing­
into­the­United­States/) 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 North
American 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 a
merchant account or third party payment gateway.
If you want to accept credit card payments without using Shopify Payments, you’ll either
need a merchant account (www.shopify.ca/faq/what­is­a­merchant­account) or you can use
a third party payment processor like PayPal. A merchant account is a type of bank account
that allows your business to accept credit card payments from customers. If you use a third
party payment processor, the fees are generally around 2.9% + $0.30 per transaction. You
can consult this list to help you find a payment gateway (www.shopify.com/payment­
gateways#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 bit
confusing due to location issues. When a customer walks into a brick and mortar retail
shop, they pay the sales tax of whatever state or province they make the purchase in, no

6. matter if they live in that city, or they’re visiting from across the world. However, when you
sell online, you’re often selling to customers who live in different states/provinces, and even
countries.
As a Canadian store owner, you only need to start collecting GST/HST when you have
revenues 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 you
don’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 often
don’t need to charge sales tax when selling to out­of­country customers. Canadian store
owners don’t need to charge GST/HST to customers who are outside of Canada. For
American store owners, international purchases are tax exempt as well. However, this can
get a bit complicated depending on the state you live in, so check in with your accountant
for detailed information about your specific state’s regulations regarding international sales
tax.
8. Determine Your Tax Obligations
Tax obligations vary depending on the legal structure of the business. If you’re self­
employed (sole proprietorship, LLC, partnership), you’ll claim business income on your
personal tax return. Corporations, on the other hand, are separate tax entities and are taxed
independently 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 the
government in lieu of the withholding that an employer would normally conduct. For
American store owners, you’ll need to pay estimated quarterly taxes
(https://bench.co/blog/Estimated­Quarterly­Payments/) if you’ll owe more than $1,000 in
taxes this year. Canadians have it a little easier; if your net tax owing is more than $3,000
you’ll be required to pay your income tax in installments (www.cra­
arc.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. In
order to calculate gross margin, you need to know the costs incurred to produce your
product. To understand this better, let’s quickly define both Cost of Goods Sold (COGS) and
gross margin.

7. Cost of Goods Sold (COGS): These are the direct costs incurred in producing products
sold by a company. This includes both materials and direct labor costs.
Gross Margin: This number represents the total sales revenue that’s kept after the
business 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 business
actually takes home at the end of the day is what truly determines your ability to keep the
doors open.
10. Constantly Re-evaluate Your Methods
When you first start out you may opt to use a simple spreadsheet to manage your books but
as you grow you’ll want to consider more advanced methods like Quickbooks or Bench. As
you keep growing, it’s good to continually reassess the amount of time you’re spending on
your books, and how much that time is costing your business. The right bookkeeping
solution means you can invest more time in the business with bookkeeping no longer on
your 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 have
your new store’s finances in order from the beginning. From opening the right type of bank
account to determining how much you’ll bring in per product, these tasks will all contribute
to 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 online
bookkeeping service that pairs you with a professional bookkeeper and uses simple,
elegant software to do your books for you.

8. 215 shares
25 Comments Shopify Blog Login1
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• Reply •
Tejaswi Raghurama • a year ago
What an amazing comprehensive guide! I couldn't agree more on the importance of
understanding 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 I
have a question: do I need to keep receipts for items that will also appear on my credit card
statement, and are itemized in my GoDaddy bookkeeping system? I've been saving online
receipts 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 can
only 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 a
safeguard 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 a
lot 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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9. • Reply • 2 △ ▽
• Reply •
Tal • 6 months ago
This is rather a technical checklist for starting an online shop. I would suggest adding the
most 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 that
your 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 / Sales
Revenue] to measure expense control. This profitability indicator will let you know how
much of your total Sales Revenue is being lost to ALL expenses for the period (not just
COGS).
Stock Turnover [Ave. Stock On Hand * 365 / COGS] is also worth looking into. It's a
liquidity indicator that let's you know how long (on average) your stock is idle for before
being sold. If it seems high, you should consider lowering your order/manufacturing
frequency. 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 obscene
fees for a business bank account that had similar features as a personal account. Many
Canadian 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 business
accounts. You can still pay your business taxes online and keep accurate records of your
spending 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 for
sole proprietors.
△ ▽
• Reply •
Joyce Knight • a month ago
Reading this article can give you ideas how to improve your business. The #8 and #9 is the
most 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 to
write 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 it
for many people.
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10. • 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 with
quickbooks/ecc webgility. A complete disconnect with this info. Great advice, but we really
do 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 my
thinking...LOL), I keep on looking out for tips and suggestions. Not as an entrepreneur but
as 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. Most
of the places people just skip of mentioning the miscellaneous expenses. What happens is
when the hard core expense and miscellaneous gets mix up, there is huge sort of
ambiguity and finally the hard core expense merges the miscellaneous where in the
company 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 but
shipping 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 35
years 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 about
the project scope for an accountant when we start our new business.. just for eg. 1st what
does 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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• Reply •
Kèitümètsè Kèy­Twø Lehari • a year ago
I wish a lot of people who have small businesses or are interested in starting one up knew
all this because most businesses fail due to lack of knowledge and information by business
owners and the management. I'm certain that with this kind of information, a lot of
businesses will succeed and grow nationally and maybe internationally.Thank you for this
interesting 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 charge
them 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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