Accounting and tax professionals who work at small business bookkeeping offices across the country can all agree on one thing: if businesses are to succeed, business owners must know their numbers. It doesn’t matter how big or how small a company is, or how long they’ve been in business, they need to know the true financial state of their business.
For many new resellers, the thought of tracking financial data, such as the cost of goods sold, sales tax, and other facts and figures of operating a retail business, makes them want to run to the nearest thrift store to search for great “finds,” or hop online to check out the latest liquidation deals – anything to avoid entering what they perceive as a maze of spreadsheets and state tax rules. But take heed, resellers! Small business bookkeeping is an important part of running your ecommerce or traditional brick and mortar business, whether it’s your full-time gig, or a side hustle.
Let’s just cover some basics.
So, What’s the Difference Between Bookkeeping, Accounting, and Tax Preparation?
We’re all familiar with tax preparation — that’s what we all do each year to determine the appropriate tax amounts we owe to our state and federal governments based on our income and several other factors. What we do throughout the year to keep track of this financial data determines if preparing those income tax returns will be a smooth process, or one filled with disorganization and angst.
Let’s start by clearing up confusion about the difference between accounting and bookkeeping — there isn’t any, they’re synonymous, and the terms can be used interchangeably according to Anna Hill, CPA and owner of Accounting We Will Go, a business she started with her partner to provide educational material to e-commerce sellers.
“Bookkeeping or accounting is the process where a seller creates, or pays someone to create, reconciled financial statements on a monthly, quarterly, or yearly basis. That’s the underlying detail that then rolls into the tax return,” she said.
Bookkeepers, Accountants, and CPA’s … Oh My!
To clarify that further, Hill said that reconciled financial statements consist of a balance sheet and an income statement that can be prepared by a bookkeeper, an accountant, or a Certified Public Accountant (CPA) – and all three of those roles mean something a little bit different.
“For tax preparation, it’s really important that it’s either a CPA or an enrolled agent, and those are both people who are authorized by the IRS to prepare returns on behalf of others,” explained Hill, clarifying the role of a CPA distinct from a bookkeeper and accountant.
And while the general terms of bookkeeping and accounting are synonymous, there is a difference between a bookkeeper and an accountant. While there is no licensing or monitoring by the state for a bookkeeper or an accountant, a person is usually called an accountant when they have a degree in accounting.
CPA’s have an advanced degree, usually a master’s in accountancy or some related field, and they must then pass state exams to become certified. A CPA is the only one of the three roles that is actually licensed by the state, and they must obtain recertification periodically as per state requirements.
Understanding the difference between a bookkeeper, an accountant, and a CPA helps small business owners choose the appropriate level of expertise they want for their business.
What Do I Keep Track Of? How? Where? Huh?
Sometimes getting started is the hardest part. Many resellers are get stuck trying to figure out “the best way” to set up a small business bookkeeping system.
“People get trapped in a place of inaction because they really don’t know what to do,” Hill said, and suggested that resellers start by tracking the following:
· the date you bought your inventory
· what you paid for it
· the date it sells
· what it sold for
Simply log the information outlined above in a computer spreadsheet software program (like Excel or Google Sheets, for instance), and if you’re not comfortable with that, you can use a good old-fashioned notebook. Resellers should also keep track of expenses such as shipping, packaging, fees to name a few.
“The whole idea about accounting is that it needs to evolve as the business evolves, so writing it down on a piece of paper may make sense on day one, but by month six it may not make sense anymore. So, having a system to collect those data points and maintain it with diligence and consistency is the secret to success,” said Hill.
And she added, “It’s important for all resellers to know how they’re doing on, preferably a monthly basis, but at least quarterly, because it’s a poor business practice to wonder all year long how you’re doing and then at tax time…SURPRISE! That’s a really bad long-term strategy.”
Getting Started with Small Business Bookkeeping
People feel overwhelmed and often over-complicate these tasks because they’re unsure about the process. Hill encourages resellers to begin right where they are and improve on that.
“Making that move to get started is all it takes, and eventually the right system will fall into place. It doesn’t have to be difficult, there just needs to be a set system, and then that system will grow and evolve,” said Hill.
As 2018 comes to a close, this is a great time of year for resellers to think about what steps to take to improve your small business bookkeeping practices and to consider whether it’s time to enlist a bookkeeper, accountant, or a CPA to help as your business grows.