Following the basic accounting principles for small businesses can help you to stay on top of your finances.
Doing your company’s accounting yourself may prove difficult or confusing. It might be tempting to just keep track of the basics (sales, expenses, cash flow) and leave the in-depth accounting for tax season.
Ignoring finances can hamper small businesses and cause them to miss opportunities to expand. Having a good grip on all aspects of your accounting lets you analyze costs and spot trends that can lead to more profitability.
What Are Small Business Accounting Principles?
There is some subjective adding and subtracting that many small business accountants do at their discretion, but most follow generally accepted accounting principles (GAAP).
This set of standards helps keep your accounting practices on the right track. You likely won’t miss important information by following GAAP rules.
When looking for small business accounting tips, it’s best to start by learning all about GAAP.
Top 10 Accounting Principles for Small Business
Following these 10 accounting principles for small business is considered best practice.
- Economic entity principle
- Monetary unit assumption
- Time period principle
- Cost principle
- Full disclosure principle
- Going concern principle
- Revenue recognition principle
- Matching principle
- Materiality principle
- Conservatism principle
1. Economic Entity Principle
This is a crucial accounting principle for small businesses: Owners must make sure to keep their personal and business finances separate.
Even in a sole proprietorship, in which you and your business are considered a single entity, it’s best practice not to mix personal and business finances for accounting purposes.
Keeping these finances separate gives you a clear view of how your business is performing.
2. Monetary Unit Assumption
When recording transactions, you should only track those that can be expressed in a consistent monetary unit. In the case of your American small business, this would be U.S. dollars, obviously.
Make sure to express past transactions without inflation. Calculating revenue from 20 years ago with inflation can lead you to overestimate and undervalue your current performance.
3. Time Period Principle
Dates are important: On every report and financial document (balance sheet, income statement, profit and loss statement, etc.), state when the data was taken.
For example, a balance sheet should state when it was created. A balance sheet created on April 1 should state that the data is “as of” April 1.
If you’re reporting for a weekly range, make that clear. For example, you could write “the week ending April 1” so readers know exactly which dates the data comes from.
Small business tip: Don’t limit your financial reporting to quarterly and yearly reviews. Getting monthly, weekly or even daily information could help you spot opportunities to maximize your business’s performance.
4. Cost Principle
The cost accounting principle for small business ensures you correctly value the expenses of your company’s assets.
When tracking your business costs, it might be tempting to look at an asset’s current value. While it’s important to consider depreciation in other areas of accounting, you’ll want to record exactly what you paid for something when calculating these costs.
5. Full Disclosure Principle
This small business accounting principle is easy to follow: Simply state the purpose and policies of your business on any financial statement you produce.
The goal isn’t to mislead anyone who uses the information, be it a lawyer, stockholder or someone else. Avoid potential litigation or federal sanctions by following this principle.
This may seem self-explanatory, but one of the best small business accounting tips out there is being honest and transparent.
6. Going Concern Principle
This small business accounting principle is based off on whether your business is expected to continue operations indefinitely.
A business that isn’t considered a “going concern” will have finances that continue to trend downward. Typically, an external auditor will review these finances and determine whether the business can sustain operations.
If not, key stakeholders must be made aware so they aren’t blindsided when a company ceases operations because of poor finances.
7. Revenue Recognition Principle
If using the accrual basis accounting method, you should also follow the revenue recognition principle.
With this small business accounting principle, it’s best practice for owners to recognize sales when they happen. Even if it takes you weeks to receive payment on an invoice, you should count the revenue for the day or week that the transaction transpired.
8. Matching Principle
The matching accounting principle for small business ensures your revenue and expenses are reported at the time they happen. This is the main tenet of accrual basis accounting.
For example, you should list employee wages for the period the work was performed instead of the week they receive their check.
9. Materiality Principle
The materiality principle lets an accountant use their professional discretion to ignore an accounting principle and determine how to report an expense.
If an expense is deemed “immaterial” or having little consequence to the bottom line, it may be permissible to count a long-term expense now instead of spreading the cost out.
This accounting principle also allows small business owners to round their financial reports up or down to the nearest hundred or thousand, depending on their size. Such changes are considered permissible, so long as they don’t bear any consequences for false reporting or stock evaluations.
Conservatism doesn’t allow accountants to ignore other small business accounting principles, but they can still use their judgment.
If the accountant has multiple options to report an income or expense, conservatism allows them to choose the one that results in less net income. This isn’t to say accountants should be conservative (they should always be honest and fair), but they can choose to go with the lower amount.
Being conservative does have its benefits. If you think you’ve made a little less, this principle makes it less likely you’ll create expenses you may not need.
Following Accounting Principles for Your Small Business
These 10 accounting principles should create a template for your small business to follow.
Sticking to these guidelines will give you a clear picture of your business’s finances. You can find trends and explore new opportunities that can help you expand your business.
For more small business accounting tips and other ways to help manage your small business, check out our Beyond Capital blog.