Small-Business Taxes and Accounting Basics for Students

Running a small business takes more than a good idea and hard work. It also requires a solid understanding of how money moves in and out of the business. From keeping track of income to planning for taxes, financial knowledge helps business owners stay organized, avoid costly mistakes, and make smart decisions. Learning some basic accounting skills can go a long way in keeping your business healthy.

What Is Accounting?

Accounting is the process of recording, organizing, and analyzing financial information. For small businesses, this means tracking money earned (revenue) and money spent (expenses). Good accounting helps business owners see whether they're making a profit, where they might be overspending, and how much they owe in taxes.

There are two main types of accounting: cash basis and accrual basis. Cash basis accounting records income when it's received and expenses when they're paid. It's simpler and often used by small businesses. Accrual basis accounting, on the other hand, records income when it's earned and expenses when they're incurred, even if the money hasn't changed hands yet. This method gives a fuller picture of the business's finances but takes more effort to maintain.

Keeping accurate records is a big part of accounting. This includes receipts, invoices, bank statements, and payroll records. Whether a business uses accounting software or hires a professional, staying on top of these details makes tax time much easier.

• What Is Accounting? Explore what accountants do and the principles that guide their work.
• A Simple Introduction to Accounting: The work of accountants is crucial to the success of any business.
• Understanding Accounting: Read an overview of what accounting is and the types of jobs in this field here.
• Bookkeeping vs. Accounting: These related types of professionals both work to keep a business's finances in order, but they have different specific responsibilities.
• What's the Difference Between Finance and Accounting? Both finance and accounting involve managing the assets of a business, but these two disciplines examine different parts of the big financial picture.

Budgeting

Budgeting is the process of planning how a business will spend and save money. A good budget helps business owners manage their resources, prepare for slow periods, and avoid unnecessary debt. It also provides a clear view of what's working and what needs to change.

To create a budget, start by estimating monthly income based on past sales or projected earnings. Then, list fixed costs (like rent and insurance) and variable costs (like supplies or marketing). Set aside money for taxes, emergency expenses, and future investments.

A budget should be reviewed regularly and adjusted when needed. If sales go up or expenses increase, the budget can be updated to reflect those changes. Sticking to a budget isn't always easy, but it gives small businesses the structure they need to grow responsibly.

• How Budgeting Works for Companies: The budget for a business can be much more complex than a typical household budget.
• Components and Types of Business Budgeting: Different types of budgets can work better for different businesses and the accountants who work for them.
• How to Start Budget-Planning for Your Business: If you've been lax about creating and maintaining a budget, use this advice to get back on track.
• Calculate Your Startup Costs: Before you can start a business, you need to create a budget to figure out how much money you'll need for initial expenses and then figure out where it's going to come from.
• How to Set Up and Maintain a Budget for Your Small Business: Learn from the experts at SCORE how to get your finances together when you're planning a business.

Accounting Activities and Games

If you want to hone your accounting skills, there are many ways to go about it, from taking college courses to teaching yourself using the Internet. You can even play online games to learn about accounting: Educational games aren't just for kids!

• Money Magic: Work on your budgeting skills by playing this game and help Enzo the magician make it to the big time in Vegas.
• The Valentine's Demand Curve: Try this interactive activity to gain a deeper understanding of the interplay between prices, quantities sold, and market demand.
• Revenue, Profits, and Price: Crash Course covers the ins and outs of how businesses make money in this video.
• Accounting Test: How well do you understand accounting concepts? Test yourself and find out.
• Introduction to Accounting: This site contains an entire course in accounting, including video lessons and quizzes, all for free.

Accounting Terminology

Accounts Payable (AP): Money a business owes to suppliers or vendors for goods and services received but not yet paid for

Accounts Receivable (AR): Money that's owed to a business by its customers for goods or services that have been delivered but not yet paid for

Accrual Accounting: A method where income and expenses are recorded at the time they're earned or incurred, not when money is exchanged

Assets: Resources owned by a business that have value, such as cash, equipment, or real estate

Balance Sheet: A statement that shows a business's assets, equity, and liabilities at a point in time

Bookkeeping: The process of recording daily financial transactions in a consistent way

Capital: Money or assets that owners invest in a business to help it grow

Cash Flow: The movement of money in and out of a business during a given period

Chart of Accounts: A list of all accounts used by a business to organize its financial transactions

Cost of Goods Sold (COGS): The direct costs of producing goods or services sold by a business

Credit: A ledger entry that increases liabilities or equity and decreases assets or expenses

Debit: A ledger entry that increases assets or expenses and decreases liabilities or equity

Depreciation: The process of spreading out the cost of a large asset over its useful life

Dividends: A portion of profits that a business may choose to distribute to its shareholders

Equity: The value of an owner's share in the business

Expense: A cost incurred by a business while operating or generating revenue

Fiscal Year: A 12-month period used for accounting purposes, which may or may not align with the calendar year

Fixed Assets: Long-term assets that a business uses over time, like buildings, vehicles, or machinery

General Ledger: A record of all financial transactions of a business, organized by account

Gross Profit: Revenue minus the cost of goods sold

Income Statement: A financial report showing a business's revenue, expenses, and profit over a specific period

Inventory: Goods or materials a business holds for sale or use in production

Journal Entry: A formal record of a transaction in the accounting system

Liabilities: Money that a business owes to others, such as loans or unpaid bills

Net Income: The profit left after all expenses have been subtracted from revenue

Payroll: The total amount of wages paid to employees, including taxes and deductions

Profit and Loss (P&L) Statement: Another name for an income statement

Reconciliation: The process of matching and verifying transactions across two records, like a bank statement and a ledger

Revenue: The total income a business earns from selling goods or services

Additional Resources to Learn About Accounting

• Small-Business Accounting 101: What You Need to Know: From setting up a bank account to handling profits and expenses, small-business accountants can have a lot to manage.
• Introduction to Bookkeeping and Accounting: This free course provides a great introduction to accounting, and if you choose to create an account and sign in, you can also receive a statement of participation at the end.
• Crucial Accounting Tips for Small-Business Success: Accounting methods vary, but the important thing is that you're keeping a close eye on all of the details of your finances, no matter how you do it.
• The Ultimate Guide to LLC Formation: Find out everything you need to know to start an LLC on firm financial and legal footing.
• Accounting Terminology Guide: Look up any accounting-related term here to find out what it means.
• Running a Business: Get help from experienced professionals to keep your business complaint with all legal requirements and run your daily operations more efficiently.
• Seven Things to Know About Accounting When Starting a Business: Knowing how to manage your finances is crucial to the success of your business.
• Accounting Basics: A Guide to Almost Everything: Watch this video to get a high-level understanding of the basics of accounting in just a few minutes.
• What Every New Business Owner Should Learn About Accounting: Keeping your business financially healthy starts with knowledge of accounting.

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