Accounting for small business: Simple steps to manage your finances

Published Thursday 27 November 2025

Table of contents

• Bookkeeping vs accounting for small businesses
• What's involved in small business accounting and bookkeeping?
• How to do small business accounting
• Financial reporting for small businesses
• Tax preparation for small businesses
• Cash flow management
• When to hire an accountant for your small business
• Getting started with small business accounting
• FAQs on small business accounting

Key takeaways

• Establish a dedicated business bank account to separate personal and business finances, which simplifies tax preparation, improves cash flow visibility, and creates professional credibility with clients.

• Implement regular bank reconciliation at least monthly to ensure your accounting records match actual bank balances and catch discrepancies like timing differences, bank fees, or bounced payments early.

• Utilize accounting software to automate transaction imports, receipt matching, and report generation, which reduces manual admin time and provides real-time financial insights for better decision-making.

• Maintain comprehensive expense tracking with proper documentation to maximize tax deductions, ensure HMRC compliance, and identify spending patterns that could impact your cash flow.

Bookkeeping vs accounting for small businesses

Although the terms are often used interchangeably, there's a difference between bookkeeping and accounting.

Bookkeeping is the day-to-day recording and organizing of your business's financial transactions. Accounting takes that data and turns it into meaningful insights and reports for decision-making.

Bookkeeping tasks include:

• Recording and coding transactions
• Matching receipts to expenses
• Creating invoices for customers
• Processing payroll

Accounting tasks include:

• Preparing tax returns and compliance documents
• Generating financial reports and forecasts
• Analyzing business performance
• Conducting audits

Your bookkeeper may handle some tax tasks, and your accountant may help with bookkeeping. You’ll need to manage both areas, or have someone do them for you, if you run a small business.

What's involved in small business accounting and bookkeeping?

Small business accounting tasks help you track money coming in and going out, stay compliant with tax laws, and make informed business decisions.

Essential accounting responsibilities:

• Transaction management: Recording, coding, and reconciling all business transactions
• Document capture: Storing receipts, invoices, and financial evidence
• Customer billing: Creating and sending invoices to clients
• Payroll processing: Managing employee payments and tax withholdings
• Supplier payments: Tracking and paying business bills on time
• Cash flow monitoring: Understanding money flowing in and out of your business
• Financial reporting: Creating profit and loss statements, balance sheets, and forecasts
• Tax compliance: Preparing and filing required tax returns

In the early days, a small business accounting checklist can help. Once you get used to the process, it’s easier to stay on top of your responsibilities.

How to do small business accounting

Small business accounting setup involves establishing systems and processes that keep your finances organized, compliant, and transparent. While specific needs vary by business type, these fundamental steps apply to most small businesses.

Core accounting setup steps:

Do you need a business bank account for your small business?

Sole traders aren't legally required to have a business bank account, but limited companies must keep business and personal finances separate.

Benefits of a dedicated business account:

• Clearer cash flow: See only business transactions without personal spending
• Easier tax preparation: Simplified record-keeping for HMRC requirements
• Better expense tracking: Match receipts to transactions without filtering personal costs
• Professional credibility: Business account details on invoices and payments
• Future-proofing: Simpler transition if you incorporate as a limited company

If you run a limited company, you must keep your business and personal finances separate. There are many basic business accounts available.

Selecting an accounting method

Accounting methods determine when you record income and expenses in your books. Your choice affects your tax obligations and cash flow visibility.

Cash basis accounting:

• When recorded: When money actually changes hands
• Example: Record a sale when the customer pays, not when you send the invoice
• Best for: Simple businesses with straightforward transactions

Accrual basis accounting:

• When recorded: When you earn income or incur expenses, regardless of payment timing
• Example: Record a sale when you send the invoice, even if payment comes weeks later
• Best for: Businesses with complex transactions or inventory

Some businesses use a hybrid accounting method. You might use cash basis for daily transactions and accrual accounting for planning major financial decisions.

Not all businesses can use cash basis or hybrid methods, so it's best to check the HMRC guidance on accounting methods first. Many businesses start off by using cash basis and progress to accrual.

For a deeper analysis of both methods, read our cash accounting versus accrual accounting guide.

Set up a chart of accounts

A chart of accounts is your business's filing system for categorizing all financial transactions. It organizes your income and expenses into specific categories, making it easier to track spending patterns and generate reports.

How it works:

• Account types: Five main categories (assets, liabilities, equity, income, expenses)
• Account codes: Specific subcategories within each type
• Example: Under "Expenses" you might have separate codes for advertising, office supplies, and travel costs

There are typically five account types: assets, liabilities, equity, expenses and revenue. Each account type has subcategories relevant to your business. For example, under expenses, you might have advertising fees, subscription costs and entertainment fees.

Having a chart of accounts helps with small business bookkeeping because you can group income and expenditure together, and spot patterns and trends in how you spend and earn. You can also generate reports based on the data in your chart of accounts.

Keep track of expenses

Expense tracking helps you control costs, maximize tax deductions, and maintain cash flow stability. Poor expense management can lead to overpaying taxes or running out of working capital.

Why expense tracking matters:

• Tax optimization: Claim all allowable business expenses to reduce your tax bill
• Cash flow protection: Spot spending patterns before they threaten your working capital
• HMRC compliance: Keep receipts and invoices as proof for potential tax inspections
• Business insights: Identify your biggest cost drivers and optimization opportunities

You can capture and organise these items with receipt capture tools. If you use Xero, you can use Hubdoc to manage your expenses.

How to reconcile your bank accounts

Bank reconciliation ensures your accounting records match your actual bank balance by identifying and resolving discrepancies between the two.

Common discrepancies include:

• Timing differences: Checks written but not yet cleared
• Bank fees: Charges appearing on statements but not in your records
• Bounced payments: Customer payments that failed to clear
• Deposits in transit: Money sent but not yet processed by the bank

Follow these steps to manually reconcile your accounts:

1. Gather your bank records for the relevant period
2. Open up your accounting system (this might be a spreadsheet, logbook, or ledger in your software)
3. Find the last point your bank balance and accounting system balance matched – start here
4. Check every transaction from your bank records against your accounting system
5. Enter any missing transactions from your bank statements into your accounting system
6. Once you've checked all deposits and withdrawals, check your closing balance on the bank statement and accounting system match. If they don't, revisit the previous steps and double-check your calculations
7. Read our in depth guide on how to do a bank reconciliation for more support

Reconciling your accounts regularly saves you time. It’s easier to remember recent transactions than those from months ago.

You can skip the hassle of manual reconciliation with small business accounting software, which automatically pulls through your bank records.

Setting up payroll

Before you can start paying employees, you need to follow these steps:

1. Register as an employer on the HMRC website. Most limited companies and sole traders can do this online.
2. Enroll for PAYE using your government gateway accounting and you'll receive two letters:
3. PAYE and Accounts Office references (within 15 working days); and your PAYE online activation code (within 10 working days).
4. Find suitable payroll software.
5. Using payroll software, you'll need to submit a full payment submission (FPS) to HMRC every month. Ideally, you'll want to choose a package that offers you other accounting benefits so you can manage more of your finances in one place.

Suitable software will help you store all of the payroll records that HMRC requires – such as payments to employees and deductions, payments made to HMRC, and taxable expenses and benefits.

Consider using accounting software

Many small business owners find accounting responsibilities challenging.

Small business accounting software can ease this stress – and give you peace of mind that you're doing things properly. Many software packages let you automate financial admin and data entry, generate clear financial reports, and show a live dashboard of your finances. This way, you always know your financial position.

Software that uses artificial intelligence and machine learning can automate tasks such as importing transactions, matching receipts and account codes, and generating accurate reports.

With less manual admin, you'll have more time to focus on the strategic aspects of your business – finding new customers, hiring staff, and developing your skills and products.

When it comes to tax preparation, Making Tax Digital-ready software lets you file compliant returns now and in the future, without copying figures across multiple programmes.

Financial reporting for small businesses

Monthly reports help you understand your business’s financial health. These are the key reports to use:

• Cash flow statement: This tells you how much money is flowing in and out of your business for operations, investments and financing. A cash flow statement will show you how much money is available in your business to spend.
• Profit and loss report: This gives you a snapshot of your business' income, expenditure, and profit or loss for a specific period.
• Balance sheet: This tells you the value of what your business owns (including cash) versus what your business owes – namely the business assets, liabilities and owner's equity.

Add monthly reporting to your bookkeeping routine to get a clear view of how your business works. Most accountants and bookkeepers can help you produce small business financial statements, or you can generate them yourself using cloud-based accounting software.

Tax preparation for small businesses

Tax preparation involves organizing your financial records and meeting HMRC obligations throughout the year, not just at filing time. Different business structures have different tax responsibilities.

Key preparation steps:

• Record maintenance: Keep complete, accurate financial records year-round
• Document storage: Securely capture and store all receipts and invoices
• Regular reconciliation: Stay current with bank reconciliation to avoid year-end rushes
• Tax savings: Set aside money monthly for your tax obligations
• Registration compliance:Obtain your UTR number and register for applicable taxes
• Allowable expenses: Identify and track all legitimate business deductions
• Deadline management: Mark important tax filing dates in your calendar

You could also work with a professional who offers small business accounting services. The right accountant or bookkeeper can take many of these activities off your plate, and make sure you're paying the right amount of tax.

Cash flow management

You need to track the cash flowing in and out of your business.

Managing cash flow can be tricky because it's always changing. Every time an invoice is paid or an expense is cleared, your cash flow position changes. Here are a few techniques for keeping on top of cash flow:

• Follow up on unpaid sales invoices promptly
• Minimise your expenses
• Set clear client payment terms and agree them upfront before starting work
• Keep your bookkeeping up to date so you can see your live cash position
• Produce regular cash flow forecasts so you plan for gaps and make investments at the right time

Small business accounting software can help you get a clearer picture of your cash position. With customisable reporting templates that let you analyse cash flow projections, you can spot gaps and protect the financial health of your business.

Managing late payments

One of the best ways to improve your cash flow is to clamp down on late payments.

Chasing clients for payment can be uncomfortable, but you can use these approaches to get paid on time:

• Introducing clear payment terms
• Tightening up your approvals process
• Automating invoice follow-ups
• Introducing late payment fees
• Requiring an upfront percentage fee

For more ideas, read our guide to managing late payments.

When to hire an accountant for your small business

A bookkeeper or accountant can make managing your finances easier, but you may choose to handle your own books. Smart accounting software can give you the tools you need to manage your accounts yourself.

You should also know when to hire an accountant, especially if your business is growing quickly. Accountants and bookkeepers can help when you apply for a loan, prepare for tax season, or grow your team.

If you fall behind on your books, handing them to a professional can reduce your stress. You can find accountants and bookkeepers who offer small business accounting services in the Xero advisor directory.

If you need more help deciding who to hire, read this guide on how to choose a small business accountant.

Getting started with small business accounting

When you get your small business accounting right, you can make better decisions. Automate tasks and keep your financial data organised to spend less time on your books and more time running your business.

With the right tools, accounting is straightforward. Try Xero for free to see how automation, clear reports and real-time insights help you manage your finances.

FAQs on small business accounting

Find answers to common questions about small business accounting below.

What are the 5 basic accounting accounts?

The five basic types of accounts are assets (what you own), liabilities (what you owe), equity (the owner's stake), revenue (money you earn), and expenses (money you spend). These accounts form the foundation of your financial records.

How much does accounting software typically cost?

The cost of accounting software varies depending on the features you need. Many providers offer tiered subscription plans, with basic packages starting from around £10 per month and more advanced plans with payroll and multi-currency features costing more.

How often should I reconcile my bank accounts?

It's a good practice to reconcile your bank accounts at least once a month. Regular reconciliation helps you spot discrepancies early, maintain accurate financial records, and get a clear view of your cash flow.

What business receipts should I keep for tax purposes?

You should keep all receipts for business expenses you plan to claim, such as office supplies, travel costs, software subscriptions, and professional fees. HMRC requires you to keep records for at least 5 years after the 31 January submission deadline of the relevant tax year.

Can I change my accounting method after I've started?

Yes, you can change your accounting method, for example from cash basis to traditional (accrual) accounting. However, you may need to make certain adjustments to your accounts to ensure a smooth transition. It's best to consult with an accountant before making the switch.