Small Business Accounting: Steps and Best Tools (2026)

Launching your small business means taking on new accounting responsibilities. While managing your finances might not be the most exciting part of running your business, it’s essential for long-term success.

Good accounting practices help you track how your business makes and spends money, calculate taxes accurately, and file returns on time. Understanding your finances lets you make smarter decisions to increase your profits.

This guide covers everything you need to know about small business accounting, including the best accounting tools to help you manage your finances effectively.

What is small business accounting?

Small business accounting tracks and organizes a company’s financial activity. It shows where money comes from, where it goes, and whether the business can cover its expenses and earn a profit. These records also provide the information needed to prepare tax returns.

Bookkeeping records day-to-day transactions, such as sales, purchases, payments, and receipts. Accounting uses those records to evaluate the company’s financial health and prepare:

• An income statement, which shows revenue, expenses, and profit over a set period
• Abalance sheet, which shows what the business owns and owes on a specific date
• A cash flow statement, which shows how cash moved in and out of the business

How to do small business accounting in 13 steps

Small business accounting includes work you can do weekly, monthly, quarterly, and annually. Use this schedule as a starting point, and increase the frequency as your transaction volume grows.

Note: This article provides general information, not legal or tax advice. Rules differ by country, state or province, business structure, and tax year. Consult a licensed attorney or tax professional about your business.

1. Open a small business bank account
2. Build your business credit score
3. Develop a small business accounting system
4. Track your small business expenses
5. Set up a small business payroll system
6. Investigate import tax
7. Choose your payment methods
8. Set up sales tax procedures
9. Know your tax obligations
10. Calculate gross margins
11. Get business funding
12. Find high-quality accounting partners
13. Periodically review your accounting methods

1. Open a small business bank account

A business bank account keeps business transactions separate from your personal records. It also gives creditors and investors a clearer record of the company’s finances.

To open a business bank account, you’ll generally need:

• A registered business name
• Business registration in your jurisdiction, if applicable
• Any required business licenses
• Tax identification and formation documents requested by the bank

Use a checking account for customer payments and daily expenses. Savings accounts or subaccounts can hold money for taxes, payroll, or other planned costs.

Eligible US store owners can create up to five additional Shopify Balance accounts. Funds can be moved from the main account into an account reserved for a specific expense, such as quarterly taxes.

The amount to reserve for taxes depends on your profit, entity type, location, and available credits. In the US, the IRS generally expects sole proprietors, partners, and S corporation shareholders to make quarterly estimated tax payments if they expect to owe at least $1,000 when filing their returns. The threshold for corporations is $500.

Legal note: A separate bank account does not, by itself, provide personal liability protection. Entity formalities and asset-protection rules depend on local laws.

2. Build your business credit score

A business credit history records how your company borrows and repays money. A credit card can help build business credit and keep company purchases separate from personal spending.

Pay the balance on time and check that the card issuer reports activity to business credit bureaus. High balances relative to the credit limit can also affect the company’s credit profile.

Review your recent business transactions before selecting a card. A company that spends heavily on travel, for example, may value travel reward points. Shopify Credit offers eligible US store owners cash back on eligible marketing, shipping, fulfillment, and wholesale purchases, with its highest rate applied to the category where the business spends the most.

3. Develop a small business accounting system

An ecommerce accounting system defines how your business records, checks, and reports financial activity. It includes:

• A chart of accounts. Categories for assets, liabilities, equity, revenue, and expenses.
• A transaction process. Rules for recording sales, fees, refunds, purchases, and other activity.
• A payment reconciliation schedule. Dates for comparing your records with bank, card, and payment processor statements.
• Receivables and payables. A process for tracking customer invoices and bills owed to vendors.
• Supporting records. A system for storing receipts, invoices, payroll records, and tax documents.
• Financial reporting. A schedule for preparing and reviewing your financial statements.

You can manage this work yourself with accounting software or hire a bookkeeper or accountant. Ask these three questions before deciding:

1. How complicated are the books? A single small business owner with one sales channel may be able to manage records on their own. Complex inventory or several business entities can justify professional help.
2. Do you have time to keep the records current? Falling several months behind makes reconciliation and tax preparation harder.
3. What could an error cost? Hire a professional if incorrect records could put a tax filing or loan application at risk.

Many owners use a combination of both approaches. They record routine transactions themselves, while hiring a bookkeeper for monthly reconciliation and an accountant for tax filings.

You’ll also select an accounting method:

• Cash basis method: Record income when you receive payment and expenses when you pay them.
• Accrual method: Record income when it is earned and expenses when they are incurred, even if payment happens later.

The IRS reports that most individuals and many small businesses use cash-basis accounting. Since accrual accounting records unpaid invoices and outstanding bills in the period when the activity occurred, it can give inventory-heavy businesses a more accurate view of performance.

Some corporations and partnerships must move to accrual accounting after exceeding the IRS gross receipts test. For tax years beginning in 2026, the threshold is average annual gross receipts of $32 million across the previous three tax years.

Tax note: Entity type, inventory treatment, and other rules can affect which accounting methods are available. Changing methods may also require IRS approval.

US store owners can use Shopify Bill Pay to pay vendors, freelancers, and other business bills from the Shopify admin. Connecting QuickBooks Online automatically imports unpaid bills and vendor information into Shopify Bill Pay.

4. Track your small business expenses

Tracking expenses keeps your accounting records current and gives you the documentation needed for tax filings. Record the date, vendor, amount, payment method, and business purpose for each expense. Store the receipt or invoice with the transaction.

Keep detailed records for these expense types:

1. Meals. Record who attended, the business purpose, and the amount paid. Keep the itemized receipt.
2. Business travel. Save receipts and record the travel dates, destination, and business reason for the trip.
3. Vehicle use. Log the date, destination, business purpose, and distance traveled for each business trip.
4. Business gifts. Record the recipient, business relationship, purpose, and cost of the gift.
5. Home office. If you’re running a business from home, record the space used for work and related expenses. The IRS simplified home office option calculates the deduction at $5 per square foot, up to 300 square feet. The space must be used exclusively and regularly for business.

Tax note: Keeping a record does not automatically make an expense deductible. Eligibility and deduction limits depend on current tax rules and the facts of each expense.

5. Set up a small business payroll system

As your business grows, you may need to hire help. Classify each worker correctly before adding them to your payroll system. The IRS considers the company’s control over the work, the financial arrangement, and the relationship between the worker and the business.

For employees:

• Create a payroll schedule
• Collect federal, state, or any applicable withholding forms
• Calculate wages, deductions, and employer payroll taxes
• Keep payroll records and file the required employment tax returns
• Prepare a Form W-2 for each US employee

US employers must deposit withheld federal income, Social Security, and Medicare taxes with the IRS. The IRS assigns employers either a monthly or semiweekly employment tax deposit schedule. Employers must also give each employee a Form W-2 and file the forms with the Social Security Administration by January 31.

For independent contractors:

• Collect a Form W-9 before making the first payment
• Record each payment and the contractor’s contact information
• Review whether the contractor meets the threshold for a Form 1099-NEC
• Send the form to the contractor and file it with the IRS

US businesses may need to file Form 1099-NEC for nonemployee services. The previous threshold of $600 went up to $2,000 for payments made after December 31, 2025.

Payroll accounting software can calculate withholding, create tax deposit schedules, and generate W-2 and 1099 forms.

6. Investigate import tax

Importing inventory or selling internationally can add duties, import taxes, and customs fees to an order. These costs depend on the product’s classification, country of origin, declared value, and destination.

Before shipping across a border, record:

• The Harmonized System code for each product
• The product’s country of origin
• Its declared customs value
• Whether the seller or customer will pay import charges

This information is also important for dropshipping, where the supplier may ship directly across borders to the customer.

Shopify Markets can calculate and collect estimated duties and import taxes at checkout. HS codes must be added to your products, among other requirements. Collecting these charges upfront gives customers a clearer order total and provides customs information for the shipment.

For country-specific rules, review guidance from your government, such as the International Trade Administration in the US.

Customs note: Duty calculations are estimates. Customs authorities can assess a different amount based on the shipment and current trade rules.

7. Choose your payment methods

Select payment methods your customers use and your accounting system can reconcile. Shopify Payments lets stores in supported countries accept payments through their Shopify store without setting up a separate payment processor.

When comparing payment processors, review:

• Processing rates and transaction fees
• Monthly account fees
• Currency conversion charges
• Payout schedules
• Chargeback and dispute fees
• Cost of leasing equipment, if necessary

Shopify Payments records transactions, fees, refunds, and payouts in the Shopify admin. You can also accept in-person payments through Shopify POS and offer eligible customers digital wallets or installments payments throughShop Pay.

For Pillow Cube, Shop Pay Installments was able to drive 10 times more installments revenue than the company’s previous buy now, pay later provider.

“We’ve also seen a consistent increase in our average order value rate,” says partner Will Beck.

8. Set up sales tax procedures

Sales tax procedures determine where you collect tax, which products are taxable, and when you file returns. Register with the relevant tax authority before collecting tax in a jurisdiction.

US online stores may incur sales tax obligations based on their physical presence or economic activity in a state. Sourcing rules can use the seller’s location, the customer’s location, or a combination of both. Confirm where you have an obligation before configuring collection.

Most Canadian businesses must register and start collecting GST/HST after exceeding $30,000 in worldwide taxable supplies during one calendar quarter or across four consecutive calendar quarters. The Canada Revenue Agency explains when registration and collection begin. Provincial taxes can create additional registration and filing obligations.

Shopify Tax in Canada manages calculations for GST, HST, PST, QST, and RST. It uses product categories to determine rates for exempt and zero-rated products automatically. Check the categories assigned to your products, since an incorrect category can result in collecting too much or too little tax.

Shopify’s finance reports include US and Canada sales tax reports for eligible stores. These reports organize sales and tax data by jurisdiction or province for use when preparing returns. Shopify Tax is also available in select countries.

Tax note: Tax software calculates tax from the settings and product information you provide. It does not determine where your business must register or replace advice from a tax professional.

9. Know your tax obligations

Your business structure determines which tax returns you file and how the company’s income reaches your personal return. US businesses generally file as follows:

• A sole proprietorship reports business income and expenses on Schedule C with the owner’s individual return.
• A partnership generally files Form 1065 and gives each partner a Schedule K-1.
• AnLLC can be taxed as a sole proprietorship, partnership, C corporation, or S corporation, depending on its ownership and tax elections.
• AC corporation files Form 1120 as a separate taxpayer. Owners report salary, dividends, or other payments they receive from the corporation.
• An S corporation files Form 1120-S and gives shareholders a Schedule K-1. Shareholders who work for the business may also receive wages subject to payroll taxes.

Income tax is only one possible obligation. Your business may also owe payroll, sales, excise, state, or local taxes.

Not every return is due on April 15. Business tax deadlines depend on the return, entity type, tax year, and filing location. Review them with a tax professional and add each filing and payment date to your accounting calendar.

Tax note: These filing examples apply to US businesses. Businesses in Canada and other countries follow the rules set by their national and local tax authorities.

10. Calculate gross margin

Gross margin shows how much revenue is left after paying the direct costs of the products or services sold. That money pays operating expenses and contributes to profit.

Subtract cost of goods sold (COGS) from revenue. Divide the result by net sales and multiply by 100 to get a percentage.

Gross margin = [(Revenue − COGS) / Revenue] x 100

If a business earns $10,000 in revenue and records $6,000 in COGS, its gross margin is 40%. COGS can include product costs, materials, direct labor, and other costs directly tied to each sale.

Gross margin doesn’t account for all operating expenses. Review it alongside net profit to see whether product pricing leaves enough money to run the business.

You can calculate gross margin using Shopify’s free profit margin calculator.

11. Get business funding

Business funding can pay for inventory, equipment, staff, or expansion. Define how you will spend the money and how the investment is expected to increase revenue or reduce costs before borrowing.

Lenders may ask for a balance sheet, income statement, and cash flow statement. Review all three at least quarterly to compare results with your budget and confirm you can cover upcoming payments.

Shopify Capital offers loans or merchant cash advances to eligible businesses in supported countries. Eligibility depends on several factors, including sales performance, store history, and payment activity. Funding options and repayment terms vary by location.

Before accepting funding, calculate the total financing cost and expected return. Test whether the business could still make its payments if sales fall below the forecast. Shopify’s business loan calculator can estimate payments, interest costs, and the total cost of a loan.

Funding note: Borrowing involves financial risk. Review the agreement, fees, repayment terms, and personal guarantees with a qualified financial or legal adviser.

12. Find high-quality accounting partners

The accounting professional you hire depends on the work you need completed:

• A bookkeeper records transactions, reconciles accounts, and manages accounts receivable and payable.
• An accountant prepares financial statements, closes the books, and explains changes in revenue, expenses, and cash flow.
• A certified public accountant (CPA) can provide tax and accounting services. A CPA firm licensed to perform assurance work may be able to issue audited financial statements.
• A tax professional prepares returns, calculates estimated payments, and advises on tax planning before the filing deadline.
• A financial planner works on longer-term financial goals but does not replace a bookkeeper or tax adviser.

Consider hiring accounting help when:

• Your books are more than one month behind
• You add payroll or register for tax in a new jurisdiction
• A lender or investor requests financial statements
• You receive a tax notice or face an audit
• You cannot explain why the business reports a profit but has little cash

A freelance bookkeeper is a flexible option for transaction coding and monthly reconciliation. An accounting firm can add tax and assurance work, and an online bookkeeping service may provide standardized remote bookkeeping for a monthly fee.

Check credentials, industry experience, data security policies, and who will complete the work. Ask for references and a written scope that lists the services, deadlines, and fees. Shopify Partners can connect store owners with sales tax experts who can review tax settings and product categories.

13. Periodically review your books and methods

Regular financial reviews make it easier to identify late payments, rising expenses, and cash shortages. In a 2025 Shopify survey, 69% of store owners reported reviewing their finances at least weekly.*

A weekly review can cover cash balances, upcoming bills, and unpaid customer invoices. Reconcile bank and payment accounts monthly, review financial statements quarterly, and reassess your accounting method and software annually.

Also track how long bookkeeping takes and how quickly reports are available. Upgrade from a spreadsheet or outsource part of the work when accounts are left unreconciled, reports arrive late, or transaction volume creates repeated manual errors.

How much does small business accounting cost?

Small business accounting can cost less than $50 per month for software alone or several hundred dollars per month when a professional manages the books. 

The software prices above use current QuickBooks Online list prices. The bookkeeper and outsourced-service figures come from Bench’s published pricing. CPA ranges come from the TaxProMatch’s 2026 CPA Compass Fee Benchmark.

Calculate your monthly budget by adding the software subscription, monthly bookkeeping cost, and 1/12 of your annual CPA fee. For example, $85 of software, five hours of bookkeeping at $55 per hour, and a $1,500 annual tax return would cost:

$85 + $275 + ($1,500 / 12) = $485 per month

One-time setup or cleanup fees can be added separately. Costs may rise when a business has more accounts, high transaction volume, payroll, inventory, or filings in several states.

Compare quotes based on the work included. A lower monthly price may exclude catch-up bookkeeping, tax filing, payroll, or accounts payable.

Best small business accounting software

Good small business accounting software keeps your financial records in one place. It can import transactions, categorize income and expenses, and produce reports you can use to estimate profits and prepare for taxes.

Cloud-based software runs in a browser or mobile app. It stores your data online, installs updates automatically, and can sync with banks and ecommerce apps. Desktop software is installed on a computer or local server. It may provide offline access, but you’re responsible for updates and backups.

All four options below are cloud-based. When comparing them, consider:

• Ecommerce integrations. Check what sales, payout, inventory, and tax data the software can import from your ecommerce platform.
• Financial reports. Look for income statements, balance sheets, cash flow statements, and inventory reports.
• Tax features. Confirm the software can track sales tax and organize the records needed for tax filings.
• Account access. Check how many users are included and whether you can give your bookkeeper or accountant access.
• Customer service. Review the available support hours and self-service resources.

The Shopify App Store has accounting apps that can transfer store data to your accounting software.

Prices are US monthly rates as of September 2026. Promotions, taxes, add-ons, and Shopify connector fees aren’t included. Xero’s Early plan increases to $27 per month on October 1, 2026.

Xero

Xero is accounting software for small and growing businesses. Its Shopify app can send daily sales summaries to Xero or sync individual orders. It can also match Shopify payouts with bank deposits for reconciliation.

Benefits include:

• Inventory management on Growing and Established plans
• Bank feeds and reconciliation
• Real-time financial reports
• Sales tax tracking
• Contact records
• Payroll (via Gusto)
• Mobile app
• Shopify integration

QuickBooks Online

QuickBooks Online tracks income, expenses, invoices, and receipts. Higher-priced plans add inventory tracking, purchase orders, and project profitability reports. Its Shopify app can sync products, orders, payouts, fees, and inventory data.

You can also connect Shopify Balance or Shopify Credit to QuickBooks Online. The connection syncs transactions into QuickBooks for bookkeeping and tax preparation.

Benefits include:

• Automated expense categorization
• Income and expense tracking
• Invoicing and bill payment
• Mileage tracking
• Contractor management
• Inventory tracking on Plus and Advanced plans
• Project profitability tracking
• Shopify Balance and Shopify Credit transaction sync

Wave

Wave offers a free Starter plan with basic bookkeeping and invoicing tools. It includes unlimited estimates, invoices, bills, and bookkeeping records. Automatic bank imports, transaction categorization, and receipt capture are part of the paid Pro plan.

Shopify stores can connect through the third-party Sync to Wave app. The connector requires a Wave Pro subscription and has a separate monthly fee.

Benefits include:

• Free Starter plan
• Unlimited invoices and estimates
• Bill and expense records
• Cash flow dashboard
• Mobile invoicing
• Online payment options
• Automated bank imports on Pro
• Receipt capture on Pro

FreshBooks

FreshBooks focuses on invoicing, expense tracking, and time tracking. It works well for freelancers and service businesses that bill clients for projects or hours.

A paid third-party Shopify connector can import orders, customers, payments, refunds, and sales tax data into FreshBooks.

Benefits include:

• Customizable invoices
• Estimates and proposals
• Time and mileage tracking
• Expense tracking and bank imports
• Online payment options
• Tax-time reports
• Project profitability on higher-priced plans
• Mobile app

*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with two or more years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.