Small-Business Accounting 101: Bank Recs, Journals & the Four Statements
Accurate books drive pricing, taxes, funding, and cash decisions. This 101 works for service firms, agencies, and online stores-and links into deeper playbooks for e-commerce and insurance agencies.
The three core financial statements (what each answers)
Income Statement (Profit & Loss) – How did we perform this period?
Revenue → COGS → Gross Margin, then operating expenses, EBITDA, interest/taxes → Net Income.
Common pitfalls: mixing owner draws with payroll, expensing inventory purchases instead of posting to inventory/COGS, and lumping one-offs into operating results.
Balance Sheet – What do we own and owe right now?
Assets (cash, A/R, inventory, prepaid, fixed assets) = Liabilities (A/P, credit cards, loans, taxes) + Equity (capital, retained earnings).
Watchouts: loan principal vs interest split, stale A/R and A/P, negative inventory, uncategorized cash.
Cash Flow Statement – Why is profit not equal to cash?
Operating (profit plus/minus working capital), Investing (equipment), Financing (debt/equity). Profit can rise while cash falls if inventory or receivables grow.
Bank reconciliation 101 (and why it’s non-negotiable)
A bank rec proves the GL equals the bank-catching duplicates, missing items, and fraud.
Steps
- Pull the statement; lock the period date.
- Match deposits/payments; record bank fees.
- Clear Undeposited Funds; group batch deposits correctly.
- Track outstanding checks and in-transit deposits.
- Investigate differences; produce and file the reconciliation report.
Special cases
- Processors & marketplaces (Stripe/Shopify/Amazon): deposits are net of fees/chargebacks. Use a clearing account to post settlements and tie to the bank.
- Trust vs Operating (agencies): keep premium funds in Trust, commissions/fees in Operating; reconcile trust monthly with sign-off.
Month-end close checklist (practical)
- Cutoff: capture bills, receipts, and sales through the last day.
- Revenue recognition: defer unearned amounts; recognize earned revenue.
- Inventory & COGS (FIFO): count/adjust; post purchases to inventory, not directly to expense; record shrink.
- Payroll & benefits: accrue wages and taxes if unpaid at month-end.
- Fixed assets: capitalize purchases, book depreciation.
- Loans: split principal vs interest; accrue interest if needed.
- Sales tax: summarize collected vs owed; prep filings.
- Reconciliations: bank/credit card/merchant/trust; A/R and A/P aging review.
- Variance analysis: compare to prior month/plan; document explanations.
- Close package: P&L, Balance Sheet, Cash Flow, KPI page, and an issues log.
Cash vs accrual (and when to switch)
- Cash basis: simple, taxes on cash received/paid.
- Accrual basis: records revenue when earned and expenses when incurred.
Use accrual when you carry inventory, have significant A/R/A/P, or need lender-grade financials.
Interlink: point inventory users to the e-commerce guide; agency-bill workflows to the insurance-agency guide.
KPIs that actually help
- Gross Margin and Operating Margin
- AR Days / AP Days; Cash Conversion Cycle
- Inventory Turns (e-com)
- Commission trend & retention (agencies)
- Cash runway and burn (for planning)
Where Gen-AI helps (with guardrails)
- OCR receipts/bills to reduce data entry.
- Entity matching (vendors, customers) and line-item coding suggestions.
- Anomaly flags (duplicate charges, fee spikes, missing deposits).
- Draft variance notes for the close package (human-approved).
Guardrails: PII redaction, no sensitive data in prompts, and human review before posting.
Tools that play nicely
QuickBooks Online or Xero; bill pay and expense capture apps; payroll; inventory connectors (for marketplaces); document portals; a lightweight BI dashboard for KPIs.
Typical monthly pricing bands
- Basic (low volume): $400-$800/mo
- Standard (A/R, A/P, some inventory or sales tax): $800-$1,500/mo
- Advanced (multi-channel, inventory, multi-state tax, trust accounting): $1,500-$3,000+/mo
Want a close that finishes on time-and numbers you trust? Start your month-end with us.
FAQs
How often should a small business do bank reconciliations?
Monthly at minimum; weekly if you have high transaction volume or use processors with net deposits (Stripe, Shopify, Amazon). Recs should produce a report filed with the close package.
What’s the difference between cash and accrual accounting?
Cash records income and expenses when money moves. Accrual records revenue when earned and expenses when incurred. If you carry inventory, have A/R or A/P, or need lender-grade statements, accrual is recommended.
What documents should I keep for month-end close?
Bank and card statements, merchant/marketplace settlements, vendor bills and receipts, payroll reports, inventory counts, loan statements, and sales tax reports. Store them in a secure document portal linked to your GL.
Why don’t deposits equal sales?
Processors and marketplaces deposit net of fees, refunds, and reserves. Use a clearing account to post settlement detail and tie each deposit to GL activity. This is essential for e-commerce.
When should I outsource bookkeeping?
Outsource when the owner is the bottleneck, when you need accrual GAAP statements for lenders or investors, when inventory or sales tax becomes complex, or when trust accounting is required.
Related Reading:
- Insurance Agency Bookkeeping (2025): Trust/Operating, Commissions & Carrier Recs
- E-commerce Bookkeeping (2025): Amazon/Shopify Fees, Payouts, COGS & Sales Tax
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