Have you ever written a check and paused for a moment to mentally check your bank account to make sure there were sufficient funds in the account for the check to clear? I have, and I’m guessing you have too. Keeping accurate accounting records is important — especially for your business.

Accounting provides you and your business the information you need to make sound economic decisions. Do I have enough money in the bank to write this check?

It’s also important for demonstrating how the company is doing financially to external parties such as investors, creditors, and tax authorities. How do I attract investors and keep the IRS off my back?

Although we all have strengths and weaknesses and habits good and bad, as a business owner it’s important to understand that accounting is not the place to slack off. It’s something all businesses need to have a firm grasp on and not let slip — or else you and your business can find yourself in hot water or closing your doors faster than you can say super-cali-fragil-listic-ex-pee-ali-dough-scious.

Today we are going to cover what you need to know about accounting and what tools and resources are out there for you. We’ll save you time by narrowing down the field of software and online accounting services for you to easily digest and get back to running your business.

While accounting is by no means rocket science, it does take discipline to manage your business’s money and financial projections. Here is a quick story to highlight the difference between good accounting habits and how those might negatively affect your business.

The Story of Johnny and Tommy

I used to babysit for two brothers, Johnny and Tommy.

Tommy was the older brother by two years and tried to show his younger brother Johnny the ropes growing up. Tommy was a great baseball player, so naturally Johnny took up baseball too. Tommy took his studies seriously and Johnny was also an excellent student.

Both boys were into sports, did well in school, and had a lot in common. They were practically twins in their behaviors, as Johnny would follow his older brother’s lead in everything… well, almost everything.

Except spending and keeping track of money.

Every Saturday, when they got their allowances, Tommy would go to the store and buy something and spend his entire allowance (and more) that very same day. He justified spending it all right away because, he said, “If I don’t spend it, I always seem to lose track of it or lose it.” A few years ago, Tommy was careless and lost all the money he got for Christmas the very same day.

Johnny was content playing with Tommy’s new toys (when he would share them of course), but he was even more content with keeping track of his money. He didn’t understand how Tommy could spend money or lose his money. Johnny would collect loose change around the house, save it in a jar, and look forward the day he would go to the bank to change in his coin jar.

While Tommy ignored his bank account for all practical purposes, except when mom and dad made him deposit some money from birthdays or holidays, Johnny was fastidious about saving, being frugal, and keeping track of his money. Johnny kept a written record of everything he spent money on and excitedly projected out how much money he would have at future dates and times. He even bargained with his parents to increase his allowance, in turn for doing more chores.

Tommy was carefree and careless, thinking there’s always more money ahead.

Johnny was disciplined, focused, and an accurate record keeper.

If they both started a business, whom would you rather go into business with: Tommy or Johnny?

What are the lessons here?

While this story may seem elementary and silly, you may be shocked to know there are many, many businesses operating just as carelessly as Tommy did. Don’t be one of those businesses — or you won’t be in business for long.

Accounting is the way to keep track of the money your business makes (revenue) and spends (expenses), and how much you have leftover (retained earnings).

The most important and most basic accounting formula worth knowing and understanding is this:

ASSETS – LIABILITIES = RETAINED EARNINGS

Does that ring a bell, or is it a new concept to you?

Free Online Resources

If you’re not too familiar with accounting principles and you don’t know how to skillfully weave your way through a conversation about ledgers, debits and credits, assets, liabilities, retained earnings, and GAAP (generally accepted accounting principles), you need to hit the books and start learning these terms and concepts.

Not to worry though: Below are some quick links and resources to help you familiarize yourself with the terminology and basic concepts of accounting, which I won’t go into much more detail about today:

Cheat Sheet

If you feel like you have a general understanding of accounting and just want a quick refresher, glance over this pdf .

Free Educational Accounting Videos

On FreeAccountingSchool.com, a certified public accountant (CPA) will teach you the basics of accounting through a series of free online videos – no strings attached. Whether you are a newbie or want to brush up on your accounting, this is a valuable online resource.

Watch these and you should gain a good understanding of the basics. Once you understand the basic concepts, it’s time to get started with your own accounting.

Accounting Software for Your Business

There are software programs that will strip the hassle from much of your accounting work, and help you keep your company’s books in order, which will save you time, money, and headaches. Our promise here at The Simple Dollar is to do the homework and legwork for you, to save you time and money, so you can focus on running your business.

In the world of accounting there are (now) two industry leaders to consider.

While I acknowledge that there are other good accounting software companies out there (no offense to those who don’t appear here), these are the only two worth exploring for your business. If you want a more detailed report about the other options that exist, The Sleeter Group, a consulting firm with 700 accountants, published a review of online accounting options in an e-book for $79.95. (Please note, I don’t recommend buying it, as that seems like an insane amount of money to pay for reviews of cloud-based accounting services.)

Start With Spreadsheets

This is worth noting: At every business I’ve ever started, our accounting began in an Excel spreadsheet before transitioning to accounting software. I’ll assume you have access to Excel, but if not, rather than buying the software, subscribe to Google Apps for your business and you can use cloud-based spreadsheets for $5 a month.

Just to reiterate, starting in Excel is (almost free) and a perfectly fine place to start. In fact, it’s how I’d begin if I started another business today.

Once your business starts to grow and you have multiple clients and accounts to manage, Excel becomes inefficient and it’s probably time to make the switch to using an accounting software.

Luckily most accounting software programs can quickly and easily import your Excel files. You may have to do some reformatting, but with few touch-ups you should be able to transition seamlessly from Excel into one of these two accounting programs. Both are designed to save you time and scale as your business grows.

QuickBooks

Intuit was founded all the way back in 1983 and upgraded its functionality substantially in 1994 with they enabled double-entry accounting.

Intuit also offers a cloud solution called QuickBooks Online (QBO). The user pays a monthly subscription fee rather than an upfront fee and accesses the software exclusively through a secure login via Web browser. Intuit provides patches and regularly upgrades the software automatically.

QuickBooks offers a $9.99/month version for the self-employed small business owner. For many freelancers, contractors, and solo-preneurs, this is a great option, since separating your personal expenses from business expenses is important. And there a number of additional features that will accommodate your business as it grows.

You can see the full lineup of services and pricing from QuickBooks here. The $9.99 version is packed with features for your small business, including:

• Helps you calculate and pay your taxes
• The ability to easily file your taxes (via Turbo Tax)
• Download transactions directly from your bank account and credit cards
• Cloud-based, ability to access your data from a smartphone or tablet
• Note: Intuit is offering a limited-time 20% discount off the services right now, so you’d pay only $7.99/month

This should be enough to get most businesses started and off the ground. QuickBooks also has a wealth of online tools, resources, and educational material for accounting and small businesses. There is a 30-day free trial (no credit card required), so you can test drive QuickBooks and see if it’s the right fit for you and your business.

XERO

Xero is a New Zealand-based company that develops cloud-based accounting software for small and medium-sized businesses. Xero boasts over 300,000 paying customers in over 100 countries around the world.

At $20/month, Xero’s starter package is a bit more expensive than Intuit’s. But keep in mind that your business will likely grow, so it’s important to look at the entire picture. Some of Xero’s key features and benefits include:

• Integration with over 350 apps
• Unlimited users, for free
• Free support, 24/7
• Cloud-first company
• Free iPhone and Android apps
• Secure, automatic bank feeds
• File storage

Xero offers three different pricing packages, so see if one is a good fit for your business.

Intuit vs. Xero

Beyond the price, the most obvious — and perhaps most important — difference between these two services is how and when they were built. Intuit’s QuickBooks was built pre-cloud, and the software has been re-engineered to serve the needs of today’s businesses.

Xero was built in the age of the cloud, and many of its cloud- and mobile-based features trump those offered by QuickBooks. Intuit is playing a bit of cloud-based catch-up, but they have the resources, brand, and customer base to continue to be an industry leader for years to come.

Saving money is our goal here whenever possible, and I don’t believe (at this point) that Xero is worth the extra cost, so I’d recommend going with Intuit to set up your small business accounting.

Taxes and Risk Management

If you do go with one of the software or online services above, depending on how confident you are with your accounting skills, you might consider having a CPA (certified public accountant) review your tax return if you prepare it yourself.

While a good CPA will likely cost you $175+ per hour, it might be worth the investment if he or she can provide tax advice that saves you many times what you invest in their services. Be sure your CPA is familiar with the accounting software you select, or keep interviewing CPAs until you find someone who is.

There is also a risk-management component to this decision, to make sure you’re not getting phone calls from the IRS. It’s bordering on criminal not to keep accurate accounting records for your business, so don’t muck this one up. Keep accurate records. It pays to do so, and it costs not to.

As a small business owner, I admit I have received a letter from the IRS about accounting discrepancies. They normally send you a letter in the mail, usually accompanied by an increase in your tax bill. While not ideal, it’s not the end of the world.

I recommend looking closely at any IRS correspondence; it doesn’t always spell doom. In my situation, they questioned my accounting on the sale of some stock. It turns out my accounting was correct, and after a few back-and-forths with the IRS via mail — with lots of documentation (which I had) — the case was closed.

Summary

Accounting is often called the “language of business” because it deals with interpreting and communicating information about a company’s past activities and forecasting future operations. It takes some discipline and learning to wrap your head about accounting, but it’s a must for your business.

“Discipline is the bridge between goals and accomplishment.”  –Jim Rohn

When starting off, keeping track of things in an Excel spreadsheet is a fine and free way to get going. Once transactions and other records seem to be increasing faster than you can keep up in Excel, it’s time to make the switch to an accounting software or cloud-based service. For the reasons outlined above, my recommendation would be Intuit.

Stay tuned for the next post, where we dig into financing and how to find funding for your company.