Hi,

I am currently working for a small business owner with a headcount of 2. Her annual sales are about $10k. How large or what requires a small business to perform accounting entries? Currently, we are only doing a bank reconciliation and tracking her sales and expenses via Excel.

Thank you,

C

That's something of a judgment call. Consider the following common reasons for maintaining an accounting system...

Provide the numbers necessary for an accurate tax return.
Let the owner know how the biz is performing.
(Somewhat of a spinoff on the previous) Show the owner where improvements can be made.
Periodic financial statements are usually required by lenders and outside investors.
Periodic financials are sometimes required for membership in certain professional organizations, to qualify for favorable gov't-sponsored grants and financing (e.g., SBA minority-biz loans), etc.

OK, with respect to (1), while tax returns are usually mantadory, it's possible that the biz is sufficiently simple such that the Excel-captured data is plenty good enough for the tax-prep person.

Similarly, (2) and (3) are judgment calls--your Excel work might or might not be sufficient to supply the needed analytical info. (4) and (5) are more situational-specific... if you need formal financial statements, you'll be informed of such by the other party.

One other consideration: Think ahead on whether any of these above items might become issues in the foreseeable future. Sometimes it's easier to begin booking your transactions in an accounting system, even before you actually need it, than to go back and re-create accounting records after-the-fact. But again, it depends. If the business's transactions are simple enough, it might be the case that carefully-maintained Excel records are all you'd need until the time you have to migrate over to a formal accounting system.

In addition to everything ArcSine said, I think it's really more important to consider how accurate your entries are, not what you do them in. I've done companies small enough that Excel would have worked. (I was already using Peachtree, though, so it was easier just to continue using it.) If the records are good and proper balances kept for assets, etc. then you can migrate over to "regular" accounting software starting with any year.

So I'm more concerned about the actual records you are keeping and not with how you are keeping them. (I don't care if you've got index cards in a shoebox as long as you get it put together properly.) A company that size can do a cash basis, but that's a choice. Even for small companies, I've always followed GAAP -- with some minor exceptions since in real life some things are just not worth it. (Even GAAP recognizes cost-benefit and materiality.) But there are companies for which cash basis works out just fine.

I would still suggest, however, that you keep record of your assets, depreciate them properly (if you don't have to follow accounting standards, you can use tax method for that), your liabilities and your equity, and then make sure to close out net income to equity at year-end. If it's a very, very simplistic business, with simplistic accounting, and basically no debt except credit cards or other short-term credit, you could even get away with not doing that -- but keeping the future in mind as ArcSine said.

As for taxes... that depends on the formation. You didn't say where you are. You're using dollars, but well, that just limits it greatly. Where are you? What legal formation is this? Is she working from her home or out of an office? Some of that stuff will make a difference on how you have to handle things for tax purposes.

In other words, it isn't just about size -- it's also about the kind of company, what's going on, how simplistic it is, etc.