Sales tax is one of those business essentials that can be easy to overlook, until the tax authorities come knocking. As a small business owner, staying on top of your sales tax obligations is crucial, not just to avoid penalties, but also to ensure your financial records are accurate and your business stays compliant with local, state, and federal laws.
In this article, we’ll explain everything you need to know about handling sales tax in your bookkeeping, including how to track, collect, and report it correctly.
What is Sales Tax?
Sales tax is a consumption tax imposed by governments on the sale of goods and services. As a business owner, you’re required to collect sales tax from customers at the time of sale and remit it to the appropriate taxing authority.
Each state, and sometimes even local municipalities, sets its own rate and tax rules, which is why understanding your jurisdiction’s requirements is so critical.
Why Sales Tax Matters for Bookkeeping
Sales tax has a direct impact on your financial records. Failing to account for it properly can lead to misreported revenue, tax filing errors, and penalties. Sales tax isn’t your revenue, it’s money you collect on behalf of the state, and keeping track of it properly ensures your books stay clean and compliant.
Why it matters:
Avoids penalties for underreporting or failing to remit taxes.
Prevents tax audits by ensuring accurate sales tax records.
Increases transparency for business owners and stakeholders by keeping financial records accurate.
1. Know Where You’re Required to Collect Sales Tax
Sales tax rules vary based on location, so the first step is determining where your business is required to collect tax. In the U.S., this depends on:
Nexus: Nexus is a legal term for a business presence in a state, which can be created by having employees, offices, or sales in that state.
Physical presence: If you operate in a state (or multiple states), you generally need to collect sales tax there.
Economic nexus: If you meet certain sales or transaction thresholds in a state, you may still be required to collect sales tax even if you don’t have a physical presence.
2. Register for a Sales Tax Permit
Before you begin collecting sales tax, you must register with the state tax authority where you’re required to do so. This typically involves applying for a sales tax permit, which allows you to legally collect and remit sales tax.
Why it matters:
A sales tax permit is required to ensure you’re compliant with state and local laws.
You’ll receive the proper instructions on how to file and pay taxes in that state.
Failure to register can result in fines, penalties, or the inability to collect sales tax legally.
3. Track Sales Tax in Your Bookkeeping
The key to managing sales tax efficiently is to keep accurate records of the tax you collect. Sales tax should be tracked separately from your actual revenue in your accounting system. You can use a specific sales tax liability account to keep track of these transactions.
Why it matters:
Prevents commingling of funds: You can avoid accidentally using sales tax funds for operating expenses.
Facilitates accurate tax reporting: Clear records make it easier to file your sales tax returns correctly.
Helps with auditing: If tax authorities ever audit you, you’ll need to provide clear and accurate records of the sales tax you’ve collected.
4. Charge the Correct Sales Tax Rate
Sales tax rates can vary greatly depending on the location of the sale, the product being sold, and even the customer. Be sure to check:
State tax rates: Every state has different rates, and some items may be exempt.
Local tax rates: Cities and counties may impose additional sales taxes on top of the state rate.
Product/service exemptions: Some products (e.g., groceries, prescription medications) may be exempt from sales tax or taxed at a lower rate.
To simplify this, many businesses use sales tax software that automatically calculates the correct tax rate based on the location of the sale and the type of product or service being purchased.
5. Remit Sales Tax to the Proper Authorities
Once you’ve collected sales tax from your customers, you must remit it to the appropriate government authority. The frequency of remittance (monthly, quarterly, or annually) depends on the amount of sales tax you collect.
Make sure to keep track of the due dates for remittance to avoid penalties or late fees. Missing a remittance deadline can lead to fines or other compliance issues.
6. Maintain a Clear Record of Sales Tax Exemptions
Some customers or sales may be exempt from sales tax. Common exemptions include sales to non-profits, resellers, and government agencies. You’ll need to collect sales tax exemption certificates from these customers to prove they are eligible for exemption.
Why it matters:
Prevent errors: Sales tax exemptions can lead to significant errors in your reporting if not tracked correctly.
Comply with tax laws: Incorrectly applying exemptions can lead to penalties and interest.
Keep good documentation: Keep records of all exemption certificates and apply the appropriate tax status to each sale.
7. File Your Sales Tax Returns on Time
Sales tax returns are typically due on a regular basis (monthly, quarterly, or annually), and you must file them according to your state’s schedule. This return will show the sales tax you’ve collected, any exemptions, and the tax you owe.
Using accounting software or a sales tax tool will help you generate accurate reports for filing.
8. Use Sales Tax Software to Simplify Your Process
Sales tax software can automate much of the process, from calculating the correct tax rate to generating reports for filing. Software like Avalara, TaxJar, or QuickBooks Sales Tax integrate with your accounting system and make it easier to stay compliant.
Why it matters:
Automates tax calculations, saving time and reducing the risk of errors.
Helps you track and remit taxes for multiple states.
Generates accurate reports, making tax filings easier and more efficient.
9. Stay Informed About Changes in Sales Tax Laws
Sales tax laws change frequently. States regularly update their tax rates, exemptions, and filing requirements, so it’s important to stay informed about changes that may affect your business.
You can stay up-to-date by:
Subscribing to state or local government newsletters.
Following news from your accounting software provider or tax professional.
Consulting with a tax professional regularly.
How Our Bookkeeping Services Can Help You Stay Compliant
Keeping track of sales tax can be a hassle, but it’s critical for your business’s compliance. Our bookkeeping services ensure your sales tax records are accurate and up-to-date. We can also help you register for sales tax permits, calculate the correct rates, and file your returns on time, saving you from potential penalties and making sure your records stay clear.
Local Expertise in Sales Tax and Bookkeeping
We offer specialized bookkeeping services to help businesses in your area stay on top of sales tax compliance:
By working with us, you’ll have a professional team handling your sales tax calculations and filings, ensuring compliance and reducing your workload.
Final Thoughts
Sales tax compliance doesn’t have to be overwhelming. By following these bookkeeping tips and staying organized, you can ensure your business stays on track with tax authorities. If you’re feeling unsure or overwhelmed by sales tax regulations, consider partnering with a professional like Smart Accountants to simplify the process.
FAQs
Q: What happens if I don’t collect sales tax?
Failing to collect or remit sales tax can lead to fines, penalties, and interest. It’s important to follow your state’s rules and stay compliant.
Q: How do I know if I need to collect sales tax?
If you have a nexus in a state (i.e., physical presence or sales volume), you likely need to collect sales tax in that state. Check with your state’s tax authority to confirm.
Q: Can sales tax exemptions apply to my business?
Yes, certain sales to exempt organizations (like non-profits) or for resale may not be subject to sales tax. You’ll need to keep records of the exemption certificates.
Q: How can I automate my sales tax calculations?
Using sales tax software like Avalara or TaxJar can automate tax rate calculations and help you file returns correctly.
Choosing the right bookkeeping software is crucial for small business owners aiming to streamline their financial processes and improve the efficiency of their bookkeeping services. With numerous options available, it’s essential to select a tool that aligns with your business needs, budget, and growth plans. Below is a comprehensive comparison of some of the top bookkeeping software options in 2025, highlighting their key features, advantages, and potential drawbacks.
1. QuickBooks Online
Best For: Small to medium-sized businesses seeking a comprehensive accounting solution.
Key Features:
Automated invoicing and expense tracking
Bank reconciliation and payroll integration
Extensive third-party app integrations
Mobile access for on-the-go management
Pros:
User-friendly interface suitable for non-accountants
Robust reporting and analytics tools
Strong customer support and resources
Cons:
Pricing can be higher compared to some competitors
Additional costs for certain add-ons and features
Pricing: Starts at $30/month
2. Xero
Best For: Growing businesses requiring multi-user access and global capabilities.
Key Features:
Unlimited users on all plans
Multi-currency support
Bank reconciliation and payroll features
Integration with over 1,000 third-party apps
Pros:
Clean, intuitive interface
Strong collaboration features for teams
Scalable as business needs expand
Cons:
Limited customer support in certain regions
Some users report a learning curve for advanced features
Pricing: Starts at $15/month
3. Zoho Books
Best For: Budget-conscious businesses seeking automation and integration with Zoho apps.
Key Features:
Automated workflows and invoicing
Multi-currency transactions
Expense tracking and financial reporting
Integration with Zoho CRM and other apps
Pros:
Affordable pricing plans
Free plan available for businesses earning under $50K/year
Strong automation capabilities
Cons:
Limited integrations outside the Zoho ecosystem
Some advanced features may be complex for very small businesses
Pricing: Free for businesses under $50K/year; paid plans start at $9/month
4. FreshBooks
Best For: Service-based businesses and freelancers focusing on invoicing and time tracking.
Key Features:
Customizable invoicing and billing
Time tracking and project management
Expense tracking and financial reporting
Client collaboration tools
Pros:
Easy-to-use interface with a focus on client interactions
Excellent customer support
Mobile app for managing finances on the go
Cons:
Limited inventory management features
Pricing can be higher for advanced plans
Pricing: Starts at $17/month
5. Wave Accounting
Best For: Very small businesses or startups on a tight budget.
Key Features:
Invoicing and expense tracking
Receipt scanning and financial reporting
Multi-user support
Pros:
Completely free core features
Simple and easy to use
No hidden fees
Cons:
Limited features compared to paid options
No third-party app integrations
Customer support is primarily via email
Pricing: Free for core features; additional services like payroll are paid
6. Sage 50cloud
Best For: Businesses needing robust desktop accounting with cloud capabilities.
Key Features:
Advanced inventory management
Job costing and project management
Payroll processing and tax compliance
Integration with Microsoft 365
Pros:
Comprehensive accounting features
Strong reporting and analytics tools
Suitable for product-based businesses
Cons:
Steeper learning curve
Higher cost compared to some competitors
Pricing: Starts at $55/month
Comparison Table
Software
Best For
Starting Price
Key Strengths
Limitations
QuickBooks Online
Comprehensive SMB accounting
$30/month
User-friendly, robust features
Higher cost, add-on fees
Xero
Growing businesses, global needs
$15/month
Unlimited users, strong collaboration
Limited support in some regions
Zoho Books
Budget-conscious, Zoho users
$9/month
Affordable, strong automation
Limited external integrations
FreshBooks
Service-based businesses
$17/month
Excellent invoicing, client tools
Limited inventory management
Wave Accounting
Very small businesses
Free
Completely free, simple interface
Limited features, no integrations
Sage 50cloud
Desktop accounting with cloud
$55/month
Advanced features, strong reporting
Steeper learning curve
Conclusion
Selecting the right bookkeeping software depends on your business size, industry, and specific needs. At Smart Accountants, we understand that QuickBooks Online and Xero are excellent choices for businesses seeking comprehensive features and scalability. Zoho Books offers a cost-effective solution with strong automation, while FreshBooks caters well to service-based businesses focusing on invoicing and client management. Wave Accounting provides a free option for startups, and Sage 50cloud is suitable for those requiring robust desktop accounting with cloud capabilities.
Running a small business involves many moving parts, and staying on top of your finances is one of the most critical. Effective bookkeeping can make the difference between business growth and financial trouble. Fortunately, with a few smart tips and practices, you can keep your books in order without spending all your time doing it.
In this article, we’ll cover the essential bookkeeping tips that every small business owner should use to stay organized, save time, and ensure tax season runs smoothly. These strategies will help you maintain accurate financial records, reduce stress, and focus on growing your business.
Keep Personal and Business Finances Separate
Mixing your personal and business finances can lead to confusion, tax problems, and missed deductions. Open a dedicated business bank account and credit card for business transactions. This simple step keeps your personal expenses separate from your business, makes tracking expenses easier, and gives you more clarity when tax season rolls around.
Why it matters:
Avoids the risk of tax penalties for misreporting personal expenses as business-related.
Makes it easier to track your business’s cash flow and overall financial health.
Stay Organized and Keep Receipts
Invoices, receipts, and purchase orders are the backbone of your financial records. Store all receipts and invoices, whether physical or digital, and categorize them appropriately. This will help you in the event of an audit and ensure you don’t miss out on tax deductions.
Why it matters:
Receipts are essential for verifying expenses and income.
Organized records ensure you’re ready for tax time and help with decision-making.
Use Accounting Software
Manually tracking expenses and income with paper or spreadsheets can quickly become overwhelming. Accounting software like QuickBooks, Xero, or FreshBooks automates many aspects of bookkeeping, keeping everything in one place. This software often offers features like invoice generation, expense tracking, and reporting, reducing errors and saving time.
Why it matters:
Reduces manual data entry and the chance of errors.
Generates reports easily, helping you track your financial health.
Keep your financial data secure and backed up.
Reconcile Your Bank Accounts Regularly
Your business books. Make it a habit to reconcile your bank account at least once a month. This will help you catch discrepancies, errors, or unauthorized transactions before they become bigger problems.
Why it matters:
Ensures your financial records are accurate and up-to-date.
Helps detect fraud or errors early, saving you from costly mistakes.
Keep your cash flow visible for better financial management.
Track Your Business Expenses
It’s important to track every expense related to your business, including office supplies, travel, and utilities. Categorizing these expenses helps ensure you’re claiming every possible deduction during tax season and gives you a clearer picture of where your money is going.
Why it matters:
Helps you identify potential savings and areas to cut costs.
Ensures you maximize your deductions during tax time.
6. Keep an Eye on Your Cash Flow
Cash flow refers to the money coming in and out of your business. You may be profitable, but poor cash flow can still cause problems. Regularly reviewing your cash flow statement will help you plan for expenses, invest in growth, and avoid financial setbacks.
Why it matters:
Helps prevent liquidity problems that could impact day-to-day operations.
Allows you to make informed decisions about investments, expenses, and growth.
Automate Your Invoicing and Payments
Use your accounting software to set up automatic invoicing and payment reminders. Sending invoices promptly and following up on overdue payments will help you maintain consistent cash flow and avoid late payments.
Why it matters:
Saves time and reduces human error in invoicing.
Ensures your customers know when payments are due and reduces late fees.
Helps keep your accounts receivable in check.
Track Your Business’s Financial Ratios
Financial ratios such as profitability, liquidity, and solvency ratios are great tools for understanding the health of your business. Regularly review these ratios to make sure you’re staying on track and meeting your financial goals.
Why it matters:
Provides a snapshot of your financial health.
Helps you make better business decisions and ensure long-term success.
Save for Taxes Throughout the Year
Tax season can be overwhelming if you don’t save for your tax bill throughout the year. Set aside a percentage of your income each month for taxes so that you’re not caught off guard when it’s time to file. This helps you avoid penalties and interest on unpaid taxes.
Why it matters:
Prevents tax season stress by spreading the payment out over the year.
Avoids penalties for underpayment or late payment.
Hire a Professional Bookkeeper or Accountant
While DIY bookkeeping is fine for small businesses just starting, as your business grows, it may be worth hiring a professional to help manage your books. A bookkeeper or accountant can ensure your records are accurate, help with tax planning, and provide financial advice to improve your bottom line.
Why it matters:
Professionals can catch mistakes or issues that you might miss.
They can advise on how to structure your business for tax savings and growth.
Save time so you can focus on growing your business.
Use Financial Forecasting
Financial forecasting involves predicting future income, expenses, and profits based on historical data. Using this practice helps you make smarter decisions about hiring, investments, and budgeting for the future.
Why it matters:
Helps you plan for the future and make informed decisions.
Allows you to adapt your business strategy to meet upcoming challenges or opportunities.
Set Up a Backup System for Your Financial Records
Accidents happen, so ensure you back up your financial data. Whether you use cloud storage or an external hard drive, regularly back up your accounting records and receipts to ensure they’re safe from data loss.
Why it matters:
Protects your business data from disasters such as computer crashes or theft.
Makes it easy to retrieve your financial records if needed for audits or legal reasons.
How Our Bookkeeping Services Can Help You
The tips above will help you keep your books in order, but managing your finances effectively can be challenging for many small business owners. If you need assistance with organizing your records, performing monthly reconciliations, or handling payroll, our bookkeeping services are here to help. We can assist with everything from simple record-keeping to tax preparation and financial forecasting.
Local Bookkeeping Services Available Near You
We serve small businesses across the Northeast with professional bookkeeping and accounting support. Whether you’re based in Stamford, NYC, or elsewhere, our team is ready to help your business thrive. Explore our bookkeeping services in:
Effective bookkeeping isn’t just about keeping the IRS happy, it’s about making smart decisions for your business. By implementing these bookkeeping tips, you’ll be able to improve cash flow, avoid errors, and save time. Start small, stay consistent, and reach out for help if needed. With the right practices in place, you’ll have more time to focus on what you do best: running your business.
FAQs
Q: How often should I update my books?
At least monthly, but weekly is ideal for a clearer view of your cash flow and quicker decision-making.
Q: Do I need a separate account for my business?
Yes, it’s essential to keep your personal and business finances separate to avoid confusion and tax issues.
Q: Can bookkeeping software automate invoicing?
Yes, many tools like QuickBooks and Xero offer invoicing features that automate the process and send payment reminders.
Q: What expenses can I write off?
Common deductions include office supplies, rent, utilities, software subscriptions, and travel expenses. Consult with a bookkeeper to maximize deductions.
A chart of accounts is the master list of every account your business uses to record money in and money out. It groups accounts by type such as assets, liabilities, equity, income, and expenses, gives each a unique number and name, and maps directly to your financial statements. Get this right and your books stay clean, reports make sense, and tax time is calm.
Now let’s break it down and build a smart chart of accounts you can trust.
What is a chart of accounts
Direct answer. It is an indexed list of accounts with numbers and names that classify every transaction your business records. Each account rolls up to the balance sheet or the income statement so you can see where money sits and how it moves.
Why the chart of accounts matters
Clear reporting that owners and lenders can read in minutes
Faster month end close and easier bank reconciliation
Cleaner tax prep and fewer reclass entries
Better margins and cost control because expenses are grouped the right way
Less chaos as you grow because the structure scales
The five core account groups
All charts of accounts hang on the same simple frame.
Assets
Liabilities
Equity
Income
Expenses
Everything you add should fit one of these. If it does not, stop and rethink the design.
A simple numbering system that works
Use four digits. Leave room to grow. Keep similar items together.
1000 to 1999 Assets
1100 Current assets
1200 Cash and cash equivalents
1300 Accounts receivable
1500 Inventory
1700 Fixed assets
2000 to 2999 Liabilities
2100 Current liabilities
2200 Accounts payable
2300 Credit cards
2400 Payroll liabilities
2600 Loans
3000 to 3999 Equity
3100 Owner equity
3200 Retained earnings
4000 to 4999 Income
4100 Product sales
4200 Service income
4300 Other income
5000 to 6999 Cost of goods sold
7000 to 9999 Operating expenses
Pick ranges and stick to them. Consistency beats cleverness.
Starter chart of accounts example
Use this as a clean baseline. Add only what you need.
No.
Account name
Type
Statement
1200
Checking
Asset
Balance sheet
1210
Savings
Asset
Balance sheet
1300
Accounts receivable
Asset
Balance sheet
1500
Inventory
Asset
Balance sheet
1700
Equipment
Asset
Balance sheet
1710
Accumulated depreciation
Contra asset
Balance sheet
2100
Accounts payable
Liability
Balance sheet
2300
Credit card
Liability
Balance sheet
2400
Payroll liabilities
Liability
Balance sheet
2600
Notes payable
Liability
Balance sheet
3100
Owner equity
Equity
Balance sheet
3200
Retained earnings
Equity
Balance sheet
4100
Product sales
Income
Income statement
4200
Service income
Income
Income statement
5100
Cost of goods sold materials
COGS
Income statement
5200
Cost of goods sold labor
COGS
Income statement
6100
Rent
Expense
Income statement
6200
Utilities
Expense
Income statement
6300
Software
Expense
Income statement
6400
Insurance
Expense
Income statement
6500
Marketing and ads
Expense
Income statement
6600
Merchant and bank fees
Expense
Income statement
6700
Professional fees
Expense
Income statement
6800
Travel and meals
Expense
Income statement
6900
Depreciation expense
Expense
Income statement
How to set up your chart of accounts step by step
Step 1. Define the reporting you need
Start with the end. What do you want to see each month
Gross margin by product or service
Simple cash burn and runway
Advertising return
Department or project profitability
The reports you want decide which accounts and subaccounts you need.
Step 2. Choose your numbering ranges
Reserve blocks for growth. For example
12xx for all cash and cash like accounts
13xx for receivables
51xx for materials cost
52xx for direct labor
61xx to 69xx for operating expenses grouped by category
Step 3. Add only essential accounts
Fewer accounts mean faster coding and cleaner analysis. Start small. Add later when a real need appears.
Step 4. Separate direct costs from operating expenses
Anything tied to making or delivering what you sell goes to the cost of goods sold. Everything else stays in operating expenses. This keeps gross margin honest.
Step 5. Create the right control and clearing accounts
Undeposited funds or payout clearing for Stripe and Square
Payroll clearing to group wages and taxes before posting the net check
Loan principal and interest split into two accounts
Sales tax payable as a liability not income or expense
Step 6. Set naming rules
Plain names. No slang. One name per concept. Use the same words for similar items. For example use Software and not Apps in one place and SaaS in another.
Step 7. Document the rules in a one page policy
Include your account ranges, naming rules, and which costs go where. Share it with anyone who touches the books.
Step 8. Lock the structure and control changes
Assign one owner who approves adds, merges, or renames. Use a change log. Avoid casual edits that break comparability.
Subaccounts and when to use them
Subaccounts add detail without cluttering the top level. Use them only where you need recurring insight.
Good uses
Income split by product line or region
COGS split into materials, labor, freight
Marketing split into search, social, events, content
Software split into finance tools, sales tools, dev tools
Bad uses
One off pet projects
Extra detail no one reads
Creating a subaccount for every vendor
Rule of thumb. If you will not review it monthly, keep it at the parent account.
Industry notes you can copy
Service businesses
Lean into labor tracking
COGS labor for delivery teams if it drives revenue
Keep operating labor separate for admin or sales
E commerce and retail
Use inventory, freight in, and merchant fee accounts
Add a processor clearing account for each platform
Record sales returns and discounts as contra income
Construction and contracting
Add work in progress and retainage receivable if needed
Track materials and subcontractors in COGS
Consider class or project tracking for job cost reports
Nonprofits
Create income accounts by donor type or restriction
Use classes or tracking categories for programs
Keep grant receivables separate from general AR
Cash vs accrual and your chart of accounts
Your chart of accounts works for both. The method changes timing, not the list.
Cash basis uses fewer accrual accounts, but you still want AR and AP to manage operations
Accrual basis needs accrual entries for payroll, interest, and prepaid items
Either way, keep the same account numbers so reports compare across years
Payroll done the clean way
Wages expense
Employer taxes expense
Payroll liabilities for taxes due
Benefits expense for health and retirement
Do not net wages and taxes in one account
Clear payroll liabilities after each filing
This keeps true labor costs visible and audits simple.
Fixed assets and depreciation without pain
One account per asset class such as Equipment or Vehicles
One accumulated depreciation account per class
A small tools expense account for items under your capitalization policy
Keep purchase invoices attached to the asset record
You will sail through tax season.
Sales tax and the chart of accounts
Create Sales tax payable as a current liability
Record tax collected to this account
File and pay out of this account
Never post sales tax to income or expense
This avoids inflated revenue and messy cleanup.
Bank and processor realities
Modern books need a few helpers.
Checking and savings each as separate accounts
One credit card account per card
One clearing account for each processor
Merchant fees to a dedicated expense account
Refunds posted to a returns and allowances account
Your reconciliation will match to the penny.
Best practices to keep your chart of accounts healthy
Design for the reports you need, not for every possible detail
Keep the list short and stable
Use clear names and a simple four digit code
Separate direct costs from operating expenses
Use subaccounts only for recurring analysis
Review the list each quarter and prune unused items
Deactivate accounts you no longer need, do not delete them
Lock prior periods after the close
Common mistakes and quick fixes
Too many accounts
Symptoms: Posting is slow and inconsistent.
Fix: Merge low activity accounts and move detail to subaccounts or to tracking categories.
Mixing COGS and operating expenses
Symptom: Wild swings in gross margin.
Fix: Move delivery costs to COGS, keep overhead in operating expenses.
No clearing accounts for processors
Symptom: Deposits never match reports.
Fix: Add a clearing account for each processor and post gross sales and fees.
Random naming
Symptom: Duplicate accounts with similar names.
Fix: Set naming rules and clean up the list.
Using other expense as a catch all
Symptom: Big lump figures and no insight.
Fix: Create targeted accounts with clear purpose and reclassify the lump.
How many accounts should you have
As few as you can manage while still seeing the truth. A typical small business runs well with one hundred to one hundred fifty accounts including subaccounts. If you have more, you likely need stronger naming rules or better use of classes and projects.
Can you change your chart of accounts later
Yes. You can add, merge, or rename. Use caution. Document each change in a log. Keep account numbers stable where possible so year over year comparisons remain clean. When you migrate systems, build a crosswalk from old to new numbers.
Who should own the chart of accounts
Give one person the keys. That can be your controller or your senior bookkeeper. They approve changes, update the policy, and review new account requests. This prevents drift and keeps reports stable.
A fast setup checklist
Pick number ranges for each group
List only the accounts you truly need
Create clearing accounts for processors and payroll
Split COGS from operating expenses
Add subaccounts only where you want recurring insight
Write a one page policy for coding rules
Save a copy of the master list and change log
Train the team and lock prior periods
Frequently asked questions
What is a contra account
An account that reduces a related account. Accumulated depreciation reduces fixed assets. Sales returns reduce revenue. Using contras keeps history visible.
Should I track departments or projects with accounts or classes
Use accounts for what you buy and sell. Use classes, locations, or projects for who or where. That keeps the chart clean and your analysis flexible.
Do I need separate accounts for every vendor
No. Use the vendor list for that. Keep the chart of accounts focused on categories.
How do I handle owner draws and contributions
Create separate equity accounts for contributions and distributions. Do not post them to expenses.
How often should I review the chart of accounts
Quarterly is a good rhythm. Prune unused accounts and confirm the structure still matches your reporting needs.
What if my accountant wants a different layout for taxes
Keep your internal chart clean. Build a tax mapping inside your software or a simple export template at year end.
Need help tailoring your chart of accounts
If you want a setup that fits your business today and scales tomorrow, our team can build or clean your structure, write the coding policy, and train your staff. Explore our bookkeeping services for setup, cleanup, and monthly close support.
We also serve local businesses that want hands-on help with account structure and monthly reporting. Connect through your nearest location page
A chart of accounts is simple at heart. Use a clear number plan. Keep names plain. Separate direct costs from overhead. Add detail only where it pays you back in insight. Protect the structure with a short policy and light governance. Do this and your books will tell the truth every month without a fight.
Here’s the short version: bank reconciliation means matching your accounting records to the bank’s records for the same period, explaining every difference, recording any bank-only items in your books, and saving a report that proves your adjusted balances agree. Do this every month at a minimum. Weekly or even daily is better if you have lots of transactions.
What is bank reconciliation?
Bank reconciliation is the process of comparing the ending balance in your accounting system’s cash account to the ending balance on your bank statement for the same date range, then:
ticking off all matching deposits and payments
identifying timing differences like deposits in transit and outstanding checks
recording bank-only items in your books such as bank fees, interest, and returned items
confirming your adjusted book balance equals the adjusted bank balance and saving the report
How often should a small business reconcile?
Monthly at minimum. If you process a lot of payments, reconcile weekly. If cash is tight, reconcile daily using bank feeds so you always know what’s cleared.
What you need before you start
The bank statement for the period you’re reconciling
Your general ledger cash account for the same period
Access to sales deposits and payout reports if you use Stripe, PayPal, Square, or a POS
Check register or payment journal
Prior month’s reconciliation report (so you can carry forward any outstanding items)
Step-by-step bank reconciliation
Step 1: Pin down the period and opening balance
Pick the statement period exactly as the bank shows it. Confirm your book opening balance matches last period’s reconciled ending balance. If it doesn’t, find out what changed since the last close before moving on.
Step 2: Match deposits first
Go down the bank statement and tick each deposit that appears in your books for the same amount and near the same date. Investigate any deposit on the statement that you can’t find in your books, common causes are missed sales, batch deposits, or posting to the wrong bank account.
Deposits in transit: Any deposit recorded in your books that hasn’t cleared the bank by statement ends becomes a “deposit in transit.” You’ll list these on the reconciliation.
Step 3: Match payments and checks
Tick off each withdrawal, check, ACH, debit card payment, and bank transfer that also appears in your books.
Outstanding checks: Any check or payment recorded in your books that hasn’t cleared the bank by the statement date is “outstanding.” List these on the reconciliation.
Step 4: Record bank-only items in your books
Some items exist only on the bank side until you record them:
Bank service charges and monthly fees
Interest income
NSF or returned checks
Merchant processor fees netted from deposits
Automatic loan payments drafted by the bank
Wire fees and foreign exchange differences
Post these as journal entries in your books with clear descriptions. Then they will match the statement.
Step 5: Investigate unmatched transactions
If something appears on the bank but not in your books, or vice versa, dig in:
Duplicate entries in your books
Wrong dates or amounts entered
Posting to the wrong bank account or expense category
Batch deposits from Stripe or Square not broken out properly
Old checks that should be voided and re-issued
Fix these before you finalize.
Step 6: Prove the adjusted balances match
Use this simple formula:
Adjusted bank balance = Bank statement ending balance − Outstanding checks
Deposits in transit
Adjusted book balance = Book ending balance ± Journal entries for bank-only items ± Error corrections
Both adjusted balances must be equal. If not, you still have an unresolved difference.
Step 7: Lock it in and save your report
Save or export the reconciliation report with the list of outstanding items and copies of the bank statement. Attach supporting documents for any manual journal entries you posted. Lock the period to prevent accidental changes.
Worked example with numbers
Let’s say your bank statement shows an ending balance of $25,940 on June 30.
On the bank side:
Outstanding checks not yet cleared: check #210 for $1,200 and ACH bill pay $380 → total $1,580
Deposits in transit recorded June 30 that cleared July 1: $3,200
They match. Save the report with the list of outstanding items and the journal entries for the fee and interest.
Handling payment processors the right way
If you use Stripe, Square, Shopify, or PayPal, the amount landing in your bank account is net of fees and refunds. Reconcile like this:
Record gross sales and fees separately in your books
Use a clearing account or undeposited funds account to hold daily sales until the payout lands
Match the net payout from the processor to the bank deposit
Tie out chargebacks and refunds to the exact payout period
This approach makes your reconciliation clean and your margins accurate.
Common issues and quick fixes
Problem: Deposits don’t match because the bank shows one lump sum.
Fix: Use your processor’s payout report to group individual sales into the single bank deposit amount.
Problem: Old outstanding checks never clear.
Fix: After a reasonable period, void and re-issue or credit the vendor. Keep a documented policy.
Problem: Unexplained difference of a few dollars.
Fix: Look for bank fees, foreign exchange adjustments, or a small transposition error. Search by amount ending.
Problem: Bank feed duplicates or skips transactions.
Fix: Never auto-accept bank feed entries without review. Compare the count and totals to the paper statement.
Problem: Reconciliation throws off prior month balances.
Fix: Lock closed periods. If something must change, document it and re-reconcile the affected month.
Problem: Sales recorded but no matching deposit.
Fix: Check undeposited funds or the clearing account. Many POS systems park sales there until you create the bank deposit.
Internal controls that make reconciliation reliable
Separation of duties: One person prepares the reconciliation; another reviews and signs off.
Numbered check stock and positive pay: Reduce fraud and errors in outgoing payments.
Monthly close checklist: Bank rec, credit card rec, loan schedules, and AR/AP aging each month.
Attachment policy: Attach the statement and supporting docs to the reconciliation report.
Lock periods: Close the prior month once approved.
How to reconcile in QuickBooks Online and Xero
QuickBooks Online:
Accounting → Reconcile → Choose the bank account
Enter the statement ending balance and date
Tick off matching deposits and payments
Add bank-only items with “Reconcile” adjustments or by posting journal entries first
When the difference is $0.00, finish and save the report
Xero:
Go to the bank account → Reconcile tab
Match statement lines to transactions or create them from the statement line
Post bank fees and interest directly from the reconciliation screen with proper accounts
Use the Account Transactions report to check for duplicates
Publish the Bank Reconciliation Summary and save it
Tip: Even with software help, the real control is your review. Never let “auto-match” replace your judgment.
When to get help
If reconciliation routinely takes more than a few hours, if more than a handful of items roll forward each month, or if you have multiple processors and accounts, it may be time to bring in professional help. Clean books make tax time faster, lender conversations easier, and decision-making better.
Explore our bookkeeping services for setup, cleanup, and monthly close support. We tailor your process, document your workflows, and keep reconciliations current.
Local bookkeeping help
We support businesses across the Northeast with timely, accurate reconciliations and month-end close:
Add these as internal links to your location pages to strengthen local visibility and help readers find the nearest team.
FAQ: fast answers to common reconciliation questions
What if my balances never match?
Work backward. Confirm the opening balance matches last month’s reconciled ending balance. Then check counts and totals for deposits and payments. Look next for bank fees, interest, duplicates, and transposition errors. Keep narrowing the gap until it hits zero.
Do I need to reconcile savings, merchant, and PayPal accounts too?
Yes. Reconcile every account that moves money, including merchant and wallet accounts. Each one affects cash and revenue accuracy.
How long should I keep bank reconciliation reports?
Keep statements and reconciliation reports for at least seven years. Digital copies with attachments are fine if they’re complete and accessible.
Can I reconcile mid-month?
Yes. You can run an “as-of” mini-reconciliation anytime to check cash, but you should still complete a formal month-end reconciliation for your close.
What’s the difference between a bank reconciliation and reviewing the bank feed?
The bank feed is just a convenience tool. A reconciliation is a documented proof that your books and bank agree after timing differences and bank-only items are considered.
How do I handle foreign currency accounts?
Reconcile the foreign currency statement first in its native currency. Then book any realized FX gains or losses. Use consistent rates and document your policy.
What about stale checks older than 90 days?
Follow up with the payee. If truly stale, void and re-issue or resolve via credit. Some states have escheat rules for unclaimed property; document your actions.
A simple reconciliation checklist you can reuse
Match opening balance to last month’s reconciled ending balance
Tick deposits and identify deposits in transit
Tick payments and identify outstanding checks
Post bank fees, interest, loan drafts, NSF, and processor fees
Investigate unmatched items and fix books as needed
Prove adjusted bank = adjusted books
Save reconciliation report, statement, and attachments
Lock the period and move to the rest of month-end close
Bottom line
Reconciliation is not optional. It is the one practice that keeps cash honest, margins real, and decisions grounded. Follow the steps above, make it part of your monthly close, and protect your business from costly surprises. If you want a clean handoff and a proven process, our team can set up the workflow, train your staff, or handle the whole close through our bookkeeping services, including support in Stamford CT, NYC, Milford, Bridgeport, New Haven, White Plains NY, Fairfield CT, Long Island NY, Westport CT, and Shelton CT.
