For any business owner, bookkeeping is a necessary process. Sometimes, depending on the scale of a business, it’s possible to be your own bookkeeper if you can’t find an accountant that suits your needs.
However, you can’t just flip a switch and become a bookkeeper. You need to maintain a well-developed understanding of the essentials of small business account and bookkeeping basics, or you can end up going down a rabbit hole that is very difficult to escape.
I made a rookie mistake trying to do the bookkeeping for my small business while uneducated, and while I figured it all out, I ended up spending much more time and effort than I would have liked.
Let’s explore some simple bookkeeping tips to get you off and running and not frustrated like I was.
How to Do Bookkeeping
There are at least eight keys to bookkeeping success. While this list only touches on the broad outlines of bookkeeping basics, each facet is essential for small business accounting.
- 1. Understand Business Accounts
- 2. Set Up Your Business Accounts
- 3. Decide on a Bookkeeping Method
- 4. Set Budget Aside for Tax Purposes
- 5. Record Every Financial Transaction
- 6. Stay on Top of Your Accounts Receivable
- 7. Balance the Books
- 8. Prepare Financial Reports
What Is Bookkeeping?
Bookkeeping is the general term given to the process of documenting financial transactions, recording them in a journal, classifying them as debits or credits, and ultimately organizing each transaction according to the business’s chart of accounts.
If that sounds like it’s a lot of work, it is. The process of keeping track of every single financial transaction within any business requires a lot of organization, as well as careful and consistent documentation.
How to Do Bookkeeping
Now that we understand what bookkeeping means, let’s look at how to perform the functions of a bookkeeper.
1. Understand Business Accounts
To laypeople, an account means something they have with a bank or a credit car company. To a bookkeeper, accounts are records of transactions broken down by type. For instance, a business may have sales from product income or payroll on their chart of accounts.
Bookkeeping breaks all transactions into five ‘parent’ accounts, each with sub accounts as needed.
- Revenues – The income of a business
- Liabilities – Debts owed by the business
- Assets – The cash on hand and resources owned by the business
- Expense – the expenditures paid by the business, including salaries
- Equity – The remaining value of the businesses assets after subtracting all liabilities
2. Set Up Your Business Accounts
All of your business’s transactions need recording in your ledger, according to their category within the chart of accounts.
In the days before computers, that was all done on paper. Now, most businesses conduct their bookkeeping digitally, using one of three methods.
- Desktop bookkeeping software on a computer
- Cloud-based bookkeeping software
- Spreadsheets software
Using spreadsheets or accounting worksheets is by far the cheapest method, but all of the organization then falls to you. Using software to aid your bookkeeping isn’t declaring defeat. It’s pretty practical and will help educate you on proper bookkeeping and best practices.
And, you can still export much of the data you record directly into spreadsheets as you wish.
3. Decide on a Bookkeeping Method
There are two styles of bookkeeping.
Single-entry bookkeeping
This method is only appropriate for straightforward businesses. Each transaction appears only once in your ledger.
Double-entry bookkeeping
This is the most prevalent bookkeeping method for all businesses. Each transaction appears as a debit and a credit, ensuring that your ledger is always balanced. This is the origin of the phrase, ‘the books are balanced.’
Pretty much all software-based bookkeeping is done via the double-entry method. It seems a bit more complicated at first, but once you get the hang of it, it provides you with much better information and awareness.
4. Set Budget Aside for Tax Purposes
Business taxes are a bit different than personal taxes, and that’s an understatement. The last thing you want is to be short on cash if your tax assessment is higher than anticipated.
To minimize your risk of having insufficient funds at tax time, make sure to keep some money in a set aside account for taxes and other potential unforeseen expenses.
5. Record Every Financial Transaction
No financial transaction is too small for your general ledger. And, each day, you should be paying attention to your financial records. If you’re using bookkeeping software, it’s going to import some of your banking transactions automatically.
By paying close attention, you can better maintain your adherence to your chart of accounts, as opposed to letting the software automatically categorize your transactions. Take advantage of the software to set rules, but don’t just assume the computer always gets everything right.
This dedication to keeping things organized will undoubtedly pay off in the long run. While others might struggle to generate a report or fill out a tax form at the deadline, you’ll have all the data right at your fingertips.
6. Stay on Top of Your Accounts Receivable
Don’t let late-payers threaten your cash flow. If you’re on the ball, you’ll be aware of when receivables are due, and you can react to situations effectively and quickly.
Not every late payment is because someone can’t pay. Maybe your client missed the bill. Getting in touch with your customers promptly with a payment reminder can keep the money coming in. Don’t waste time when a receivable is overdue. Act!
7. Balance the Books
OK, so you have all the data, you’ve been keeping track of your transactions and ensuring they properly land in the right buckets according to your chart of accounts. Spend the time to make sure that all of your debits and credits are balanced.
Doing so will help keep your records neat and organized. As a bonus, it will be that much easier to maintain accurate awareness of your profitability, and you can prepare for upcoming tax and reporting deadlines.
8. Prepare Financial Reports
Here is where all your hard work pays off. If you’re putting in the time to balance your books and properly categorize all of your debits and credits, reporting with bookkeeping software is as easy as the click of a button.
Most software has built-in reporting functions like a balance sheet or a profit and loss statement. But you can also run custom reports that will help you better understand the state of your firm.
The Advantage of Bookkeeping in a Small Business
Bookkeeping in a small business will help you do quite a few things that are essential for success.
Tracking Profitability
Keep track of your earnings over time, gauging how well you profit from your inventory and plan for the future. Consider the following ratios as essential profitability metrics.
- Return on capital
- Return on equity
- Return on assets
- Profit margin
- Overall gross margin
Maintaining Cash Flow & Improved Financial Management
Keeping accurate financials will make it easier to analyze what’s working and what’s not. You’ll be able to tell precisely where you stand in terms of profits versus expenses, minimizing the risk of overextension.
Easier Reporting
Good bookkeeping practices will make reporting a breeze. Click, print, read, all without the stress of last-minute searches for receipts, missing invoices, and canceled checks.
Evaluate Performance & Plan for the Future
Solid bookkeeping will remove all of the mysteries from your finances. This way, you and your accountant can track patterns, compare month-to-month and year-to-year metrics, and strategize for the future.
Projections and forecasts will help you stay prepared for whatever is on and even over the horizon.
Conclusion
Good bookkeeping practices and effective financial tracking are essential for every small business. Don’t waste time by hoping it will all work out in the end. Get started with your business bookkeeping today.