What is bookkeeping? Bookkeeping is the process of keeping track of a company’s financial records that involves recording and summarizing transactions, checks, and other financial data.
As a business owner, you’re likely aware of how important bookkeeping is, but you may be stuck on how to go about bookkeeping for your business. This beginner’s guide to bookkeeping will help answer general questions you may have, including:
- What is bookkeeping?
- The benefits of bookkeeping for small businesses
- Bookkeeping options for small businesses
- Different methods of bookkeeping
- How to start bookkeeping
- Best practices for small business bookkeeping
Let’s get to it!
What is Bookkeeping?
Bookkeeping is the process of recording and reporting financial transactions in an organization, universally used by businesses of all sizes and industries.
Bookkeepers create records of cash flow, income, and expenses in addition to other types of transactions related to day-to-day operations.
Many people often confuse bookkeeping with accounting. So what is the difference between the two terms?
The main difference between bookkeeping and accounting is that bookkeeping is concerned with the day-to-day recording of transactions. In contrast, accounting provides information that will be used in making decisions.
To summarize, accounting is the process of analyzing, interpreting, and communicating financial information, and relies on data from bookkeeping records.
What are the Benefits of Bookkeeping for Small Businesses?
There are many benefits of bookkeeping for small businesses, including:
- Keeping track of finances and expenses, as this information can be helpful in making future business decisions.
- Identifying areas where you may be overspending, as this can save you money in the long run.
- Helping you prepare for tax season by keeping track of your finances throughout the year, so you can be sure that you are taking advantage of all the deductions that you are entitled to.
- Giving you peace of mind by keeping your finances in order so you can easily focus on other areas of running your business.
Bookkeeping Options for Small Businesses
Small businesses have a few different options when it comes to bookkeeping, where they can choose to do it themselves with the help of bookkeeping software, outsource it to a third-party service, or hire a bookkeeper.
Each option has its own set of pros and cons, so it’s important to weigh your choices before making a decision.
Using bookkeeping software is the easiest way to get started, as you can subscribe to accounting software and do most of the work yourself. Some software even include integrated payroll features, which would save you some time doing the task.
While doing your own bookkeeping can be a great way to save money, it can also be time-consuming and frustrating if you’re not familiar with the software.
Hiring a Bookkeeper
Hiring an in-house bookkeeper who will record all transactions and reconcile your bank statements for you will free up time for you to focus on growing your business.
While hiring a bookkeeper can be expensive, a skilled and trustworthy bookkeeper is well worth their salary for helping catch costly mistakes in your books.
You can also outsource your bookkeeping duties by contracting with a firm like Binery that specializes in performing bookkeeping duties for small businesses. Their scope covers most common bookkeeping tasks, from tracking invoices and payments to reconciling accounts payable/receivable statements.
Ultimately, the best option for small businesses will vary depending on their needs and budget, but taking the time to research all of your options is essential in order to make the best decision for your business.
What are the Different Methods of Bookkeeping?
The two main methods of bookkeeping are single-entry and double-entry. Let’s look at these methods in detail.
The single-entry bookkeeping method is the simplest and most common method of bookkeeping, where you only need to record each transaction once. This method is best suited for small businesses with simple transactions.
The double-entry bookkeeping method involves recording two entries for a single transaction, which is based on the principle of debits and credits. This means that each transaction will have a corresponding debit and credit entry, ensuring accuracy and preventing errors in the recording of transactions.
How to Start Bookkeeping
Setting up bookkeeping for your small business is as simple as a few steps, outlined below.
Step 1: Choose a Bookkeeping Method
As we’ve mentioned, there are two main bookkeeping methods, and the type of business you run will determine the method best for you. That said, double-entry is the most accurate of the two, and is usually the recommended method for most businesses.
Step 2: Create Accounts
Creating the right business accounts is key to success in bookkeeping, where “accounts” in this context refers to transaction records, not bank accounts. There are five main accounts you should start with:
- Asset accounts: Asset accounts represent the company’s resources. Common asset accounts include cash, accounts receivable, inventory, prepaid expenses, and fixed assets such as land, buildings, and equipment.
- Liability accounts: Liabilities are obligations of the company incurred during the normal course of business, which is usually paid using the company’s assets. Common liability accounts include accounts payable, accrued expenses, and interest payable.
- Revenue (Income) accounts: Revenue accounts are used to record business revenue, including revenue from sales, services, interest, and other sources.
- Expense accounts: Expense accounts are for recording expenses such as rent, interest, salaries, and utilities.
- Equity accounts: There are two types of equity accounts in small business bookkeeping: common stock and retained earnings. Common stock is the account that represents the ownership of the company by its shareholders. Retained earnings is the account that represents the net income of the business that has been reinvested back into the business.
If you’re stuck on how to start creating these accounts, accounting services like Binery can help you get set up.
Step 3: Record your Transactions
After choosing a bookkeeping method and creating accounts, the next step is to record your business transactions accurately. If you’ve chosen to use the double-entry method, transactions are split into debit and credit accounts.
For example, when you purchase bookkeeping software for $400, you will debit your Cash account and credit your Software Expense account with the $400. This means the cash and expense account should balance $400. On paper it would look like the following:
Most software will have your bank data, so you might only need to record the transaction under the expense account, as the software can import data automatically and fill in the missing fields. If using manual methods like excel, you’ll have to record both transactions.
Step 4: Balance your Accounts
Balancing your accounts is a critical aspect of bookkeeping, and you choose to balance your books on a daily, weekly, or monthly basis. If you’re using software, the accounts should balance (read: cancel each other out) if you record your transactions accurately.
When balancing accounts, the assets amount should be the same as equity and liability combined. In other words, Equity + Liabilities = Assets.
If your accounts don’t balance, you’ll need to recheck your entries and adjust where necessary. That is why it is important to be keen to detail when recording transactions.
Step 5: Prepare Financial Reports
After balancing your books, you should now be ready to prepare the relevant financial reports for your small business. Common reports include:
- Income statement: This is also called the profit and loss statement, and it shows the revenues, expenses, and costs of your business at a given period.
- Balance sheet: This is a statement that shows your assets, liabilities, and equity as a representation of your business’s financial health.
- Cash flow statement: A statement that shows how much cash your business has on hand, as well as how much cash it has generated and used over a certain period of time.
Again, if you’re using software or you’ve outsourced your bookkeeping, these software and services make it effortless for you to get your financial reports.
Best Practices for Small Business Bookkeeping
Here are a couple of best practices for small business bookkeeping that can go a long way to help keep your finances in order.
- Familiarize yourself with common financial reports, ie the income statement, balance sheets, and cash flow statement.
- Make a habit of tracking your income and expenses so that you can see where your money is going and where you can cut back.
- Understand both bookkeeping methods, so you can choose the right method for your business
- Separate personal costs from your business costs
- Create a budget and try to stick to it. This will help you stay on track and help avoid overspending.
- Prepare ahead for financial events such as taxes, which means maintaining accurate and updated records of all your business transactions
- Review your financial accounts at least monthly to ensure accuracy in accounts such as the payable and receivables
- Always backup your financial records to protect the information from internet threats or physical threats.
Bookkeeping is an important part of running a successful business, as it would be difficult to determine whether or not your business is profitable without accurate cash flow information.
Having accurate financial information allows businesses to track their progress over time and make the necessary changes if they are not meeting their financial goals.
While bookkeeping can be time-consuming, there are many software programs available that can make the process easier. For businesses just starting out, it is important to learn bookkeeping and find a system that is easy to use and understand.
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