Mastering the art of bookkeeping is essential for the smooth operation of any small business. From understanding the core concepts to unraveling the bookkeeping basics, this guide provides step-by-step on a journey to demystify how to bookkeeping, empowering you to confidently take charge of your financial records and fuel the success of your business.
What is Bookkeeping?
Bookkeeping is the vital practice of meticulously organizing and maintaining a business’s financial records. It is the backbone of financial management, ensuring records of transactions and storing financial documentation.
With the help of modern technology, bookkeeping has become more accessible and efficient, often utilizing electronic methods such as specialized software or user-friendly spreadsheets.
Bookkeeping vs. Accounting
In financial management, bookkeeping and accounting play distinct yet interconnected roles. While they may appear similar initially, they have unique focuses and responsibilities:
- Bookkeeping revolves around the meticulous recording and organization of financial data. It encompasses payroll, invoicing, recording transactions, and managing receipts and bills.
- Accounting involves interpreting and presenting this data to business owners and investors, including financial statements, budgets, tax returns, and comprehensive business performance analysis.
The differences between bookkeeping and accounting.
While there can be some overlap and variations in duties across businesses, understanding the differences between bookkeeping and accounting is crucial for harnessing their combined power to drive informed financial decision-making and maintain a solid financial foundation.
Why Is Small Business Bookkeeping Important?
Small business bookkeeping is pivotal as it separates personal and business finances, safeguarding personal liability. It helps identify errors swiftly, averting future fiscal complications. Bookkeeping for small businesses also streamlines tax procedures and collaborations with tax professionals, fostering cost savings.
Furthermore, bookkeeping services clearly envision your business’s financial health, enabling process improvements. Lastly, it organizes essential records, easing loan applications and equipment purchases. Therefore, investing in outsourced accounting services can be a strategic move for small businesses.
How To Bookkeeping In 8 Steps?
As you can see, business bookkeeping is regarded as one of the most important factors contributing to the stable financial statement of each enterprise, especially small and medium ones. Therefore, knowing the bookkeeping basics will help your business embrace more opportunities in the future. Here are the 8 steps to bookkeeping.
Separating Business And Personal Expenses
Separating business and personal expenses is the first critical step towards mastering your business finances. Establishing a business bank account organizes your transactions and safeguards against personal liability for business debts, especially if you operate a corporation or an LLC.
When personal and business expenses are mixed, it often results in unnecessary stress during tax filing and bookkeeping. This lack of organization can lead to overlooked business expenses that could have been crucial tax deductions, or it could mean extra time your CPA spends to sort out your taxes.
In both scenarios, you end up losing money. Therefore, keeping business and personal expenses separate is essential for clarity, protection, and efficient financial management.
Establish The System
Establishing a system for business bookkeeping is vital for a reliable snapshot of your business’s financial health. Your system can range from sophisticated cash registers feeding data into small business accounting software to a simple box of receipts and notes, depending on your volume of transactions.
Investing in accounting software such as QuickBooks, FreshBooks, or Expensify can simplify the process, reliably recording various types of transactions and presenting clear information. Many offer free trials, allowing you to explore their suitability for your business.
Alternatively, use a spreadsheet to record transactions manually for a more hands-on approach. Ensure it includes the supplier’s or buyer’s name, account number, expense or revenue type, invoice date, and the amount owed or paid.
No matter what method you choose, maintain consistency. Regularly update your transaction data, in the same way, to avoid overlooking any transaction. Establish a routine for transferring information from journals to the ledger, keeping your business’s financial health updated.
See more: How To Start A Virtual Bookkeeping Business In 2023?
Choose The Account Method
Regarding cash-based accounting, employees record transactions only when money physically changes hands. This method offers simplicity and a clear understanding of your cash flow at any time given, making it an attractive choice among small businesses. However, it only accounts for receivables or payables once they receive the money.
On the other hand, accrual accounting records income and expenses when they occur, no matter when the money is exchanged. This means you record transactions when you bill your customers or receive bills, creating accounts receivable and payable. This method provides a more realistic overview of your business’s financial health over time, making it suitable for larger, established companies.
Ultimately, the choice between cash and accrual accounting depends on your business size, financial complexity, and personal preference.
Remember, every transaction affects at least two accounts, and capturing both sides of the transaction is essential for accuracy. This practice, known as double-entry Bookkeeping, provides a complete picture of where your money originates and where it’s allocated.
Choose The Right Tool
In terms of choosing the right business bookkeeping tool, you have three primary options:
- Cloud Accounting Solutions: Platforms like QuickBooks, Xero, or Wave are widely used and can offer powerful accounts management tools. However, these require a certain level of bookkeeping knowledge to operate effectively. Without prior experience or time to learn, they can become overwhelming and potentially lead to errors that cost you later.
- Spreadsheet Tools: You could opt for a more straightforward, hands-on approach with spreadsheet tools like Excel. They allow you to customize your record-keeping and can be effective with templates like the free Excel Income Statement Template.
- Cloud-based Bookkeeping Services: If you prefer a more hands-off approach, you can enlist a cloud-based bookkeeping service like Bench. Such services handle your bookkeeping, prepare monthly financial statements, provide expense reports with insightful financial data, and can even assist with your tax filing. It’s an all-inclusive solution designed to make your financial management effortless.
Remember, the right tool for your business will depend on your specific needs, industry, and comfort with accounting practices. Take the time to consider each choice carefully and select the one that best appropriates your business’s financial management needs.
Separate Transactions Into Accounts
Imagine you’re running a bustling business, and transactions are happening left, right, and center. Now, how can you track this activity? It’s simple – you create different accounts within your ledger, like having other jars for different types of cookies. As you add or remove cookies from the pots, you can add or subtract from these accounts with each transaction.
Every business is unique, so the accounts you need will vary. But there are some accounts that almost every industry will need. Think of these as your essential cookie jars:
- Cash
- Accounts Receivable
- Accounts Payable
- Sales
- Inventory
- Cost of Sales
- Payroll Expenses
- Owner’s Equity
- Retained Earnings
Choose A System For Storing Your Documents
It’s essential to establish a proper method for document storage, especially for financial records. When tax season rolls around, it’s your responsibility to provide evidence for all your expenditures. Thus, systematically keeping all your receipts and financial records becomes essential.
While diamonds might last forever, the ink on your expense receipts certainly does not. That’s why opting for digital storage is a great idea, which the IRS also accepts. Consider using cloud storage solutions such as Dropbox, Evernote, or Google Drive to keep your receipts from fading or smudging over time. Receipt tracking apps like Shoeboxed are also an excellent choice, specifically designed for this purpose.
If you’re leveraging the services of Secur Accounting for your business bookkeeping requirements, you’re in for a treat. Secur Accounting provides an exceptional feature that facilitates the upload and storage of unlimited digital receipts and documents on its platform. This significantly simplifies your financial record-keeping and ensures that tax season goes smoothly.
By integrating its advanced accounting services with secure digital document storage, Secur Accounting helps you manage your financial records with ease and efficiency, saving you from the headache of faded or lost receipts.
Organize Your Deductions
Understanding the IRS’s rules about deductions is critical to effective tax planning for your business. The IRS’s main principle regarding beliefs is that they must be both “ordinary” and “necessary” for your business.
An “ordinary” expense is typical in your field, while a “necessary” expense is essential for your business operations. For instance, pens would be considered an ordinary expense if you’re a writer. However, a $900 cell might not be deemed “necessary.”
Yet, even if an expense meets the criteria of being both ordinary and necessary, it doesn’t automatically qualify for a full deduction on your taxes. For instance, if you primarily work from your dining room table, it doesn’t mean you can claim your monthly rent as a business expense. The share of your home used for enterprises must be exclusively and regularly used to qualify for a home office deduction.
The IRS has provided a detailed guide on business deductions to assist you in understanding what can and cannot be deducted. If you are ever uncertain about a deduction, it’s a good idea to consult this guide or get advice from a tax professional. This way, you can navigate the complexities of tax deductions and maximize your potential savings while ensuring IRS rules and regulations.
See more: How To Become A Bookkeeper? (An In-Depth Guide 2023)
Post Transactions Regularly
The frequency you transfer transactions from the journals to the ledger depends too much on the number of transactions your business handles. Regardless of the frequency you choose, it’s critical to maintain consistency in posting these transactions. This approach helps prevent a sudden influx of work at the end of a small business accounting period that could be overwhelming.
Consistent recording and updating of transactions help you keep your financial records accurate and up-to-date. It aids in providing a clear and timely picture of your business’s financial health, which is crucial for decision-making.
Accounting software can be a significant aid in maintaining these processes. Such tools can automate posting transactions, saving you time and reducing the risk of errors. The software ensures your records are always current, and many programs also offer features that can help with other aspects of your business’s financial management.
Frequently Asked Questions
How Do I Start Bookkeeping For Beginners?
Starting business bookkeeping as a beginner can be broken down into four main steps:
- Acquaint yourself with and organize your chart of accounts.
- Initiate the process of documenting financial transactions.
- Align or reconcile your bank accounts.
- Conclude the month by creating financial reports.
Can I Teach Myself Bookkeeping?
It’s possible to learn bookkeeping on your own. Numerous reliable online resources can equip you with the essential skills and knowledge required for bookkeeping. Tax professionals recommend enrolling in courses that offer fundamental bookkeeping lessons and more advanced aspects of small business accounting.
See more: How Much Does Bookkeeping Business Cost For Small Business In 2023?
What Are The Steps of Bookkeeping?
There are four steps of bookkeeping basics:
- Analyze Transactions: Examine each financial transaction and assign them to their accounts.
- Create Journal Entries: Record these transactions in the form of journal entries. Remember, each transaction affects at least two accounts – a debit and a credit.
- Post to Ledger Accounts: Transfer these journal entries to their specific ledger accounts, summarizing all related transactions in one place.
- Adjust Entries: At the end of each accounting period, make necessary adjustments to ensure your accounts reflect accurate balances.
In conclusion, understanding how to bookkeeping is a fundamental skill for successful small business accounting. It’s the compass that guides you through the financial landscape of your enterprise. By mastering the practices of separating expenses, establishing a consistent system, choosing the right tools, and regularly updating transactions, you can easily navigate the complexities of financial management.
Remember, business bookkeeping is not just about recording transactions, it’s about creating a clear financial picture that enables your business to grow and thrive.
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