Small Business Bookkeeping Basics
Bookkeeping is a regular and essential part of running any business, large or small. For small business owners, it can be a somewhat complex process to manage, especially because it’s typically not an area of expertise when you’re first starting out, and you’re often not able to hire additional headcount to manage the process full time.
If you’re brand new to business, we know it can be a bit daunting to figure out how to begin. We’ve prepared some great resources to help you get started, including a glossary of common terms, and frequently asked questions. Below, we’ll outline the steps to get your bookkeeping practices established, so you’re well prepared to keep your bookkeeping on track.
Getting Your Small Business Bookkeeping Setup
The initial setup for bookkeeping goes beyond just opening a business bank account or taking out a line of credit. You’ll also need to set up records for sales and payroll, and educate yourself about the different types of accounts within your business.
There are 5 types of accounts that you’ll need to know about and understand:
- Assets: cash and other resources owned by the business, like inventory and accounts receivable
- Liabilities: obligations and debts owed, like accounts payables and loans
- Equity: the value remaining after liabilities are subtracted from assets, like common stock and retained earnings
- Revenues or Income: amounts earned through sales
- Expenses or Expenditure: cash that flows out of your business for things like salaries and utilities
You can set up these accounts using a bookkeeping software like QuickBooks Online or Sage Intacct, so that all you’re responsible for is recording transactions as they occur, and tagging them with the appropriate categories. Implementing technology for your bookkeeping needs helps to streamline the process and reduce human error, and it can also save you a lot of time.
You’ll also need to decide on a bookkeeping method. You can choose from Single Entry or Double Entry based on the needs of your business. Single Entry is a method where you enter each transaction only once, which makes sense for simple transaction-based businesses. This method is not recommended because it is almost impossible to find errors and correct them.
Double Entry is a method where each transaction is logged in one account (debit), and requires an equal and opposite entry in another account (credit). This is the most accurate and most common bookkeeping method, and while it requires more work, it’s our recommended approach.
Record Your Transactions
The most time-consuming part of bookkeeping is data entry on a timely and consistent basis. If you don’t keep up with recording your transactions as they happen, it’s easy to fall behind and become completely overwhelmed. This is an area where many small businesses struggle, and where we often find our bookkeeping solutions to be the most beneficial, because we can help you stay up-to-date and on top of your finances. By using online bookkeeping software and linking it to your bank account, you can automate the recording of transactions in your accounts and ensure that all of the numbers are accurate.
Prepare Your Financial Reports
Financial statement preparation is another important part of the bookkeeping process, as the statements provide you with an accurate view of the financial health of your business, which can be shared with your accountant or CPA and used to help shape future decisions. There are three basic financial statements, which include:
- Balance Sheet: a balance sheet lists all of your business assets, liabilities, and equity on a particular date
- Income Statement: an income statement, also called a profit & loss report, can be particularly useful to small businesses as it displays net income over a specific period of time
- Cash Flow Statement: a cash flow statement shows incoming and outgoing cash during a specific period of time
Store Your Records
As mentioned earlier, technology can be really helpful to manage all of your bookkeeping and accounting needs. With online software, you can store your records securely in the cloud rather than locally on a desktop, which not only makes them extra safe, but also accessible from anywhere, at any time. Some of our favorite platforms to work with are QuickBooks Online and Sage Intacct