Do you know where every bit of your revenue comes from, where it flows to, and how that impacts your business? If the answer is no or you aren’t sure, you’ve arrived at the right post. Today, we’re talking about the basics of bookkeeping.
What’s Bookkeeping, and why is it important?
Bookkeeping is the process of compiling, tracking, and storing records of your business’s financial affairs. It’s an essential component of business accounting that can help you improve cash flow and make informed financial decisions.
But that’s not all. Diligent bookkeeping can also help you:
- Keep track of every possible tax deduction so you can maximize your return potential.
- Provide the detailed financial information banks need for loan applications.
- Catch financial mistakes such as:
- Extra payments
- Fees from subscriptions you meant to cancel
- Utility payments that haven’t gone through
- Bank errors
We could talk about different examples for this entire post, but here’s what it all boils down to: Bookkeeping shows you where your money is going, and how your business is growing.
Bookkeeping Basics
If hiring an accountant isn’t in the budget right now, you can tackle the books on your own. Prior accounting experience is beneficial, but thanks to the wealth of accounting tools and software available for businesses, it’s not necessary. Anyone can add bookkeeping to their skillset. The key is to be consistent, organized, and exceptionally detailed.
If that sounds like you, it’s time to get started! Here are five bookkeeping basics to get your business on the right track.
Separate Personal and Business Expenses
Priority number one is to isolate your personal and business expenses.
When these expenses are intertwined, deciphering what your business is earning versus spending becomes incredibly difficult. This turns your bottom line into a foggy blur and makes reporting on your business standings near impossible.
Plus, not separating expenses opens your business up to liabilities and potential legal problems in the event of an audit or data breach. So, even if your business feels like part of the family, make sure it has its own bank account.
Choose Your Bookkeeping and Accounting Methods
Once you’ve isolated your expenses, it’s to decide on your preferred bookkeeping and accounting methods.
First, you’ll need to choose between single entry and double entry bookkeeping.
In single entry bookkeeping, you simply record transactions as they happen. This option is best suited for small businesses with no inventory, no employees, and no overhead. A sole proprietorship, for instance, could use single entry.
If your business is any more complex than a sole proprietorship, double entry bookkeeping is your best bet. Double entry, as the name suggests, requires you to record each transaction twice. You’ll take assets from one column (credit) and carry them over into another column (debit) so that the columns always equal each other.
For example, let’s say you spend $500 on a piece of equipment. In this case, you would subtract $500 in cash from your credit column and add $500 in assets to your debit column. This approach might remind you of balancing a checkbook.
Next, it’s time to decide between the cash and accrual method of accounting.
The cash method only recognizes revenue when it’s received. In other words, you would only put a transaction on the books once the funds were deposited into your account. However, the accrual method recognizes revenue when it’s earned. For instance, you would record a transaction after writing the invoice for completing a project or service.
Decide on Your Accounting Software
Now that you know how you’ll record business transactions, you need to decide where to keep them. Again, you have options here.
If you’re running a smaller operation, recording transactions manually might be your best choice. You could do this in a paper ledger, but if you do, be sure to back up your paper records digitally (and preferably in the Cloud). This way, you’ll protect your records from being accidentally lost, stolen, or damaged.
If you decide to go the manual route, we recommend using a Microsoft Excel spreadsheet or Google sheet that you can save to the Cloud and share easily with stakeholders, loan officers, or tax representatives. These digital platforms both offer bookkeeping templates to help you get started.
Maybe manual entry just isn’t going to work for you. In this case, check out an accounting software option like QuickBooks, Xero, or Wave to help you keep the books:
- Quickbooks is a top-rated option for Small Businesses with more complex financial needs. Pricing starts at $30 (US) per month.
- Xero allows unlimited users at every subscription tier and features customizable dashboard options for each user. Pricing starts at $12 (US) per month.
- Wave is a simple accounting solution best suited for small, service-based businesses. This is a free software, making it a popular pick for businesses on a budget.
Categorize and Organize Your Expenses
Remember when we said the key to bookkeeping is to be organized and detailed? Here’s where those two characteristics can really shine.
The next step is to categorize your transactions. Every credit or debit on your business account should fall into one of the categories you create. This will help you understand what your biggest revenue drivers are, where you’re spending the most, and even what you can mark as a tax deduction.
Your categories will depend on your business, but common examples include:
- Meals & Entertainment
- Office Supplies
- Payroll
- Rent & Utilities
- Travel
A best practice is to include detailed documentation for each of the expenses dropped into these categories. We recommend attaching these items digitally for safe storage and to keep your office space clutter-free. Wondering how long you should hold onto those physical records? A good rule of thumb is to keep every receipt or record of payment for three years, in case of audit or other reference need.
Remember: Consistency is Key
If you let the expenses pile up, bookkeeping becomes less efficient and quite a headache. So, build bookkeeping into your schedule.
You can set this time as frequently as makes sense for your business, but it’s best to tackle the books at least once per month. Doing so will help you keep a close eye on cash flow and the overall health of your bottom line.
What’s your best-kept bookkeeping secret? Is there an accounting software that has served your business particularly well? Share your thoughts with our community in the comments below!