Guide to Business Bookkeeping

Resources

• Free Accounting Consultation: 1-800Accountant
• Recommended Online Accounting & Bookkeeping Service: Xendoo
• Recommended Accounting Software: QuickBooks

Articles

• Review: Best Accounting Software for Small Businesses 2024
• Guide to Small Business Bookkeeping

The significance of accurate bookkeeping cannot be overstated for small businesses and startups. It serves as the backbone for monitoring financial activities, guaranteeing tax compliance, and offering invaluable financial insights. Even if you outsource your bookkeeping and accounting, it’s important to have a basic understanding of what each term entails.

As the owner of a small business, your job is really simple: grow the company and grow it safely. But what does that mean? 

The extent to which a company is growing is measured by a balance sheet, which we covered in detail earlier in the course. Simply put, if a company’s assets rise each quarter, then it’s growing. But for a company to be growing safely, it needs to ensure that it can manage any debt that it takes on, keep enough cash on hand to be able to pay for what its operations costs, and ensure that the businesses operations are profitable – or at least trending towards profitability. 

To do this successfully, a business owner needs to have at least a base-level understanding of bookkeeping, accounting, and finance. And we’ll be giving you everything that you need to know about these topics in this video. 

Hey everybody, Will Scheren here from Small Business Startup Guide by TRUiC. This video is part of a larger course dedicated to helping small business owners cut through the noise and get to the essentials of starting and operating their business. If that sounds like it would be really useful to you, be sure to like and subscribe. 

So what do small business owners need to know about bookkeeping, accounting, and finance? Let’s start with bookkeeping. 

Bookkeeping is the process of recording and organizing the financial transactions of a business. For example, if your ecommerce store uses a credit card to pay for ads that they run on Facebook, that expense will need to be recorded in a spreadsheet or a software program along with the date of purchase, and it needs to be illustrated in a way that shows the increase in the short-term debt that the business holds and an increase in the advertising expense. If the business then uses cash to pay off the credit card, they’ll need to record a decrease in cash as well as a decrease in short-term debt. Bookkeepers may also record other financial transactions, such as loans and investment returns. 

Keeping your business’s books in order and well documented will allow you to keep up-to-date financial documents so you can strategize the next steps of your business, get through tax preparations much more quickly, and can be invaluable if your business is ever audited by the IRS. But if your business processes a lot of transactions, then bookkeeping can be a chore that costs a lot of time. So you’ll want to set up a bookkeeping method that automates as much of the process as possible and requires you to know as little about accounting principles as possible so you can stay focused on your business.

Setting up an accurate bookkeeping system is essential for a business so that it can manage its finances and comply with tax rules. The following steps can help: one, choose a bookkeeping method; two, set up a table of accounts; and three, record transactions. 

Choosing a bookkeeping method – there are many options for keeping track of your transactions, ranging from manual entries using physical record books to different types of software. Manual bookkeeping tends to be less expensive, but it’s time-consuming and subject to human error. Digital bookkeeping, on the other hand, can speed up parts of the process using automated invoices and receipts. For example, some startup bookkeeping apps allow you to upload pictures of receipts while you’re on the go, digitizing them and adding the expense to your books, which reduces the amount of data entry that you or your bookkeeper needs to do. 

In the next video in the course, we’ll be showing you how to set up automated bookkeeping with one of the more popular bookkeeping softwares, QuickBooks. 

At TRUiC our mission is to offer all our resources and information for free – but we support our work by using affiliate links, meaning we earn a commission on many of the amazing deals we’ve negotiated for you. Full transparency, Quickbooks is one such affiliate partner. Link in description below. 

Setting up a chart of accounts – well-run businesses usually keep a general ledger, which is a combined record of all company transactions. Most businesses find it helpful to categorize similar transactions into sub-ledgers, such as separate records for accounts receivable or accounts payable. 

Earlier in the course, we asked you to consider all of the categories of revenue, expenses, assets, debts, and more that your business would want to keep track of. This would be all of the accounts that your business would want to keep track of as you do your bookkeeping. Go back and watch the videos on small business financial projections if you need help considering categories to set up for your business. 

A new business owner will generally need to set up a separate chart for each sub-ledger. This could mean a separate physical accounting book if using manual bookkeeping or using a separate accounting sheet if you’re using accounting software. The chart of accounts lists all of the different subcategories that the business tracks. 

Recording transactions – businesses record transactions in one of two ways: single entry and double entry. 

In single-entry bookkeeping, a transaction is recorded only once on the general ledger, and it isn’t accounted for in sub-ledgers, sole proprietorships, or very small startups tend to use this method. 

However, we recommend double-entry bookkeeping where every transaction is recorded into two separate entries. For every action, there’s an equal but opposite reaction. With double-entry bookkeeping, entries into the ledger balance one another. You’ll have one ledger entry stating what was purchased, the date it was purchased, and the value of the purchase, and another entry detailing how the purchase was paid for. 

For example, if you borrow $1,000, the business’s financial records should both record an increase in the cash account and an increase in the liabilities account. If you remember, earlier in the course, we discussed balance sheets, and recording your ledger entries in this method will help ensure that your books are staying balanced. 

Common bookkeeping mistakes – it’s easy to make bookkeeping errors, especially if you’ve never done this type of recordkeeping before. Here are some common mistakes to look out for: 

Not keeping accurate records. Small errors in data entry can lead to big problems. Slight miscalculations in profit and losses can trigger IRS audits and payroll shortfalls that might limit your borrowing ability. 

Mixing personal and business finances. Sometimes small businesses aren’t diligent about separating personal and business finances. This can throw off other bookkeeping calculations and make it hard to track how your business is doing. 

Not staying current with bookkeeping. Small business owners, especially those who do their bookkeeping themselves, are prone to falling behind on record keeping. Playing catch-up can be much harder than keeping current, making it more difficult to ensure that your business is tax compliant and that employee pay and tax records are up to date. 

Bookkeeping and accounting similarities and differences – bookkeeping and accounting both involve tracking a business’s finances. However, accounting tends to focus more on the analysis of business transactions, while bookkeepers do more on recordkeeping. 

Both bookkeepers and accountants keep meticulous records and play an important role in monitoring the financial health of a business – and both bookkeepers and accountants follow Generally Accepted Accounting Principles so they can maintain consistency throughout financial documents and comply with accounting standards. However, accountants generally take monitoring the financial movements of a company further than a bookkeeper by providing tax advice, preparing tax returns, helping to apply for loans, and providing strategic advice for business decisions. 

When it comes to managing your business’s bookkeeping and accounting, our recommendation would be that if you feel like you have the time to manage your bookkeeping yourself, it’s okay to handle the bookkeeping responsibilities of the business yourself. However, we highly recommend hiring an accountant to ensure that your business stays in compliance with business laws and so you can lean on your accountant to provide you with the system to manage your bookkeeping. 

For bookkeeping services, you can work with 1-800Accountant for DIY bookkeeping or Xendoo for full-service help. And for full transparency, they are also a couple of our affiliate partners. Links in description below.

We’ve provided discounted links to these services below this video. 

In the next video in the course, we’ll be showing you how to set up QuickBooks, which is a bookkeeping software recommended by many accountants that you may end up working with. It can automate a lot of the bookkeeping work that small businesses need to take on. 

This video is part of a step-by-step course that provides business owners all of the essential information for starting and operating their business. We provided a link below this video that gives you access to all of the free and discounted tools that we mention in the course. 

Be sure to like and subscribe to get more of this content. We’ll see you in the next video, and if you have any questions, let us know.