As a small business owner, you understand the impact that financial decisions have on whether you get to wake up and work on your business tomorrow. Bookkeeping is an essential process that informs your financial chain of decisions. If you’re new to business bookkeeping, you’ve come to the right place.
Welcome to Bookkeeping 101, where you’ll learn why bookkeeping is crucial for your business, how to get started on the basics of bookkeeping and when to leverage professional services.
What Is Bookkeeping
Bookkeeping is the part of accounting that records the financial transactions of a business. The aim of bookkeeping is to draw a clear picture of the revenue, expenditure, assets, tax bill, and liabilities of a business while helping to chart the way forward.
Why Is Bookkeeping Important?
Running a business is like running a marathon. Without a coherent plan for your resources, it becomes much more difficult to gauge the health of your business in the long run. Monthly and quarterly bookkeeping will:
- Help you catch bank errors, as well as incorrect or omitted transaction records, so that you have an opportunity to fix them before you’re bogged down by tax season.
- Ensure that you reconcile all your records on time so you can claim all available tax breaks and deductions. The end result should be a lower tax bill, and subsequently more money in your pocket.
- Help you identify which parts of your business are bleeding resources and which ones are a gold mine that need more attention.
- Give you a clearer picture of your business’s financial health so that you can make sound financial projections and show your repayment capacity when bringing in investors or lenders.
6 Key Steps of Bookkeeping
It is extremely beneficial to consult a professional bookkeeper or certified public accountant as you set up your bookkeeping system. This is true whether you choose to learn bookkeeping and do it yourself or outsource to a professional.
There are, however, the general decisions you have to make before you can kick start the process.
1. Have Separate Personal and Business Expenses
This step is essential because it will give you an accurate picture of your financial status when you compile your end-of-year financial statements. It will also make bookkeeping a breeze because you don’t have to retrace each expense to figure out where it falls. If you have a limited company, separating finances protects your personal assets.
2. Decide Which Bookkeeping System To Use
Single entry and double entry bookkeeping methods both have their benefits and challenges. While the former is easy to implement, the latter gives you more accurate financial data for reporting at the end of the accounting cycle. If you’re unsure about the way forward, consult a professional bookkeeper or a CPA about the pros and cons of each method.
3. Choose an Accounting System
Once again, you need to choose one system at the beginning and stick to it.
Cash accounting records the transaction when the actual money moves from debtor to creditor. Accrual accounting records the transaction at the point of billing.
Examine how you do business and gauge which method suits you. For instance, an inventory based business will most likely need the accrual accounting method.
Alternatively, get a professional bookkeeper to help you set up the right system for you.
4. Group Your Transactions Into Categories
Your business transactions will typically fall within these five categories:
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
Each category is further broken down into subcategories or accounts, such as sales, marketing or supplies.
When you’re going through your financial audits or putting together your tax deductions, having clear transaction categories can save you plenty of headaches.
There is no one size fits all. However you choose to categorize, make sure they mesh with your industry standards.
5. Figure Out What Qualifies as a Deduction
One of the most important roles that an accountant plays is to make sure you stay on top of your tax obligations while paying the minimum that is legally acceptable.
The IRS has a very detailed guide to business expense deductions. While you can do your own taxes and should have a good understanding of your obligations, relying on professional services can save you tens of hours of tedious work.
6. Keep Records of Your Expenses
Throw out that box file that has seen better days and look into digitizing your receipts. Many accounting software solutions offer receipt capture.
Whether you opt for physical or digital expense records, have them on hand to justify your tax deductions.