Starting the Bookkeeping Process

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Bookkeeping is one of those tasks that can be tedious and time consuming, but its importance is paramount for running a successful business. It’s like going on a cross country road trip with no map and a broken gas gauge. Eventually you are going to end up lost and stranded.

This article will help you be ready to begin the bookkeeping process and explain a little more about why it is so important.

What is bookkeeping?

The bookkeeping process consists of tracking, organizing, and categorizing all of the financial transactions that occur in your business. You can utilize a bookkeeping software, or you can keep track using physical books/ledgers. Good bookkeeping allows you to always be aware of your cash flow and helps figure out which tax deductions you qualify for.

Why is bookkeeping important?

There are many reasons why bookkeeping is important for your business, we will go over some below.

  • It makes tax season go smoothly.When tax season arrives, there is information you need to know for your tax documents. Specifically, you need to know your net profit, and you need your total income and expenses to calculate it. If your books are complete and done with accuracy, this can be easily done.
  • It helps you understand how your money is being used.Are you making a profit? Are you paying too much for shipping? Do you have enough money for payroll? These are questions that you don’t want to find yourself guessing the answers to.If your bookkeeping is up-to-date and complete, you can create financial reports which will help you understand your cashflow and the overall financial status of your business.
  • It helps you save money.This reason sounds enticing right? Having a proper bookkeeping system in place allows efficiency at tax time, as we already discussed, but it helps your accountant discover tax deductions that you never realized you qualified for as well. Those deductions lower your taxable income, which directly lowers your tax bill or increases your tax return.The IRS requires certain proof, in other words specific supporting documents, for some deductions, which you will be able to easily provide with proper bookkeeping. Also, if you ever get audited, you will be much less stressed during the process if your bookkeeping is in order.
  • It makes borrowing money easier.You may be cash-strapped, and your friends and family are unable to help you out, so you will need some type of loan. For most lenders, you will need to prove your profitability and that you can pay the money back. Bookkeeping allows you to produce the financial reports that you will need in order to get a business loan or line of credit.A potential lender will look over your income and balance sheets, and your cash flow statement to decide whether or not to lend you the money.
  • It allows you to recognize errors quickly.If you wait until the end of the year to reconcile your accounts, you may realize an error occurred quite a while ago. Now you have to dig through mounds of paperwork to figure out and correct the error in order to file your taxes. That is a headache no one wants to deal with.Having a bookkeeping system in place allows you to reconcile your books on a regular basis and discover any errors before they become overwhelming to fix.

How to begin bookkeeping:

Listed below are eight steps that will help you successfully get started with the bookkeeping process.

These steps are not necessarily quick or painless, but it will be worth it in the end when your bookkeeping system is up and running, and everything you need to know about your business’s finances is readily available.

1. Isolate your business’s finances from your personal finances

This step is extremely important, especially if you ever get audited. If your business and personal finances are mixed, meaning you use one account for both, that means the IRS will look at all of your finances, personal and business, for an audit.

Another reason it is important to separate your business finances from personal is possible liability. You do not want to be held personally responsible for any debts that belong to the business.

Lastly, when it comes time to do your taxes, it will be a big mess and you could potentially lose out on significant deductions because some business expenses were categorized as personal ones.

2. Select a bookkeeping system

The two most common bookkeeping methods used are single-entry and double-entry bookkeeping.

The single-entry method consists of recording each transaction only once. The assets and liabilities your company holds are recorded separately. This method is most similar to keeping a checkbook. If you are a new business, single-entry bookkeeping would probably work well for you.

Double-entry bookkeeping is more detailed than single-entry, as every transaction is recorded twice, once as a debit, and once as a credit. This method may be a bit confusing at first, but it provides a more complete picture of your finances. This method is much more appropriate for larger businesses that have numerous transactions each month. It is also the method primarily used on accounting software, and by most accountants and professional bookkeepers.

3. Select your accounting method

There are two accounting methods to choose from, cash or accrual based. This is like the decision about your bookkeeping method as smaller, newer businesses would benefit from cash-based accounting, while larger businesses should use accrual-based.

When using cash-based accounting, you would only record a transaction when money exchanges hands. This means if you ever sell on credit, the transaction is not recorded at the time of sale, but when payment is collected. This works for small business because it is an easier method, and you can always tell how much cash you have on hand.

With accrual-based accounting, you record every transaction twice, when it occurs and when payment is received. If payment is received right away, both entries are recorded at the same time. Your expenses would also be recorded like this.

This method allows for a more in-depth picture of your company’s finances.

4. Decide which bookkeeping tools to use

There are three main tools available to track your transactions: cloud-based accounting solutions, spreadsheets, or a cloud-based bookkeeping service.

Some popular cloud-based accounting solutions are QuickBooks, Wave, and Xero. These tools are great options but can be a little complicated. If you take the time to learn how to use them properly, you can avoid possible problems in the future.

Spreadsheets are an easy way to track your transactions. You can use programs like Excel or Google Sheets; however, this option is only ideal for businesses with minimal transactions.

This last option is similar to the first, but someone else does your bookkeeping on your behalf. Remote Books Online is one such bookkeeping service that can take care of all your bookkeeping needs, prepare your financial reports, and even file your taxes for you. This is a great option for those who want everything taken care of, without the hassle of actually doing it themselves.

5. Categorize your transactions

Each transaction that your business has needs to be categorized and recorded into your books. These categorizations are important for organization and help your accountant find all possible tax deductions at tax time.

Let’s look at an example. Imagine you had a business expense, an expensive meal that you never categorized. Was it a dinner celebration for landing a big account? Was it lunch with one of your clients? If you don’t know what the expense was for, you will have to dig through everything and figure it out down the road.

You may want to consider having a professional accountant or bookkeeper with experience in your industry look over your categories to confirm they will meet the standard guidelines.

6. Decide where you will store all your financial data

Keeping all of your documents safe and organized is a very important part of running a business. When filing your taxes, your CPA may tell you that in order to apply certain tax deductions you will need supporting documentation. Having your invoices and other records organized will make that request a breeze.

A good way to store your documents is digitally on cloud-based systems like Dropbox and Google Drive. There are also apps, like Shoeboxed, out there which are specifically designed for scanning and saving your receipts.

Remote Books Online can store all of your digital receipts and documents on the Remote Books Online app, if you decide to go with a bookkeeping service for your bookkeeping needs.

7. Understand your deductions

In order for something to be a deductible it must be ordinary and necessary to your business, according to the IRS. This means it must be a common expense for people in your industry and that it is required to run your business. Think of it like this, a painter needs paint brushes in order to do their work, however they do not necessarily need the most expensive brushes on the market. Or say you work mostly from home, while it may be necessary and ordinary in your field, that does not mean your entire mortgage is deductible.

Figuring out what can be a deductible can be tricky, which is why the IRS has a guide you can follow if you are ever unsure.

8. Be consistent!

When you are a busy business owner, it is easy to fall behind on your bookkeeping tasks. It is important to make bookkeeping a consistent task you complete by habit.

It might be beneficial to schedule yourself a day once a month to work specifically on bookkeeping tasks, like reconciling bank statements and recording any missing transactions, to stay up-to-date on your financials.

If you are already behind on your bookkeeping, you may want to hire someone to catch you up quickly. Remote Books Online offers this service

Hire a Bookkeeper or Do it Yourself?

When deciding whether it would be more beneficial to do your own bookkeeping or to outsource the job to a professional, there are a few things to keep in mind.

Doing the Books Yourself

Doing your own bookkeeping is a great idea if your business is very small, or a hobby/side gig for extra income. It might be a good idea to still consult with a bookkeeper or accountant to be sure your set-up is correct. As a DIYer you could easily use a spreadsheet program like Excel, or a cloud-based software like QuickBooks to organize and store your bookkeeping data.

Hiring a Professional

If your bookkeeping needs are more complex, or you just don’t have the time to deal with it, it might be a good idea to hire a professional.

Remote Books Online has a team of bookkeepers that can complete your bookkeeping duties, completely online, for you. They can also provide you with simple software to create financial statements and track your expenses, and will help take the stress out of filing your taxes.

Whichever decision you make, keeping your books up-to-date and accurate will always help you understand your finances and allow you to make the best decisions to help your business succeed.

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