Bookkeeping: How to Keep Records for Your Small Business
It’s true that doing your own bookkeeping can be a complete nightmare. Whether you’re starting a new business or have been running an online store for years, learning how to track your expenses and revenue can feel like a huge challenge.
You’re not alone. Nearly three-fourths of small business owners feel they are not very knowledgeable when it comes to bookkeeping and accounting. On top of running your business, you also have to manage an asset account, tax returns, credit card chargeback, and more. It can be confusing and overwhelming if you’re diving in for the first time. But it doesn’t have to be.
What is bookkeeping?
Bookkeeping is the process of recording and managing all financial transactions for your business, including sales, purchases, and payments. Bookkeepers track all costs and income, to help a company make informed financial decisions.
The basics of bookkeeping
In business bookkeeping, an account is a record of all debit and credit entries of a certain type, such as accounts payable or payroll.
There are five basic types of accounts:
Assets. Resources or things of value owned by a company as the result of its transactions (e.g., inventory, accounts receivable).
Liabilities. The obligations and debts owed by a company to suppliers, banks, lenders, or other providers of goods and services (e.g., loans, accounts payable).
Revenues or income. Money earned by the company through sales or providing a service.
Expenses. Cash that flows out of the company to pay for assets or services (e.g., utilities, salaries).
Equity., The remaining value of an owner’s interest in a company, after all liabilities have been subtracted(e.g., stock, retained earnings).
Things New Business Owners Should Know About Bookkeeping
Whatever your trade may be in the small business world, you probably love the type of work you get to wake up and do each day. Or, perhaps you’re still transitioning into a true entrepreneurial lifestyle.
While self-employment can be a breath of fresh air, there are likely some tasks you just plain can’t stand, such as bookkeeping. To help make the process of tracking your business finances a little easier, consider the following bookkeeping concepts for new business owners.
Maintaining well-organized business financial records is a must.
You must always maintain a solid recordkeeping system that contains all of your business financial files — invoices, bank statements, receipts, previous years’ tax returns, and the like.
It’s imperative to categorize your business income and expenses.
How can you gauge the true growth of your small business over time? The answer comes via good bookkeeping.
Reporting all relevant sales tax information is critical.
There are numerous business tax filings you must make when diving into formal entrepreneurship, but one critical requirement many newly crowned business owners overlook revolves around sales taxes.
Things Only Students of Accounting Programs Will Understand
It takes a special kind of person to become an accounting professional. You must be willing to learn new topics, work with software, use basic math every day, be a problem solver, and communicate well with people. Not everyone is up to the task of learning accounting and working in the field, but if you are, you have a great future ahead of you.
Once you join the accounting club, you will be one of a limited number of professionals who know what it’s like to feel the joy of creating a spreadsheet, to revel in working with numbers every day, to learn and use new software programs, and best of all to have a career that is not limited. You are joining a group of professionals who are ambitious, driven, and who earn a great living working in accounting
Math is everything.
You never thought you would say this, but now that you have worked on an associate degree in accounting, you understand the truth: math is really everything. It’s all about numbers. When you study accounting your life becomes nothing but numbers. They tell the story behind a business, a spreadsheet, tax returns, and audits are so important in accounting programs and coursework.
A spreadsheet is your best friend, or your nemesis.
Underneath it all is math, but on the surface you will be working with spreadsheets, all the time. This type of software will become your new best friend, but at times it will also be your enemy. All students of accounting programs understand the joy that comes with creating a perfect spreadsheet, one that actually works, with no errors, with totals that actually make sense. Creating such a perfect spreadsheet will make your day.
You know where you’re going after finishing accounting programs.
So many students pursuing higher education have no path. They go to college because they know it’s what they’re supposed to do. They major in communications, psychology, or art history, with no real thought for where those degrees will take them. Accounting students are different.
What Does a Bookkeeper Actually Do?
Whether you sell handmade alpaca socks, enterprise software, or legal advice, there are two things we can guarantee about your business: you earn money and you spend it. Bookkeepers are the ones who help you keep track of all that.
If all your mental powers have been focused on getting your business off the ground, you might not fully understand what a bookkeeper does. In this guide we break down the day-to-day role of a bookkeeper, and why a good one is worth holding onto.
A bookkeeper is someone who prepares your accounts, documenting daily financial transactions. Bookkeepers have been around as far back as 2600 BC—when records were tracked with a stylus on slabs of clay—making bookkeeping not the oldest profession, but pretty darn close.
A (very) brief history of bookkeepers
In colonial America, bookkeepers would record transactions in a “wastebook”—so called because the data would eventually find its way into an official ledger and the original book would go into the trash.
Bookkeepers vs. Accountants
There are some financial tasks that bookkeepers aren’t equipped for; that’s where accountants come in. While bookkeepers record daily transactions, accountants use the information compiled by a bookkeeper to produce financial models. Bookkeeping is straightforward and transactional, while accounting is more subjective and calls for skilled interpretation—like helping you understand when it’s time to incorporate, or filing your taxes to get the best return possible.
Bookkeeping Basics for Entrepreneurs
Bookkeeping is the process of tracking all of your company’s financial transactions, usually by entering them into accounting software or a physical set of “books.” It lets you see exactly where your business is spending money, where your revenue is coming from, and which tax deductions you’ll be able to claim.
You need it to do your taxes
You need to know your net profit in order to do your taxes, and to figure that out, you need to know your total income and expenses. And the only way to know that for sure is to have accurate, up-to-date books.
ou need it to borrow money
If you need to borrow money from someone other than friends and family, you’ll need to have your books together. Doing so lets you produce financial statements, which are often a prerequisite for getting a business loan, a line of credit from a bank, or seed investment.
It tells you where your money is going
Getting your books together and producing financial statements is the only way to gauge the financial health of your small business.
t helps you catch errors quickly
If you wait until the end of the year to reconcile or get your financial transactions in order, you won’t know if you or your bank made a mistake until you’re buried in paperwork at tax time. Regularly organizing and updating your books can help you catch that erroneous overdraft fee today, rather than six months from now, when it’s too late to bring up.