Bookkeeping Basics 101

Bookkeeping 101

Want a simple bookkeeping system to help plan and analyse your cash flow? This article about why cash flow can be even more important than profit includes a handy spreadsheet you can use. “If you don’t have adequate support, you can be denied both tax credits and deductible expenses, which, if you’re actually entitled to them, can be a big hit at tax time,” says Charlie. The reason it’s so important to keep these records is simple. To get the full tax benefit of claiming legitimate business expenses, you need to be able to support them.

Bookkeeping 101

Make sure you always account for the principle, as well as interest. Rather than list a million things you should be doing, we will list some of the most common bookkeeping pitfalls and how you can avoid them, starting with unreconciled transactions. Start your free 14-day trial of Shopify—no credit card required. But before you sign off on the debt, it’s important to make sure the numbers make sense. In other words, it’s a good idea to calculate the ROI of the loan. Add up all the expenses you need the loan to cover, the expected new revenue you’ll get from the loan, and the total cost of interest.

Operating Expenses

One of the great things about using a software is that the debits and credits involved in creating an invoice are all handled behind the scenes. The 10 Best Small-Business Accounting Software of 2022 To rank the year’s best accounting software for small businesses, we looked at and evaluated… Bookkeeping is essential to the vitality and long-term success of any small business. Primarily, you need to have an accurate picture of all the financial ins and outs of your business. From the cash you have on hand to the debts you owe, understanding the state of your business’s finances means you can make better decisions and plan for the future. For example, if over the course of the month your cash account has had $3,000 in debits and $5,000 in credits , you would adjust the cash account balance by a total of $2,000 . Most accounting software will automatically import your bank data so you don’t have to manually enter and organize each transaction.

  • Perfect for small business owners who aren’t ready for full-fledged accounting software.
  • So for this tutorial, to keep things simple, we’re going to talk about increases and decreases rather than credits and debits.
  • As a sole proprietor, freelancer, or small business owner, you can choose between using a traditional hand-written ledger, spreadsheet software, or accounting software.
  • Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks.

Records those invoices and bills even if the funds haven’t been exchanged. Generally, accrual-based is the recommended accounting method, but the decision is ultimately up to you.

The numbers in your books should be periodically tested by doing physical counts of inventory on hand. Being adept at digital marketing, for example, isn’t enough if you don’t have a clear financial picture of your business and run headlong into cash flow problems. It also entails the discipline to distinguish between exact business income and expenses from personal income and expenses. It can be difficult to track business expenses, but by using a business credit card, for example, you can make sure that all of your expenses are kept together and tracked.

Is Bookkeeping Important For Your Business?

It also protects your personal assets in the unfortunate case of bankruptcy, lawsuits, or audits. And if you want funding down the line, from creditors or investors, strong business financial records can increase the likelihood of approvals. Choose a bookkeeping software that posts summarized statements and attributes all your sales and fees to your bookkeeping system.

Bookkeeping is simply the tracking of your income and expenses. The cash flow statement shows the movement of cash related to financing activities, investing activities, and operating activities. Once everything is categorized and reconciled, you can prepare your financial statements. Each transaction needs to be classified as an asset, liability, equity, revenue, or expenses). In addition, setting up a bookkeeping system is knowing how you’ll classify your expenses. The best part is that most of these programs enable you to connect your business bank account.


Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. If you’ve never worked in finance before, small-business bookkeeping can feel overwhelming. Fortunately, most small-business bookkeeping software was made specifically for non-accountant small-business owners. (Free bookkeeping software can help you save money if you’re just starting out.) Alternatively, in-house or outsourced bookkeepers can update your books for you, typically for a monthly fee. But whether you plan to do bookkeeping yourself or outsource it to an accountant, it pays to understand the basics of bookkeeping.

Check out their reviews and talk to them directly before making any final decisions. Simplifies processes such as applying for a business loan or buying new equipment.

  • Most small businesses will either do their books themselves or outsource the work to a professional.
  • And the cash flow statement is based primarily on the cash account, while also pulling in information from other accounts to show where all that cash went.
  • On a day-to-day basis, you might need to make decisions about when to buy something, or how much to spend on your business.
  • The liability accounts on a balance sheet include both current and long-term liabilities.
  • They are also assets that the company uses to support its daily operations, such as delivery vehicles and office equipment.
  • With records in good shape and neatly organised, you know exactly what is stored where so you save a lot of valuable time.

This article is for business owners who want to improve their knowledge of bookkeeping and follow best practices in setting up a system to record the financial activities of their company. You also need to understand what debits and credits are before you can start to enter any transactions. Any transaction posted in your ledger or your accounting software will be a debit or a credit. While the job of bookkeeper may appear similar as an accountant, they are only similar on the surface. A bookkeeper records all of the financial transactions for a business, while an accountant’s job is to interpret and analyze the data recorded by the bookkeeper. The way you categorize transactions will depend on your business and industry. Generally speaking, your transactions fall into five account types—assets, liabilities, equity, revenue, and expenses.

Business Bookkeeping Basics Faq

There are numerous accounts that need to be manually updated at year-end. This task is often far too difficult if you do not have an accounting background. It’s best to discuss this process with a CPA or accountant. You may not have accounted for the principle and interest portions of the payments correctly. If you have categorized the whole payment to a single expense, your books are probably incorrect.

Bookkeeping 101

For this reason, you will need to decide whether you will use a single-entry or double-entry bookkeeping system. Well, let us try to explain in the simplest way possible. Whether you are an established business or a new small business owner considering to set up a bookkeeping system, here are seven bookkeeping basics you must follow. This happens when you sell products and services but do not collect money straight away. In order to stay up to date on who owes you what, you must track “Accounts Receivable” so you can send accurate invoices or bills to customers on time.

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The chart of accounts lists every account the business needs and should have. It’s always best to file and store all receipts and invoices beforehand to lower the taxes. Companies that have extra cash may choose to invest their money so they can earn even more down the line. With these longer-term earnings, a business can build asset reserves or put them towards expansion so it doesn’t have to seek funding from external sources. Others demand your attention on a more regular basis—daily, weekly, or monthly. When working with an in-house bookkeeper, you limit yourself to the expertise of that single person.

Step 1: Become Familiar With And Set Up Your Chart Of Accounts

Companies like Quickbooks provide robust software that can help facilitate advanced accounting functions. Not only are many of these types of tools extremely helpful, they can also save money when it comes to hiring a traditional accountant. Although this is a great option for accountants, it may not be optimal for business owners. When it comes to the traditional method, business owners will have to consider whether or not they want to hire an in-house bookkeeper or an external accounting firm. Both methods can be expensive with hourly consulting fees and salary/benefit considerations for in-house hires. In-house accountants can be a solid option if you own a large operation and need constant oversight.

Bookkeeping 101

Having a good piece of software doesn’t make you knowledgeable about the US tax code, regulations or requirements. Business owners can miss out on deductions, disqualify themselves as a compliant business, and face IRS auditing through improper tax filing. Having simply taken an accounting class in college is no substitute for the wealth of knowledge an accountant brings to the table. Bookkeeping is an extremely time consuming and tedious task.

One account will get debited while another gets credited. This system is used to keep track of transactions that involve cash receipts and disbursements.

Bookkeeping 101: Bookkeeping Basics For Small Businesses

The Profit and Loss Statement and the Balance Sheet give you the overall picture of your business finances. Owner’s equity is the overall Bookkeeping 101 value of your business at a point in time. At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes.

This will ensure that, as your business scales, your books will always be tidy and accurate. Often, the balance sheet is overlooked and is actually one of the most important if not the most important – financial statements. A company can be profitable while incurring a lot of debt. When a company buys or sells goods and services, a bookkeeper updates the business accounting books to keep track of funds coming in and going out. Every entry represents a different transaction, and every accounting system has a chart of accounts that lists accounts as correlating categories. Think of it as a detailed filing system, recorded either by hand or using software.

Bookkeeping Vs Accounting: Whats The Difference?

Assets.Resources or things of value owned by a company as the result of its transactions (e.g., inventory, accounts receivable). This report shows a company’s assets, liabilities, and owner equity or capital on a particular date. This is a snapshot in time, not a report that shows over a period of time.

Also, reconcile your bookkeeping records with your bank statements every month. Keeping a regular bookkeeping schedule also diminishes the chances of duplicate entries, or entries being logged into multiple or wrong accounts.

Sole proprietors don’t legally need a separate account, but it’s definitely recommended. Best financial bookkeeping for service-based businesses. And while there’s value in getting expert bookkeeping help and advice, make sure you never lose the solid understanding of your numbers, no matter who you have managing the day to day. Whether you do all bookkeeping yourself or decide it’s best to hire a certified bookkeeper, understanding how money flows through your business is good business.

Selling to international customers can be easier than domestic sales. Canadian store owners don’t need to charge GST/HST to customers who are outside of Canada.

I’m going to show you the basics of accounting, how these concepts relate to your day-to-day activities, and how financial software can make the whole process easier. Now that you have reconciled all your accounts and transactions, you are ready to close the month and print out your financial reports. Using a manual ledger can be a time-consuming exercise; therefore, you must use bookkeeping software to automate the completion of financial reporting. As for the income statement, that uses the accounts we looked at in Step 2, like the revenue, expenses, and cost of goods sold. And the cash flow statement is based primarily on the cash account, while also pulling in information from other accounts to show where all that cash went. The information for those statements comes directly from the accounts we’ve just been looking at.

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