Small Business Bookkeeping Basics

Why Is Bookkeeping So Important (And Necessary)?

While you can certainly buy a ledger book at an office supply store, keep in mind that it’s much easier to set up your chart of accounts if you’re using an accounting software, such as Wave. Try setting aside and scheduling a ‘bookkeeping day’ once a month to stay on top of your financials. Use that day to enter any missing transactions, normal balance reconcile bank statements, review your financial statements from the last month and make any major changes to your accounting or bookkeeping. 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.

In traditional bookkeeping systems accounts are coded according to whether they are assets, liabilities, equity, revenue, or expense. The next two columns indicate whether the account is to be debited or credited and in what amount. By convention the account to be debited is listed before the account to be credited. The term “credit” is often abbreviated “Cr”, while debit is abbreviated “Dr” (from the German word “drek”). Record transactions with double entry bookkeeping using balancing debits and credits.

At least once a week, record all financial transactions, including incoming invoices, bill payments, sales, and purchases. And make it a priority to close your books regularly too. You may do this every month, but at the very least, balance and close your books every quarter. Now that you’ve balanced your books, you need to take a closer look at what those books mean. Summarizing the flow of money in each account creates a picture of your company’s financial health.

Here is another example of a bookkeeping entry for a cash sale. This one throws assets = liabilities + equity in another variable – what the bookkeeper has to do when sales tax is involved.

You Need It To Borrow Money

When they don’t, you’ll need to take a step back and research the source of the imbalance. From there, you also want to add this transaction to your asset account since you’re adding new equipment.

Detailed inventory and fixed assets records are used to prepare automatic reports. As stated earlier, standard adjusting journal entries and reversing entries at the beginning of the next month can be set up in an automated accounting system. This document summarizes your business’s assets, liabilities, and equity at a single period of time. Your total assets should equal the sum of all liabilities and equity accounts.

Accountant Vs Controller

The account will be used to track the money that your business owes to others. Bookkeeping records financial transactions, whereas accounting analyzes the financial health of a business based on those records. Simply put, one’s administrative, the other’s analytical.

Accountants may supervise bookkeepers and prepare some of the more complex journal entries. Supervisory accountants would review the financial transactions, journal entries, and financial statements, including the balance sheet, income statement, and statement of cash flows for accuracy.

  • With accounting software, there is an automatic posting of transactions to detailed journals and the general ledger.
  • Manual bookkeeping systems without accounting software require recording all transactions, then manually posting them to journals and the general ledger.
  • When you record sales transactions on credit, the accounts receivable detail is automatically recorded by the customer and invoice through the accounting software.

If you’re doing simple bookkeeping for a small business or you’re operating a one-person business, applying the cash basis of accounting is ideal. Here, you record each transaction whenever cash changes hands. It’s all of your reported income for that time period minus your expenses for the same bookkeeping period! The result will be your Net Profit or Loss (this number is then reported in the Equity section of your balance sheet – reflecting an element of your business’ overall value). Your bookkeeping software will have a function somewhere to reconcile the bank accounts for the end of the month.

As small- business writer Joshua Adamson-Pickett explains, it not only helps you make solid decisions now and plans for your company down the road, an efficient bookkeeping system saves time. Notably, it prepares you for government audits and helps prevent fraud. Before you set up your bookkeeping system, you have to understand the firm’s basic accounts – assets, liabilities, and equity. Assets are those things the company owns such as its inventory and accounts receivables. Liabilities are those things the company owes such as what they owe to their suppliers , bank and business loans, mortgages, and any other debt on the books.

Choose a bookkeeping software that posts summarized statements and attributes all your sales and fees to your bookkeeping system. This will ensure that, as your business scales, your books will always be tidy and accurate. Good bookkeeping or accounting software should be in your kit of small business accounting tools. With the rise in virtual bookkeeping and other types of online bookkeeping services, small business owners need to keep up with the latest technology.

Individual line items are then broken down into subcategories called accounts. In our ice cream shop example, some accounts in your ledger might be “revenue-ice cream sales”, “expenses-ice cream ingredients”, etc. At the very least, you’ll want to track expenses and income in a secure cloud-based platform. So basics of bookkeeping 101 on a regular basis, you’ll draw all of the information from your different accounts together, and create a full set of financial statements. The balance sheet is a snapshot of your company at one particular time, whereas the income statement and cash flow statement show the changes over a particular period.

basics of bookkeeping 101

You can then use that picture to make decisions about your business’s future. To record a transaction, first determine the accounts that will be debited and credited.

CPA firms may review or audit the financial statements, especially when required for obtaining financing or providing financial information to investors. This article describes the bookkeeping process, whether it is performed by bookkeepers, accountants, or small business owners. Bookkeeping and accounting include steps from recording transactions to preparing financial statements. The bookkeeping process is much more efficient when you use automated accounting software. You’ve learned how to record simple transactions using double-entry bookkeeping, and how to set up an accounting system that makes sense for your business.

What Is The Difference Between Bookkeeping And Accounting?

Accounting software helps you and your accountant stay on the same page. By connecting seamlessly with your POS, accounting software automates the collection and organization of financial data and transactions. Account reconciliation proves that you’ve accounted for all transactions – and that the amount of cash in your checking account is actually correct. Note that modern accounting software can automate account reconciliation. Your bookkeeping will provide business accounting basics reports – Financial accounts and management accounts.