Bookkeeping
Basics for
Small
Business
Owners
Businesses of all sizes engage in bookkeeping activities, and it’s a vital function to keep your
business financially stable and in compliance with regulations and tax law. It’s the cornerstone
of continuity but one that’s not as exciting as marketing or sales. No business can survive
without this key endeavor.
As a small business owner, you might start out doing your bookkeeping then hire someone
internally or outsource it as your business grows. The more complex the ownership of the
business, the more likely you’ll need professional help from the moment you start your business.
What is Bookkeeping?
So, what is bookkeeping, who does it, and what do you need to know? In its simplest definition,
bookkeeping is the act of keeping records on the financial activities of a business, whether
for-profit or charitable. Sole proprietorships, partnerships, LLC, and corporations must all
engage in bookkeeping.
Bookkeepers track, store, and retrieve financial records and transactions. This key role records
all money that comes in or out of a company as well as the obligation to pay money or the right
to collect money. You must record every financial activity in the books of your company.
A bookkeeper’s most common
financial transactions include:
• Invoicing services or goods sold to customers
• Registering payments for outstanding invoices
• Recording invoices owed to suppliers, contractors, etc.
• Issuing payments to suppliers, contractors, etc.
• Tracking and recording employee payroll activity
• Paying employees and recording payroll taxes
• Reconciling bank statements
• Track activities and prepare financial reports
• Make annual entries such as depreciation, bad debt
write off, etc.
• Supply information to the accountant or CPA
Bookkeeping
vs. Accounting
Some people use the words bookkeeping and
accounting interchangeably, but they are distinctly
different in job function, education, and expertise.
Bookkeepers might not have specific training in
finance. They may have some college (or none) or a
two-year degree rather than a Bachelor’s. Anyone can
function as a bookkeeper if they can develop the skills
and experience. Accountants are different. Someone
using the title “accountant” is typically expected to
have a four-year degree in accounting or finance.
Beyond that, a CPA (certified public accountant) has
additional education, certification, and credentials. You
will likely need a CPA to work with your business at some
point. They file taxes, annual reports, handle audits
(internal and external), and engage in strategic planning.
Bookkeeping is a transactional role that’s largely
administrative. Bookkeepers record the financial
transactions in the bookkeeping or accounting system.
Accounting tends to be more subjective where the
professional engages in insight and analysis based on
the transactions of bookkeeping.
Depending on the size of your business, industry, and
how you’re incorporated, you might need all three
financial specialists – a bookkeeper, an accountant,
and a CPA. But if you’re just starting out, you’ll often
begin with a bookkeeper and only engage a CPA for
tax filings.
Bad Things Can Happen If You
Don’t Keep Your Books Current
If you’re running your business and don’t have a bookkeeper or aren’t doing the books
yourself, you might wind up in trouble. Some business owners live off their checkbooks
or business credit cards, paying bills, purchasing, and collecting cash without keeping a
record of the transactions.
Throwing receipts into a bin and planning to catch up on the books later is no way to go.
Your books should be kept current on no less than a weekly basis. If you don’t keep current
with the bookkeeping, you might suffer some of these negative consequences:
Tax issues Lingering errors
Running a company means you’ll have Mistakes happen in business, and they’re
federal and state income taxes, self- easier to fix the sooner you notice them.
employment or employment taxes, and You might have underbilled a client, or they
possibly sales and use taxes. Income tax might have underpaid. Your bank might have
filings are on a monthly, quarterly, or annual double charged you or not credited a deposit
basis depending on your revenue and payroll properly. If you’re not current on your books
taxes are due more often. Miss a deadline and bank reconciliations, it might be too late
and you can expect fines and penalties. when you notice to fix the mistakes.
Turned down for financing Planning problems
To get a business loan or line of credit, Without accurate and current financial
you must be able to demonstrate your information, you won’t know how well
company’s stability. For a small business, your business is doing, what areas are
that means providing the lender with your most profitable, and to best plan. Monthly
income tax returns, financial statements, reporting of results helps keep you on track.
and records to prove your monthly revenue, If you let your bookkeeping pile up, you
expenses, and net income. Without these won’t know if you’re operating at a profit
critical statements, approval isn’t likely. and how you could be doing better.
How to Do Bookkeeping
in 6 Basic Steps
If you’re a business owner asking yourself, “Do I need a bookkeeper?” The answer is yes.
But you can be that bookkeeper, or you could turn to someone you trust to help you out
with the task. You don’t need to run out and buy bookkeeping for dummies. Just follow
these six steps.
1
Choose how to keep the books
Running a company means you’ll have federal and state income taxes,
self-employment or employment taxes, and possibly sales and use taxes.
Income tax filings are on a monthly, quarterly, or annual basis depending
on your revenue and payroll taxes are due more often. Miss a deadline
and you can expect fines and penalties.
2
Decide on cash or accrual basis
Cash basis means you only record transactions when you take in cash-
in-hand or pay out cash for expenses. Accrual basis means you record
invoices and track accounts receivable. You record bills owing to vendors
as accounts receivable. You accrue transactions for which you’re waiting
to get/send the cash. Accrual is standard for businesses with lines of
credit and receivables.
3
Set up your accounting system
Every accounting system needs to be properly set-up. Most accounting
programs are intuitive and guide you through the process- Quickbooks
Online and Xero are two great options! At a minimum, you need to set up
your bank account, a sales account, and expense accounts by category.
You may be able to choose a template company that’s like yours depending
on your bookkeeping software.
4
Start logging activities
The best bookkeeping habit is to log activity daily. When you make a sale,
record it, and issue an invoice (if needed). When you spend money, record
that. By tracking frequently, you shouldn’t fall behind and create a crisis.
Record every check you write and every bill you owe. At a minimum, even
the smallest of businesses should have weekly bookkeeping activity.
5
Maintain records
After you record an invoice, expense, or sale, don’t toss the documentation.
You might be audited and need to present the receipt or proof of the
transaction. If your receipts are digital, be sure to make a cloud backup. Check
with your tax prepare or CPA to find out if there’s anything else you need to
be accumulating in your records to satisfy their reporting requirements.
6
File taxes on-time
If you have employees, you’ll have payroll taxes, and those must be filed
promptly along with monthly or quarterly reports. Income taxes demand
quarterly estimates in most cases. For payroll taxes, you might want to
engage an outside payroll company, so that they will handle your payroll
taxes since these are complex. A CPA is a smart bet for filing quarterly
and annual tax statements.
Sound complicated?
Consider a simpler solution:
For business owners that don’t want the hassle of starting a bookkeeping
system from scratch, there are lots of solutions out there. Most programs
still require a significant amount of data entry to manage, but there are
new programs that tap artificial intelligence (AI) tools to streamline
the process. Some AI-based systems extract your financial data and
process your transactions for you.
Your time as a business owner is better spent growing your business.
Automated bookkeeping frees your time to focus on what’s important.
