What is Bookkeeping?
Bookkeeping is the systematic practice of maintaining and updating a company’s financial records to reflect all financial transactions, including credits and debits. Professional bookkeepers are responsible for preparing and tracking critical financial documents such as invoices, bills, and financial statements. These activities ensure that the business is prepared for tax season and other financial reporting requirements.
It is important to distinguish bookkeeping from accounting, as bookkeeping represents the crucial initial step in documenting all business activities. While bookkeeping provides detailed oversight of each individual transaction to identify and correct discrepancies and mistakes, accounting involves a comprehensive analysis of these financial records. Accountants rely on accurate bookkeeping to evaluate and advise on the financial health and growth potential of a business.
Why Do Small Businesses Need Bookkeeping?
Maintaining accurate bookkeeping is essential for the stability and success of small businesses. With multiple facets to manage, including assets, liabilities, income, and expenses, staying organized is crucial for business owners. Effective bookkeeping can help small businesses:
- Create organized and detailed financial reports
- Be more prepared at tax time
- Understand business transactions at a granular level
- Develop a plan for profitability that leads to improved cash flow and long-term success
Bookkeeping Options for Small Business Owners
Thankfully, managing bookkeeping doesn’t require small business owners to be mathematical wizards. There are several ways to distribute bookkeeping tasks and use technology and accounting software to keep track of expenses more efficiently.
Bookkeeping Software Platforms
Contemporary accounting software platforms simplify bookkeeping more than ever before. Tools such as FreshBooks, specifically designed for small business owners, can greatly streamline bookkeeping activities. FreshBooks offers a flexible, mobile, and secure solution for various tasks, including:
- Tracking business expenses
- Continual monitoring of accounts payable and accounts receivable
- Managing financial reports for specific periods
- Producing and sending customer invoices
- Tracking incoming payments
- Implementing double-entry accounting to ensure accuracy and compliance
External Consultants and Outsourcing
Hiring professional bookkeepers and accountants is another effective way to manage, monitor, and report on financial activities. This option offers the advantage of having a dedicated bookkeeping and accounting professional without the need to establish an internal accounting department. However, as a business owner, you will still have certain responsibilities. For instance, you might need to provide access to accounting systems, share receipts, and details for customer billing, or approve vendor payments, even when these tasks are outsourced.
How to Start Bookkeeping in a Small Business
Bookkeeping is something every business needs. Establishing a strong financial foundation for your small business begins with a few simple steps:
Set Up the Appropriate Accounts
It is crucial to separate your business finances from your personal finances by having distinct accounts. In the realm of bookkeeping, the term “accounts” refers to various categories used to classify transactions, rather than the actual business bank accounts. These categories encompass assets, liabilities, revenue (income), expenses, and equity. Properly distinguishing these accounts is key to ensuring accurate and coherent financial documentation.
Decide on a Bookkeeping Approach
Just as there are various accounting approaches, there are two main methods for managing bookkeeping: single-entry bookkeeping and double-entry bookkeeping. Double-entry bookkeeping is preferred in the industry because it offers a more precise recording and matching of transactions to the relevant accounts. Most accounting software supports both methods, simplifying the adoption of double-entry bookkeeping for businesses.
Establish Realistic Payment Terms
It’s wise to make and record sales transactions on time, every time, and allow the accounting system to use the payment terms to calculate customer receivable due dates. The calculated due dates will appear on sales invoices, so customers can be informed of the expected payment deadline. This approach helps maintain a clear cash flow and fosters better financial planning.
How To Do Bookkeeping For a Small Business
Once you’ve established the basics of bookkeeping for your small business, it’s time to create a structured, ongoing bookkeeping system. While this task might seem overwhelming initially, mastering it early on will deliver long-term security and insight into your business finances. The core aims of bookkeeping are to meticulously track expenses and profits and to ensure all relevant information is collected for tax purposes. Below are fundamental bookkeeping principles to follow to set up a dependable bookkeeping process for your small business:
Keep Your Receipts
It’s crucial to maintain thorough records of all sales and purchase transactions. For each transaction, document the amount, date, and any pertinent details. This detailed record-keeping will enable you to accurately summarize finances, particularly during tax season. Always retain purchase receipts as evidence of transactions.
Keep a Ledger
The transaction information captured on your receipts should be recorded in a ledger, preferably a digital one. This ledger serves as a comprehensive tool to synthesize your business’s financial performance, encapsulating revenues, expenses, and other relevant financial data. A well-maintained ledger provides a clear overview of your financial status.
Create Financial Reports
Utilizing the data from your ledger, systematize and prepare financial reports for analysis. Key reports include the profit and loss statement, balance sheet, and cash flow analysis. Additionally, aged accounts receivables and aged accounts payables reports are beneficial for tracking outstanding customer payments and unpaid vendor invoices. These reports are instrumental in gaining deeper insights into your small business’s financial health.
Proactively Handle Tax Liabilities
Organized, detailed transaction records simplify the tax process significantly. By managing your bookkeeping proactively, you’ll save considerable time during tax season. You can easily provide your CPA or tax expert with your financial statements, allowing them to manage the tax filings effectively. Alternatively, leveraging a cloud-based accounting software like FreshBooks can facilitate year-round collaboration with accountants and bookkeepers. Most accounting software comes equipped with features designed to cater to a wide range of small business needs, streamlining financial management.
