Bookkeeping Basics for Small Business Owners

You are a small business owner and want to do your own bookkeeping, but you don't know how to do it. You can consider this video 101 bookkeeping crash course.

 Here at BPS, we've helped many small businesses to streamline their books. Bookkeeping is not the most exciting thing ever for business owners, but in this blog, we will tell you the 7 steps to do your own bookkeeping. Bookkeeping is defined as the process of recording all your business financial transactions. So that you can see where you are spending and what your revenue is and what tax deductions you can claim at tax time.

Why does Bookkeeping Matter for Small Business Owners?

This is a lot to understand but do you know why bookkeeping matters for small businesses?

Tax Deductions
It matters because it will help you catch more tax deductions when you record and categorize every transaction in your books. By doing this you will be able to see which expenses are tax deductible so that nothing is amiss. Without proper bookkeeping, you will forget many expenses to record like lunch with a client a few months ago. You can miss many deductions unless you have proper bookkeeping in place.

Business Loan
Bookkeeping matters because it can help you get a business loan. If you apply for a business loan, banks are going to see your financial statements, like Profit & Loss or income statement and Balance Sheet. You cannot just download the bank statements from your bank account and send them to the bank.  You are going to need proper financials that show your sales, expenses, and net profit. This is what you are going to get through bookkeeping.

Financial Mistakes
Bookkeeping helps you find financial mistakes. When you have proper bookkeeping in place, you keep a close eye on the transactions in your business. This means you will be able to catch things like banking errors, invoicing mistakes, and paying your vendor twice, for example, subscription fees that you forget to cancel.

Financial Picture
Bookkeeping gives you a clear financial picture of your business. You will be able to keep track of your expenses and manage cash flow. You will also be able to see the growth of your business.

7 Steps of the Bookkeeping Process

It seems like a lot to do on your own, but don’t worry at Bookkeeping Pro Services, we can help you set up you're bookkeeping and help track your revenue and expenses throughout the year. The following are the steps you need to take to get bookkeeping in place.

1: Separate Business and Personal Financials

Now the first step is to separate your business and personal expenses. You will need to make sure that you don’t mix your business and personal transactions. It should be clear to the IRS what your business is earning and spending and what is net profit. It is especially important if you have a C corporation. C corps are required to separate bank accounts and credit cards for business and personal. You are going to face legal and tax problems if your business and personal financials are not separate.

2: Single Entry or Double Entry Accounting

Budget for Small Business Owners
One of the most important benefits is having bookkeeping in place is the ability to create a budget for your business. With the help of bookkeeping, you will have financials and you will see your revenue and expenses. Based on previous months and years of financials and ongoing growth and marketing plans you can create a budget for future years.

Double entry is a system of accounting that tracks where your money comes from and where it is going. So basically, you record every transaction twice. By paying a utility bill from the bank account you Debit the utility expense account and Credit your bank account. Debit and credit should always equal each other. That is how you know that your books are balanced.

Let’s take an example. You buy a table for your office use and it costs $1000. You subtract $1000 from your bank, and it is a credit account and your office furniture asset account is debited with $1000.

You have lost $1000 in the bank, but you gained $1000 in the form of a new asset. Double-entry accounting is like double-checking your books. It helps you create financial statements which you will need to make smart financial decisions.

So, what is a single-entry system? It is basically just recording your transactions once they occur. It is less functional but if your business is simple like a sole proprietorship with no inventory and employees, you can probably use the single-entry system. If your business is growing and more complex, you will need a double-entry system.

3: Cash VS Accrual Method

The third step is choosing between the cash versus accrual method of accounting. On a cash base accounting, you will only recognize revenue when you receive it. For example, you received a check from your customer, and when you deposit the check into the bank account, you record it as revenue.

On an Accrual basis, we recognize revenue when it is earned. For example, you complete a project and write the invoice. You see, no check or payment was received but still, you record it as revenue.

If you are a small business or just getting started, you can probably use the cash method. But if your business is more complex, for example, if your business is more than five million per year in revenue or if you manage large assets or investments, you probably need to use the accrual method. Other than volume or size of business cash or accrual also depends on your business process. If you are buying and selling your products or services on credit.

You need an accrual base accounting system, no matter whether you have just started your business, or it is low in revenue. Either way, you can talk to us, and we can guide you to the best system for your business. If you want to read it in detail, you can check out our blog on the Cash vs accrual method.

4: Accounting Software

To set up a bookkeeping system you need accounting software. You can do it manually using something like Excel or Google sheets or accounting software. If you do it manually like using Excel, you can use our accounting setup template. All you need is to enter each transaction when it happens. You can download this using this link.

If you choose to use accounting software. There are a few options for small business owners such as QuickBooks Online, Xero, or Wave. You will pay a monthly subscription fee for the software which you can use to produce financial reports. Keep in mind though you may need a bookkeeper or accountant to help you learn how to properly use the software. We can help you, let’s schedule a meeting.

 5: Transactions Categorization

Categorization of the transactions is essentially classifications of your transactions to understand what you are spending on. Categorization can help you to determine what your tax deductions are. Not all transactions are equally tax deductible, so you will need to know what you are spending on marketing versus what you are spending on meals. For example, if you pay for Google ads it is categorized as advertising and marketing expense. You will need a total so that you can deduct that cost from your taxes.

6: Organize your Documents

To organize and store your documents you need to keep your records for your bookkeeping. It is not just to keep your receipts in a shoebox. There are 2 important rules for your record keeping. 1. If the expense is over $75 you should keep a record to prove that expense. 2. You should keep every receipt and financial record for three years.

We recommend keeping receipts digitally, IRS is totally fine with that. You don’t need the receipts to file your taxes, but you will need them if you get audited. You can keep your receipts digitally using apps, like Receipt bank, Hubdoc, Google Drive, or drop box. Accounting software like QBO, Xero, and wave apps also allow you to attach your receipts with transactions.

7: Reconcile your Books

Finally, the last step is to make it a habit to record your transactions consistently and reconcile your books at month’s end. If you do it you will have smart financials, and insight into your business every month and year-end. This way you will save a lot of time and headaches come during tax season.

So what you have Decided?

The more you automate your bookkeeping the easier your tax season will be. Doing your own bookkeeping is free but it can be complicated, time-consuming, and take you away from running your business. You can hire a virtual bookkeeper like bookkeeping Pro services to do it for you. It will help save you time, give you confidence your books are being done properly, and make tax time a lot easier. 

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