- The definition and importance of bookkeeping
- For those starting a business and those who haven’t hired an accountant
- Learn the basics of small business accounting
Just as you keep an eye on your personal finances to make sure you have enough money to cover expenses, you’ll want to monitor how money is coming into and going out of your business. Naturally, this process can be a little more complicated than keeping up with your credit card bills and mortgage payments each month.
Bookkeeping is the process of tracking all of your company’s transactions, which helps you pinpoint where your revenues are coming from and where you’re paying money. This record can help you maximize tax deductions, demonstrate that your finances are sound when applying for a business loan, and determine any efficiencies or financial errors.
Bookkeeping is distinct from accounting, in which your company’s finances are organized at certain intervals for purposes such as quarterly earnings statements or year-end financial reports.
Businesses have the option of using either single-entry or double-entry bookkeeping. Single-entry simply records transactions and is better suited for less complex businesses, such as sole proprietorships. Double-entry tracks both where money is being withdrawn and where it is being spent, logged as a debit on one sheet and a credit on another.
Bookkeeping also follows either a cash or accrual system. The cash system only records a transaction when money changes hands, and is better suited for smaller, less complex companies. The accrual system immediately marks purchases or sales, such as when a project is completed and an invoice submitted, even if the actual transaction will take place later; it is also necessary if you plan to offer credit to your customers or request it from your suppliers.
Some helpful information that can be tracked through bookkeeping includes:
- Accounts receivable and accounts payable, or money due to the company and what the company owes others
- Available cash
- Any outstanding loan balances
- Sales revenues
- Purchases of equipment, office supplies, and other materials for the business
- Payroll and associated expenses
- Retained earnings, or any profits that have been reinvested into the business
Bookkeeping can provide a breakdown of a company’s assets, liabilities, and owner equity. Assets are any tangible items of value held by the company, such as real estate or equipment, while liabilities are any money owed by the business to lenders, suppliers, or other entities. An owner’s equity is the amount of money left over when liabilities are subtracted from assets; this can also be expressed in the formula Assets = Liabilities + Equity.
Your business transactions should be kept completely separate from personal transactions. You also have the option of doing manual bookkeeping using a method such as a spreadsheet or ledger, or using bookkeeping software (which typically comes with a monthly fee) to keep track of this information. Business owners also have the option of doing their own bookkeeping or hiring a professional if they find it to be too challenging or time-consuming.
Expenses should be categorized into areas such as payroll, travel expenses, office supplies, and employee benefits. This breakdown can help you identify areas where you may qualify for tax breaks.
One general rule is to record any transactions over $75, and to keep all receipts and documentation related to these transactions. It’s best to log these digitally, although they can be organized manually as well. Retaining these records serves as a safeguard in case the business is audited.
Try to be consistent about updating your books. Going through the process at least once a month ensures that the numbers are accurate and helpful.