Small businesses just starting out need to keep their records as accurately as any business, but they may not have the funds to hire a bookkeeper. Luckily, doing your own bookkeeping is usually not too difficult. Read on for bookkeeping tips to use as your business gets off the ground.
What is bookkeeping?
Bookkeeping is the process of recording every financial transaction your business makes—both income and expenditures—and keeping those records organized. Bookkeeping is part of the larger process of accounting, which is focused on interpreting and presenting the data in a business's books.
As such, the goal of bookkeeping is to provide organized, accurate financial information that accountants can use to communicate a business' financial results at the end of the year for income tax purposes and potentially for other reasons such as to provide financial information to potential investors.
Types of bookkeeping
You'll need to make two decisions right away when you start bookkeeping: Will you use a single-entry and double-entry system? And will you use a cash or accrual accounting system?
A single-entry system operates in the same manner as keeping a record in a checkbook: You simply record every input and output from your business.
With double-entry bookkeeping, you record each transaction twice—once as a debit from one account and again as a credit to another account. The purpose of double-entry accounting is to provide more visibility into the workings of your business. It includes enough granular detail to enable the creation of all the major financial statements, such as balance sheets, income statements, cashflow statements, and more. Single-entry accounting doesn't enable this type of analysis.
Cash vs. accrual accounting
Cash and accrual accounting differ in the timing of when you record each transaction your business makes. With cash accounting, you record each transaction when it occurs. So you put a purchase or sale in the books after the money has changed hands. In accrual accounting, you immediately record a purchase or sale, even if no one has paid anything. Accrual accounting offers a fuller picture of assets and liabilities on your company's balance sheet, providing a better sense of your profitability.
Which style of bookkeeping should you use?
Single-entry cash accounting will likely best serve very small and simple businesses. The detailed record of inputs and outputs this method produces is sufficient for creating the relatively simple tax returns that a small business needs to submit every year. A small business likely doesn't have a need for more complex financial reporting. Small business owners tend to have an immediate, intimate view of the business' health and profitability without needing to quantify them.
How do I keep the books?
Unless you're going to write everything down with a quill pen in a giant ledger, you're going to need some type of digital bookkeeping solution. This can be as simple as a single spreadsheet on your laptop.
In fact, using a spreadsheet is one of two bookkeeping options available to small businesses. The other is using accounting software.
Set up a spreadsheet that tracks incoming payments and expenses that comes in and out of your business bank account and credit card. Create a formula that provides a running total so that you can see your net revenue as you earn throughout the year.
Using a spreadsheet
A spreadsheet may be all you need if you're using a single-entry cash accounting method for your bookkeeping. Solopreneurs such as sole proprietors, single-member LLCs, and even those who hire contract help are the best candidates for this streamlined method.
Set up a spreadsheet that tracks each incoming payment and expense that comes into and out of your business bank account and credit card. Create a formula that provides a running total so that you can see your net revenue as you earn throughout the year. This record of earnings and expenses will be sufficient for your accountant to fill out the tax forms for your business.
Use simple bookkeeping software
Many small business owners, including solopreneurs and other micro-businesses, may find it helpful to do bookkeeping using accounting software. There are many free options that provide good accounting functions and have the added advantages of incorporating invoicing, tax management, and other options.
Sign up for free versions of several tools, such as Zoho, ZipBooks, or Wave, and poke around inside each to see how the function. You'll want one that makes intuitive sense to you and seems simple to maintain. Once you've landed on one, you can connect it to your business bank account so it can track the money flowing into and out of your account. This creates a more automated version of the spreadsheet method.
Using accounting software reduces errors in bookkeeping and provides helpful integration between parts of your business, such as invoicing, bookkeeping, and banking. If your business grows beyond simple accounting, you can upgrade to a paid version for more functionality or switch to a more sophisticated tool.
Bookkeeping for a solid start
Whatever system you decide on, get your bookkeeping in order from the moment you start your business.
Best practice is to start a separate business account through which these transactions flow, and with that, you'll be ready to guide your business as it grows.
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