Bookkeeping plays an important role in your business and the management of your company’s finances. When your finances are in order, you can make smarter business decisions, save time during tax season and maximize deductions that reduce your tax burden.
Bookkeeping can encompass many things. If you’re considering taking on this monumental task on your own, it’s crucial to understand the bookkeeping basics for small businesses.
Bookkeeping Basics for Small Businesses
Bookkeeping has many moving parts. Let’s take a closer look at bookkeeping basics 101.
Separate Business and Personal Expenses
One of the first and most important steps you should take with your bookkeeping is to separate your business and personal expenses. If you haven’t already, open a business bank account and use it only for business expenses.
Why is it important to separate business and personal expenses?
- It can make tax preparation and your bookkeeping messy and confusing. For example, you may miss a business expense from your personal account and lose a deduction that would have otherwise saved you money.
- If your business is an LLC or corporation, there needs to be a clear distinction between personal and business expenses or you could be personally held liable for business debts.
Separating your business and personal expenses is a simple step that will save you time and money in the future.
Set Up Your Accounting Software
Once you have successfully separated your business and personal expenses, you can set up your accounting software. With cloud accounting software, connecting your bank accounts and reconciling transactions is simple and straightforward with cloud accounting software. You’ll also have the ability to access this tool from any internet-connected device.
If you have no experience using accounting or bookkeeping software, take the time to learn how to use the program and find ways to streamline the bookkeeping process.
Choose a Bookkeeping Method
Determine whether single-entry accounting or double-entry accounting is the right choice for your small business.
- All of your transactions are recorded once and either as an expense or income with single-entry accounting. Single-entry accounting is ideal for simple businesses that don’t have a great deal of equipment, inventory, or transactions. Most businesses that start out this way don’t continue to use this method for long.
- With double-entry accounting, all transactions are recorded twice – as credit and debit. This approach balances the books and can prevent errors. It’s what we recommend you utilize in your business.
Choosing a bookkeeping method is an important step that will impact how you manage your business’s finances.
Choose an Accounting Method
The next step is to choose an accounting method: cash or accrual.
- Cash accounting only records transactions when the business receives money. For example, if your business sends an invoice to a client, you would not record that invoice until the bill was paid.
- Accrual-based accounting records both invoices and bills as they are sent or received, regardless of whether they have been paid.
You’ll want to choose whichever method is right for your business.
Now that you’ve chosen your bookkeeping and accounting methods, you can begin recording and managing your transactions. It’s important to ensure that all transactions are accurately recorded and according to both the bookkeeping and accounting methods you’ve chosen.
Transactions should be properly categorized upon entry to prevent confusion, save time and maximize deductions at tax season.
Two other important aspects of managing transactions are understanding your:
- Accounts receivable, which may involve sending out invoices or estimating the value of a product.
- Accounts payable, which are the bills owed by your business to a creditor, vendor, etc.
Ideally, both your accounts receivable and accounts payable will be paid on time.
Set Up Payroll
Payroll can be processed either through your accounting software or with a separate program or service. Consider both options to see which one will work best for your business. If you have an accountant handling your accounting, speak to them and see if they can also manage your payroll.
If you are doing your own bookkeeping, it is crucial to stay organized. Not only will this save you time when managing your business finances, but it will also save you headaches during tax season.
- Establish a system for storing your expense-related documents and records. Cloud-based digital storage solutions are ideal because they ensure that your receipts are clear and easy to read. The IRS does accept digital records, so consider this option.
- Keep your deductions organized.
- Make bookkeeping a habit. Record financial transactions at least once a week, and make sure that you’re closing your books regularly. Pro tip: Work on your books first thing in the morning when your mind is fresh and clear.
Develop a system to keep everything related to bookkeeping organized. This way, you can quickly and easily find the information or documents you need.
Keep in mind that some accounting software programs also allow you to store documents, which can simplify the organization process.
Work with a Tax Professional
Even if you decide to handle your bookkeeping yourself, it’s a good idea to connect and work with a tax professional.
A tax professional can help you identify deductions to reduce your tax burden and make tax preparation as simple and stress-free as possible.
Consider Professional Bookkeeping Services
These are just some of the many bookkeeping basics for small businesses. As you can see, bookkeeping is complicated, and there’s a lot you need to consider.
As a small business owner, you have a lot on your plate. Bookkeeping tasks can eat up a lot of your time. Because bookkeeping isn’t your specialty, there’s also a higher risk of error and other issues that can complicate tax preparation and make it harder to manage your finances.
Rather than trying to do it all on your own, consider hiring a professional bookkeeper.
Outsourcing your bookkeeping to an experienced professional will free up your time, allowing you to focus on core tasks that help your business grow. There’s less concern about costly errors because you’re working with a professional.
Bookkeeping is complicated. These are the basics of keeping your own books, but many small business owners find that it makes more sense to outsource their bookkeeping.
To learn more about how we can help with your bookkeeping needs, schedule a call today!