If you’ve started a business, then there’s a topic that you need to master as soon as possible: small business bookkeeping. We’ll admit it; the word “bookkeeping” sounds boring. But it’s a crucial task, and keeping good books can set your business up for success.
In this guide, we’ll cover the basic essentials of bookkeeping for small businesses, including what bookkeeping is, its benefits, and how to get started.
Bookkeeping is the act of creating a record of a business’s finances. It’s crucial to any business venture, for both small and established businesses. Typically, it creates a balance sheet that tracks purchases, income, payroll expenses, and more. While bookkeeping is the backbone of accounting, it’s technically not the same as accounting. Bookkeeping tracks and documents day-to-day business finances, and accounting offers a more technical, big-picture, and high-level analysis of the business’s current situation and projected future. Additionally, bookkeepers may have certifications, but accountants have — at a minimum — an accounting degree, and they may have completed the certified public accountant exam.
Bookkeeping is essential because it sets you up for long-term success. Without a record of your business assets, financial transactions, income, and expenses over time, you’ll be flying blind and just hoping for the best. But keeping books helps you operate smoothly, making informed financial decisions.
Let’s talk about a few of the key ways bookkeeping will help you with small business tasks.
Business taxes are unavoidable, and no matter what your taxation structure is, they can get expensive. Bookkeeping not only helps you create an income statement for the year; it can also help you narrow down your taxable income by tracking expense categories so you can make smart tax deductions. Instead of tracking this information down on your own, you can simply consult your books during tax season.
Note: taxes can be complicated, so we highly recommend consulting with a tax professional for help with your business taxes.
If your business has a corporate veil, such as a corporation or limited liability company (LLC), then you must keep your business and personal transactions separate. Even if you’re a less-formal structure like a sole proprietorship, it’s still a good idea to separate them. Bookkeeping makes that possible.
Good books track your funds — both where they come from and where they’re going. If you accidentally send business funds to your personal bank account, it should show up on your books. On the flip side, if you accidentally use your personal credit card for a business purchase, your books will show it.
Just as school kids take achievement tests to track their school’s education outcomes, you need to be able to track how you’re succeeding. And since finances are a significant portion of how “successful” your business is, you need to be able to track them.
Keeping good books makes that possible. By recording and tracking your business transactions, you can gauge if you’re generating enough income, if you need to raise your prices, and more. Your reports will say a lot about your financial health.
When you apply for a business loan, there’s a very good chance that your bank will ask to see your financial statements for a certain period of time. If you keep books faithfully, you’ll be able to provide those statements easily. In contrast, if you don’t use bookkeeping, you’ll be unable to secure that financing right away.
In small business, a little financing can make a big difference. So regularly creating financial statements will help enable you to get the startup capital you need.
Can your business support hiring a few employees? Should you rent that new corner location? Is it time to introduce that new product line? Should you let employees go? Should you hire a dedicated bookkeeper or do it yourself? So many business decisions are impacted by your finances, and you can only answer these questions if you have the appropriate financial reports to back them up.That’s where your books come in. Since you can easily assess your cash flow and bottom line with good bookkeeping, you can make informed decisions about how to create your business plans for the future.
While small business bookkeeping can sound overwhelming, it boils down to a few general steps. Follow these steps and you’ll be well on your way to establishing excellent financial records.
As we mentioned above, it’s absolutely crucial for you to keep your personal and business expenses separate. If you don’t, you’ll compromise your personal asset protection (for state-registered business structures only). And the first step to separating those accounts is to obtain a separate business bank account. To do that, you’ll need an employer identification number (EIN).
Ultimately, the type of business account you need will vary depending on your needs and goals. The crucial thing is to make sure you have one so you can run your business smoothly.
Once you have your separate bank account, you can pick a method for bookkeeping. For some small business owners, this might be as simple as inputting your expenses and income into a spreadsheet. Others might download bookkeeping software (there are tons of online options). You can even hire an employee or independent contractor to be your bookkeeper.
Ultimately, your budget, business activities, and personal preferences will dictate what method you pick.
Single-entry and double-entry bookkeeping are the two types of bookkeeping you’ll need to choose from. Single-entry bookkeeping is the simplest method; you input each piece of financial data only once. It’s favored by some entrepreneurs for its simplicity. Single-entry generally works best for smaller businesses with a lighter transaction load.
If you choose double-entry accounting, you (or your bookkeeper) will input data from each transaction twice. You’ll format it as a credit one time and as a debit the other; the goal is for them to balance equally. The double-entry method is more complex and time-consuming. That said, some small business owners prefer it because it makes it easier to spot mistakes and issues since it’s so thorough.
Another crucial decision for your books is whether you’ll run your books on a cash basis or with an accrual method. With cash basis accounting, you’ll input transactions every time you spend or receive money. Even if you anticipate receiving payments from a client, you won’t record transactions for that client until you receive the money. And you won’t record payments you make until you actually send money yourself. The cash method is pretty simple, but it doesn’t enable as much advanced planning.
Accrual-based accounting works a bit differently. Instead of recording transactions when the money changes hands, you’ll record them as soon as they exist. For example, if you create a customer invoice, you’ll record that transaction right away, even if you haven’t received the business income yet. Accountants often recommend accrual accounting because even though it’s more complicated, it provides a more comprehensive, real-time view of your finances.
Either method of accounting can work for your business. The important thing is that you pick a method and stick with it.
To effectively track how your money is flowing, you’ll need to categorize each transaction. Is it an equipment purchase? A customer payment? A sales tax payment? Something else? Categorizing your transactions with simple but fitting labels makes it easier to see your financials at a glance. Plus, it can help you when tax time rolls around to differentiate your expenses from your income.
Starting and running a business can feel lonely and difficult at times, but it doesn’t have to. Here at ZenBusiness, we have all the tools and support you’ll need to succeed. Whether you need help starting your LLC or a bookkeeping basics course, we’ve got your back. We’ve also created ZenBusiness Money, an app that can help you easily track and manage your business finances — all in one place.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Technically, you can make a record book with something as simple as an Excel spreadsheet (or even a Google Sheet, if you want to keep things as affordable as possible). You can also start a book with bookkeeping software, if you prefer, or hire a bookkeeping service. Ultimately, the act of tracking your financials is what creates your book.
Note: this is slightly different from keeping company records for your LLC or corporation. That type of record book collects important company documents like your operating agreements, formation documents, and more.
Technically, you can do your own bookkeeping. Many small business owners do; that’s why we designed our money app to help streamline this task as much as possible. That said, if you’re not very detail-oriented or you find yourself too busy to keep up with the books, hiring an in-house bookkeeper might be worth the expense. They’ll keep detailed records so you don’t have to.
Small businesses use a wide variety of bookkeeping methods, from a simple spreadsheet with single-entry bookkeeping and cash-based accounting to a complicated accounting software and the accrual method. Ultimately, the best bookkeeping method for your small business is the one that works for you and your habits and preferences.
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