A beginner’s guide to small business bookkeeping
When you run a small business, you need finances that work. You need your financial management processes to be smooth, efficient, and seamless. More importantly, you deserve the peace of mind of knowing that your company finances are in order. Bookkeeping is a major component of ensuring exactly that.
If you’re new to the world of small business bookkeeping, all of this may sound a little overwhelming. This beginner’s guide will tell you all the basic steps you need to know to get started on the right foot.
Step 1: Separate your business accounts from your personal accounts
This first step is perhaps the most important step as it helps maintain the overall organization of your bookkeeping practices. Keeping separate accounts for your business finances and your personal finances is basic, good sense banking. It ensures clarity on where this money is coming from and where it can be spent. If you were to mix your personal and professional funds in one account, you would be facing a much lengthier and more complicated tax season.
Keeping your accounts separate also makes it much easier for you to distinguish which documents you’ll need to send to your bookkeeper if you hire an external firm, such as Geekbooks. Rather than sifting through one account and trying to identify which transactions were business-related, you can simply send them all the information from your business account.
Step 2: Track your expenses
Once you have those separate bank accounts set up, be sure to track your expenses in the business account very closely. Tracking expenses can get a bit complicated, but it is made much easier when you establish categories for your transactions. For example, you can categorize your expenses for dinner meetings with clients under a “Food” category. That way, when you look at that category, you know that all of the transactions under it are for those meal meetings. As a result, determining your total amount spent on those meetings is super easy to find.
Step 3: Decide on a bookkeeping method
There are two main bookkeeping methods you can choose from: single-entry and double-entry.
Single-entry bookkeeping is most commonly used by small businesses with very few transactions. Typically, it only maintains a record of cash disbursement, as well as cash receipts, sales and purchases. The rest of the records, for things like inventory and equipment, are only recorded in notes. A single-entry system typically only affects one account. The books maintained in a single-entry bookkeeping system are simply daily cash receipt summaries. You will also have a monthly summary of cash receipts and disbursements, which accounts for the revenue and expense, respectively.
Double-entry bookkeeping is the more common method. This system affects two accounts: your debits and your credits. For every transaction recorded, there is something received (which is the debit) and something given up (which is your credit). Double-entry bookkeeping systems are usually more accurate and comprehensive. It can also act as a trustworthy source of financial information, which can be used for business valuations.
Step 4: Keep money aside for tax purposes
You don’t want to come up short when tax time rolls around. That will make this dreaded time of year all the more tedious and stressful. To facilitate tax season and paying your small business taxes, be sure to put a percentage of your earnings aside throughout the year. This will be your tax fund, which you can withdraw from to pay your taxes when they are due. With this strategy, you’ll stay prepared and avoid costly interest charges.
Exploring a new practice is always a little intimidating – and small business bookkeeping is no exception. However, with the help of this handy beginner’s guide, you should now feel far more prepared to tackle this challenge with confidence.