Simple Guide to Bookkeeping for Beginners
Bookkeeping is an essential skill for small businesses to have for the smooth running of the business and timely and accurate tax filing. A common misconception is that bookkeeping is the same as accounting, but the operations involved in the two differ significantly.
Bookkeeping basics involve recording all the financial transactions made by a business in the course of its business operations. Accountants then use the books kept by the bookkeeper to calculate the taxes due and prepare end-of-year reports.
What Does Business Bookkeeping Involve?
Depending on the size of the business, your bookkeeping accounts may be more or less complex. Very small businesses may use a simple system that records each transaction in a similar fashion to a checkbook. Larger businesses with more complex business transactions may need to use a double-entry bookkeeping system in which every transaction is recorded in two accounts: in one account as a credit and in another account as a debit.
Where to Record Your Business Transactions
Transactions can be recorded by hand or digitally, using a spreadsheet program such as Excel or Google Sheets. Businesses commonly use specialized accounting software such as QuickBooks to ensure clear and accurate records.
Supporting Documents Are Essential
All of the financial transactions recorded must be backed up by some kind of supporting document. This can be a receipt, an invoice, a purchase order, or another type of document that proves the transaction took place.
Why Is Business Bookkeeping Important?
Bookkeeping is a crucial aspect of business because filing taxes and preparing financial statements would be impossible without it. Bookkeepers must understand the business's Chart of Accounts and how to use credits and debits to create a Balance Sheet. Small businesses that don't have the resources to employ a bookkeeper often use outsourced small business bookkeeping services to stay on top of their finances.
What Is The Difference Between a Bookkeeper and an Accountant?
Though bookkeepers and accountants share the same goal—keeping records to help your business thrive financially—their roles are different. The bookkeeping process focuses on the daily responsibilities of recording transactions whereas accountants provide guidance on tax matters and analyze the financial health of the business.
| Bookkeeper | Accountant |
| Creates and maintains the Chart of Accounts | Prepares and files tax returns |
| Manages and balances accounts | Advises small businesses on finances, compliance issues, and taxes |
| Keeps financial records in the general ledger | Advises and facilitates businesses applying for loans |
| Manages payroll | Prepares year-end reports that conform to the FASB’s Generally Accepted Accounting Principles (GAAP) |
| Prepares a monthly financial statement | Uses financial information provided by a bookkeeper to analyze the financial state of the business |
| Reconciles bank statements at the end of each month | Has little contact with business owners apart from tax season |
| Communicates with business owners on a regular basis |
Businesses that want to outsource their financial management can choose to outsource their bookkeeping, accounting, or both, depending on the amount of help they need.
What's Involved In Everyday Bookkeeping?
Bookkeeping is a complex and time-consuming task that 40% of small business owners say puts a strain on running their business. A business’s accounts must also be managed correctly to avoid potential penalties from the IRS.
A Bookkeeper’s Responsibilities
Small-business bookkeeping revolves around keeping accurate records of all financial activity. To do this, bookkeepers should be involved in a business’s daily operations. Some of their tasks include the following:
Recording everyday transactions. Every time money moves in or out of your business, a transaction must be recorded in the general ledger. The general ledger is a document that records credits, debits, and balances for each account. Transactions can come in many different forms such as sales, purchases, or bills.
Managing the Business's Chart of Accounts. Businesses may have many different accounts, which is why a Chart of Accounts is essential for keeping track of them. It's essential to pick up on mistakes in the Chart of Accounts because small mistakes can turn into bigger problems if they go unnoticed.
Reconciling Bank Statements. This is a monthly task in which the bookkeeper checks that the recorded transactions and financial data match the business's monthly bank statement.
Preparing Financial Reports. These include Profit and Loss statements, the Balance Sheet, Cash Flow statements, and the Income Statement.
Managing Accounts Receivable. This involves sending out invoices, discussing terms of payment, making sure customers pay on time, and following up on overdue payments.
Managing Accounts Payable. This involves ensuring that vendors are paid on time.
Managing Payroll. Bookkeepers can do payroll in QuickBooks, using another software program, or manually.
Which Accounts Should Bookkeepers Be Familiar With?
There are five main bookkeeping accounts all bookkeepers must be familiar with:
Assets: Anything of value your business owns is an asset. This includes any available cash in your bank accounts, your Accounts Receivable balance, inventory, and other physical assets such as technology, furniture, or real estate.
Liabilities: These are the debts your business owes, and include your Accounts Payable amounts and any outstanding loans.
Revenue or Income: This is money that your business receives in exchange for products or services. For example, a boutique in Jacksonville, Florida, might sell clothing and accessories, and the income from these sales is counted as revenue.
Expenses: Business expenses include things like salaries, utility bills, rent, and expenses that are necessary to grow your business (such as work lunches).
Equity: This is calculated by subtracting your liabilities from your assets, using the accounting equation: assets - liabilities = equity. Your equity is your financial interest in the business.
How to Set Up a Bookkeeping System in a Small Business
If you are a new business owner who is also new to bookkeeping, setting up a bookkeeping system can seem daunting. However, you can keep on top of your business's financial records and stay organized by following these steps:
1: Set Up Your Chart of Accounts
The Chart of Accounts is one of the most important documents in bookkeeping. The Chart of Accounts can be kept using a manual ledger or accounting software. Bookkeeping software programs will generally provide you with a default chart that is intuitive enough to use, meaning you don't have to create one from scratch.
2: Record All Financial Transactions
Bookkeepers must keep meticulous records of all transactions in their ledger book or in the application they have installed. For bookkeepers using a paper ledger, this will involve careful recording of all invoices, bills, and every other transaction conducted by the business. For businesses using software, most transactions are handled by the software program.
3: Reconcile Your Bank Accounts
The monthly reconciliation process involves finding transactions that are still outstanding at the end of the month and providing the business with an accurate idea of the cash balance that’s available heading into the next month. This process is particularly important for small or new businesses with limited cash flow.
Pro tip: It's important to complete the reconciliation process on a regular basis because it's easier to keep track of fewer payments than a long list of payments. In turn, a smaller list of payments to check makes this end-of-month task much more manageable.
4: Close the Month and Run Financial Statements
When you have reconciled your bank accounts, you need to close the month and produce the month’s financial statements. If you use a manual ledger, every account needs to be closed and then combined into the proper account types; this can be a long and arduous process that can be avoided with the use of bookkeeping software.
Financial reporting is also very important for bookkeepers as the statements you produce will provide an accurate idea of the financial health of your business at any given moment. You can then share this information with your accountant, who can advise you on how to improve or maintain your business's financial health.
The three most typical financial statements are:
Balance Sheet. Your Balance Sheet shows your business’s assets, liabilities, and equity on a particular date.
Income Statement: Income statements can be particularly useful for small businesses as they show your net income over a specific period of time.
Cash Flow Statement: The Cash Flow Statement shows incoming and outgoing cash during a specific period of time.
Doing Your Own Bookkeeping vs. Outsourcing
Though bookkeepers and small business owners can find many tips for easier bookkeeping online, outsourcing your bookkeeping is often the most prudent strategy for small business owners. Outsourcing your bookkeeping not only drastically reduces the chance of making mistakes, but also saves you time and energy that you could be spending on growing your business.
Using bookkeeping services in conjunction with outsourced small business accounting services also means that tax preparation, financial analysis, and strategic planning are taken care of. This can be particularly useful for sole proprietors or businesses that have few employees and want to focus on their business instead of poring over the books.
Find the Right Bookkeeping Method for Your Business
It’s possible to learn bookkeeping for beginners and do your own small business bookkeeping. However, most small businesses benefit immensely from a little help with their books, either by using bookkeeping and accounting software or by outsourcing their bookkeeping and accounting services to professionals who can take the burden off their shoulders.
Outsourcing your bookkeeping not only frees up a huge amount of time that you can invest in growing your business, but it can also potentially save you money as you will be much less likely to receive penalties for late or inaccurate accounting. Ultimately, outsourcing allows you to spend more time on the aspects of your business that you enjoy, knowing that your finances are in the best of hands.
