Can you imagine traveling in a boat with no compass? Surely, you are moving somewhere but have no idea where. In business, bookkeeping is your compass; without it, you won’t know how your business is performing. Are you even making a profit, or are there incurring losses in business? So, without proper bookkeeping, you will lose track of your business, just like the boat would lose out on it’s route without a compass.
But you are lucky to find this blog post. In this bookkeeping basics guide, you’ll be able to prevent your business from failing and manage your finances more effectively. So without further ado, let’s dive into the details.
What is Bookkeeping?
Bookkeeping is a process to monitor and track all the financial transactions in your company using accounting software or manually entering the details in books. The process lets you understand where your money is going, how it is being spent, and where your revenue is coming from with all the tax deductions.
Bookkeeping is a subsection of accounting, which deals with the processing and interpretation of all the finances within the company. By recording the day-to-day transactions, it provides ease to the company at the moment of auditing.
Why is Bookkeeping Important?
Bookkeeping matters because it helps you create a budget. When your revenue and expenses are organized, it gets easy to review the finances of the company. With a budget, you’ll be able to create a financial road map for your business.
Let’s look at some of the reasons why bookkeeping matters for your business:
You’ll Learn How Much Tax You Need To Pay
When you do accurate bookkeeping, you keep track of your revenue which helps in understanding how much taxes you need to pay. When you know the total income, it will be easy to update the books and pay your taxes on time.
Accountability of Money
Are sales going up and down? Is the shipping cost high? Will there be enough money to pay the salary of employees next month?
With bookkeeping, you’ll be able to get all your answers and more. You’ll be able to gauge your financial standing, helping you make better decisions for your future.
You Won’t Miss Paying Out Taxes
When your books are up-to-date, it will be easy to pay your taxes on time without worrying about tax deductions.
The IRS has clear guidelines to keep your books updated to avoid any stress if you are audited.
Your Errors Will Be Reduced
When companies wait till the end of the year to get audited, it gets challenging to pinpoint mistakes done by the bank. Rather than maintaining a regular tax check, it gets easy to sort things out in advance. Bookkeeping will help you sort things out, minimizing the errors.
Now, let’s look at the basic seven steps that’ll help you keep your books in order.
Step 1: Don’t Mix Your Personal And Professional Expenses
The first step is simple. One of the most important bookkeeping tips is that If you have a personal account, make a different one for your business expenses. It is always wise to keep business, and personal accounts separate because managing both in one account can be energy-draining. It makes you responsible for the debts incurred in your business by mixing it with a personal account.
Moreover, by mixing both the accounts, you might miss an important deduction that you were supposed to make. Your Cost Per Acquisition (CPA) will be difficult to figure out, making you lose more money on the wrong strategies to gain a customer.
Step 2: Select a Bookkeeping System
Bookkeeping can be done in two ways: Either single-entry or double-entry bookkeeping. If you are starting or doing bookkeeping for a startup, you can begin with single-entry bookkeeping.
In single-entry bookkeeping, you simply record the expenses or the income once. And the assets and liabilities are noted separately. If you are a beginner, then single-entry bookkeeping is the right way to begin. It’s fast, simple, and basic.
The double-entry is for advanced bookkeepers and for businesses that are well-established. Alternatively, if you hire a bookkeeper, they’ll also use double-entry bookkeeping because of the ease they provide for the company.
In double-entry bookkeeping, every entry is recorded in a journal, and then the entry is again noted in the general ledger, both in the debit and the credit section.
Mostly, the latest accounting software uses double-entry accounting, and even experienced bookkeepers use double-entry bookkeeping. So, if you are starting, it is better to use single-entry bookkeeping for your business, and as your business expands, you can migrate to a double-entry bookkeeping to keep track of your finances.
Step 3: Choosing Your Accounting Methods: Cash Or Annual
The next step is to choose your bookkeeping method: Either annual or cash.
With cash accounting, you’ll be able to record it once the exchange has been done. That is when the customer pays you, and till the amount enters your account, you cannot place it in the journal.
Mostly, the startups opt for cash accounting because the maintenance is easy and simple. You can tell how much payables you need at any point in time. And since startups don’t have low cash; it is easy to manage the accounts on cash.
While with accrual accounting, your income will be noted once you billed the customer, regardless of whether the customer pays you in a few months.
Generally speaking, accrual accounting is a smart choice for well-established businesses. It gives a clear idea of how your business is growing at any point in time that cash accounting fails to give.
Step 4: Select The Right Tools
Every transaction that you make must be categorized in your books. It’ll help your bookkeeper find irregular deductions and make your life easy when facing the auditors.
Also, you’ll be able to separate an unmarked receipt from lunch with a bonus given to your employee. A smart way to manage your finances is to use a bookkeeping tool to save time, resources, and energy for your employees.
Your categorization will be done based upon the industry you belong to. Normally, all the transactions fall into the following account types: assets, liabilities, equity, revenue, and expenses. Later, the accounts are broken down into further categories.
Moreover, some tools will help you ease some load off your back.
- There are tons of cloud-based accounting solutions, but the most popular one is QuickBooks. It is easy to use, and once you learn how to use it, accounting will become easy for you.
- The next tool is the simplest one—an excel sheet where you can maintain your income statement. You can download financial statement templates
- The last one is to hire someone to do the bookkeeping for you. Don’t stress yourself with numbers and get yourself an expert who will manage all your expenses, revenue, and taxes.
Step 5: Find A Way To Sort Your Documents
When you are about to give tax, you need to display the validity of your expense, so it is crucial to sort your documents well. If the documents are not organized, it will be difficult to present particular documents when they are needed the most.
Arrange your documents with the purchase recipients. Since the IRS accepts digital records, you must keep cloud-based storage of the documents. Online free cloud storage tools like DropBox, Google Drive, or OneDrive can be used to store the sorted version of those documents. And when the auditor asks you can simply provide them with a link.
Step 6: Organize Your Deductions
It is vital to know what is necessary and what is ordinary. For instance, a writer’s expense for a $900 pen might not be necessary but ordinary.
So, it is crucial to deduct what is necessary and reduce ordinary expenses. However, if you have no idea what the deductions will be, you might consider the IRS deductions list to keep track of what you need to deduct from your expense report.
Step 7: Treat bookkeeping as a habit
It can be easy to overlook bookkeeping when you’re busy running a small business. One way to keep up with it is to establish a routine.
Try keeping a schedule where you do bookkeeping the whole day. Use that day to monitor the missed transactions and review your financial statements.
If you are months behind, then use the day to cover what is not mentioned in the list. Use this time to fill the missing gaps that will help you sort things out.
Whether you are running a startup or a well-established business, bookkeeping is something that will help you sort out things before the auditors stress you out. If you are doing the bookkeeping yourself, the above guide will help you reduce the errors and create your books in an organized way.
Now, you know the basics of bookkeeping, you can do it on your own or hire someone. Good Luck