Small business bookkeeping is essential for success. When you understand bookkeeping practices, you can track your finances. It’ll also give you information that you can use to make decisions.
Additionally, bookkeeping will help you prepare for tax season in advance. Read this guide to learn how to manage your business finances with ease.
Best Website Builders to Grow Your Small Business Online
| Provider | User Rating | Recommended For | |
|---|---|---|---|
 | 4.6 | Beginners | Visit Hostinger |
 | 4.4 | Pricing | Visit IONOS |
 | 4.2 | Design | Visit Squarespace |
What Is Small Business Bookkeeping?
Bookkeeping is the process of recording, tracking, and organizing all of a business’s financial transactions. It includes documenting every sale, expense, and payment, as well as monitoring all sources of income and spending. Effective bookkeeping provides clarity and helps maintain accurate financial records.
Good bookkeeping helps you to understand whether your business is doing well financially. It can also help you make informed decisions and prepare for tax duties.
If your business doesn’t practice bookkeeping, it’ll suffer cash flow problems. You may also face tax penalties and miss chances to grow.
How Bookkeeping Differs from Accounting
Many business owners confuse bookkeeping with accounting. However, these two practices are different.
Bookkeeping focuses on recording daily transactions to maintain accurate financial records. It’s the first step in tracking all business activities. When done right, bookkeeping exposes mistakes so staff can correct them.
Accounting involves using bookkeeping records to study a business’s financial state. Then, they give professional advice on ways to improve and help plan taxes.
Key Bookkeeping Terminology
Understanding basic bookkeeping terms helps you navigate your financial landscape better. Bookkeeping uses many professional terms. Here are some common terms and what they mean:
- Accounting Equation: It states that a business’s assets (what it owns) are equal to liabilities (what it owes) plus equity (the owner’s share).
- Accounting Ledger: The system for recording financial transactions. It shows all of your business financials.
- Accounts Receivable (AR): Money that customers owe your business. Keeping track of AR helps you monitor debtors and accept payments.
- Accounts Payable (AP): Money your business suppliers for things you have received.
- Inventory: The stock of products your business has for sale.
- Accrual Accounting: A method of recording transactions. You’ll record income and expenses as they occur, even if you haven’t received or paid the money.
- Double-Entry Bookkeeping: A way to record each transaction in two places. It helps ensure the records are accurate and mistakes are easier to identify.
Setting Up a Bookkeeping System for Your Small Business
If you own a small business, here’s how to create an active bookkeeping system.
Open Business Bank Accounts
The first step in bookkeeping is to separate your personal and business finances. Register your business and open one or more business checking accounts.
This separation makes it easy to handle tax time. It can also help you get funding from investors.
Business owners who open a business savings account find it easy to organize funds. You can move about 25% of your business earnings to your savings account. This money can cover quarterly estimated taxes.
To open business accounts, you need your business name. You’ll also need other documents. Each bank has its own demands.
Some states don’t require business owners to create separate accounts. Even if you operate in such a state, it’s still best to get a business account for better record-keeping.
Choose the Right Bookkeeping Method
There are different bookkeeping methods. You must choose one that fits the nature of your business.
Single-Entry vs. Double-Entry Bookkeeping
Single-entry bookkeeping is suitable for businesses with simple finances. This method records each transaction once. However, most businesses use double-entry bookkeeping. It records transactions in two places, making it easy to see mistakes.
It debits one account and credits the other. If you buy goods, the products will be under debit while the money you pay stays under credit. So, your books will show both sides of transactions.
Cash-Basis vs. Accrual Accounting
Cash-basis accounting records transactions when you receive or give money. When you receive payment, the money goes to revenue. But it counts as an expense when you make a payment.
Even if you received or rendered services earlier or later, you only write a record at the point of payment. This method is easy to practice and suits small businesses with little or no inventory and simple accounts.
Accrual accounting records transactions as they occur. It doesn’t matter if you have sent or received money.
This method recognizes revenue as you earn it and expenses when you incur them. It matches revenue with cost and clearly shows your financial performance.
You can use any method if your business’s yearly revenue is below $5 million. But it’s better to use accrual accounting as your business grows.
Use the Best Bookkeeping Software for Small Business
Simple businesses use spreadsheets, but accounting software offers more benefits. Platforms like QuickBooks, FreshBooks, or Xero automate bookkeeping tasks. The use of automatic processes creates clearer reports.
These tools help in keeping track of expenses and generating invoices. They also help in managing payroll and creating financial reports.
When choosing the best bookkeeping software for a small business, consider features like:
- Ease of use
- Cloud-based access for flexibility
- Connection with banks and other tools
- Ability to handle invoices and process payments
- Reporting options that match your needs
- Scalability as the business grows
- Fees that match your budget
Good tools make your work easier. However, you still need to check entries. Ensure the tool records each transaction in the correct field.
Create and Host Your E-commerce Website
In recent times, all businesses require an online presence to increase sales. What better way to become active online than to build an e-commerce website? It will help you market your goods, allowing you to sell from home.
However, the web host service you choose when creating your website determines how easy it will be for guests to use it. A good web host can also connect other useful tools to your website.
You’ll also enjoy fast loading and minimal downtime. So, carefully select the best web host for your store.
Set Up a Payment System
The method of payment your customers use can affect your own bookkeeping process. You can use one of the following:
- A point-of-sale (POS) system for in-person payments
- Credit card payments with a mobile reader like Square
- Online payments using a platform like PayPal
Each payment method has different setup processess, but they all charge processing fees. When choosing one, ensure customers can easily use it.
Establish a Payroll System
Payroll mistakes can make your workers unhappy and lead to tax penalties. So, you need a payroll system to help you confirm their work hours and calculate wages. It can also help you to share payments.
You must understand the difference between employees and independent contractors to avoid mistakes. They both have different tax rules. For employees, you must remove tax from their wages and pay it.
When dealing with independent contractors, you’ll issue 1099 forms. Accounting systems mostly have payroll features you can use. Another option is to use a specific payroll service.
Choose a system that withholds tax, creates pay stub slips, and maintains accurate records.
Essential Bookkeeping Practices
Let’s take a look at things you must do for successful bookkeeping.
Track All Business Transactions
Bookkeeping involves recording all business transactions. You’ll track sales, money coming in, and all business expenses. You’ll also record customer and vendor payments.
Record transactions as they happen. It’s also important to keep copies of all receipts and other transaction documents.
Categorize Expenses Properly
Create categories for things you spend money on. Proper expense categorization helps you understand where your money goes and maximizes tax deductions.
Make groups that match your tax forms and your business needs, like:
- Insurance premiums
- Office supplies and equipment
- Travel and Transportation
- Professional services
- Meals and entertainment
- Advertising and marketing
- Contractor payments
- Rent and utilities
For vehicle expenses, track mileage for business trips. This spending can be fully deductible.
Maintain a Chart of Accounts
Arrange a list of financial accounts into categories. Keeping a chart organizes financial information. This list includes all accounts for recording transactions in your general ledger. Here are the five main groups of accounts:
- Company’s assets (what your business owns)
- Expenses (costs of running the business)
- Liabilities (what your business owes)
- Revenue (income from sales and services)
- Equity (owner’s stake in the business)
You need a detailed chart that shows useful information. Small business accounting software offers industry-specific chart templates you can use
Reconcile Bank Statements Regularly
Bank reconciliation is when you compare your financial records to your bank statements. Do this to check if both records match. This practice can help you notice errors. You’ll also see transactions that you didn’t permit, if any exist.
Try to do this once a month. Start by comparing the details of each transaction in your books and statements. Look for items that appear in one record. Find out why they aren’t showing in both documents. Make changes based on your financial data.
Follow the Three Golden Rules of Bookkeeping
The three golden rules of bookkeeping state how to record transactions in a double-entry system:
- Debit what comes in and credit what goes out of asset accounts. When you cash, you debit the account, and vice versa.
- Debit the receiver and credit the giver when tracking transactions between accounts.
- Debit expenses and losses, credit income and gains.
These rules keep your books balanced and your financial statements correct.
Understanding Financial Statements
There are different types of financial statements. Let’s explore the common ones.
Balance Sheet
The balance sheet shows what your business owns and owes. It also shows the owner’s equity at a specific point in time. The equation is assets = liabilities + equity.
Key components of a balance sheet include:
- Assets: Property, cash, stock, accounts receivable, and equipment
- Liabilities: Accounts payable, unpaid taxes, loans, and credit card debt
- Equity: Owner’s investments, current year’s profit or loss, and retained earnings.
Your balance sheet is in a good state if your assets exceed your liabilities. This report proves that your business is financially stable. However, some service-based businesses may have few assets and be financially sound.
Income Statement
Another name for the income statement is a profit and loss statement. It shows what your business earns and spends, as well as profit or loss. With this report, you can determine what to change to make more profit.
The parts of an income statement are:
- Revenue from sales and services
- Direct cost of the goods you sell
- Gross profit (revenue minus cost of goods)
- Operating expenses
- Net profit or loss (what remains after expenses)
Review your income statement monthly. It’ll help you identify patterns, control costs, and adjust your business strategy.
Cash Flow Statement
The cash flow statement shows how money moves in and out of your business. Your business can be profitable, but it may still face cash shortages. This situation is common when the timing of payments doesn’t match expenses.
The cash flow statement divides activities into operating, investing, and financing. Monitoring these three groups can prevent cash shortages and help you plan purchases.
Tax Considerations for Small Businesses
Small businesses can face tax challenges if they don’t understand their duties. Learn all about taxation and how you can save more.
Understand Your Tax Obligations
Tax requirements depend on your business structure. Your location and activities also affect your tax liability. Common tax duties are:
- Federal income tax, which self-employed people pay every quarter
- Self-employment tax for Social Security and Medicare
- State and local income taxes
- Sales tax
- Payroll taxes for employees
- Property taxes on current assets
There are punishments for missing deadlines or underpaying. So, find out all your tax duties and note deadlines on a calendar. Set aside money for tax every month.
Track Tax-Deductible Expenses
Accurate expense tracking can reduce your tax burden. Here are some expenses that you don’t have to pay tax on:
- Education and training
- Home office expenses
- Vehicle expenses and mileage
- Business travel, meals, and entertainment
- Retirement plan contributions
- Insurance premiums
- Professional services
Keep records and receipts for all deductible expenses. If you’re not sure if something qualifies, ask a tax professional.
Prepare for Tax Filing
To have a stress-free tax time, you must prepare ahead. Always keep your financial records properly. Save 25-30% of your profit for tax payments and track quarterly deadlines.
Also, separate your business and personal expenses. Regularly compare your records and statements to ensure accuracy and completeness.
If necessary, hire a tax professional specializing in businesses in your industry. Their expertise can help you avoid more tax deductions and reduce the risk of errors.
Common Bookkeeping Mistakes to Avoid
Here are some mistakes to look out for when recording transactions.
Mixing Personal and Business Finances
Mixing personal and business finances complicates record-keeping. It makes tax preparation difficult. If you run an LLC or a corporation, it can affect your legal liability protection.
So, it’s best to use separate bank accounts and cards for personal and business expenses. If you use personal funds for business, record them as owner contributions. Remember to pay them back.
Neglecting Regular Bookkeeping Tasks
Many small business owners avoid bookkeeping until tax time is near. This negligence created a backlog. Rushing through all tasks might lead to mistakes. To avoid this, update your books on a weekly basis.
You can use software that automates tasks to import bank transactions. Such tools can even categorize your expenses and ease the workload.
Failing to Reconcile Accounts
If you don’t reconcile accounts, many errors may go unnoticed. These errors affect your finances negatively.
Compare your records with bank statements as you receive them each month. You can even get accounting software to handle this task for you.
Improper Expense Tracking
Poor expense tracking causes tax problems. Common mistakes include losing receipts and recording expenses in the wrong place.
To avoid these problems, capture and categorize expenses as soon as you pay. You can use a mobile app or physical files. When recording business meals and entertainment, state the purpose and attendees.
Waiting Until Tax Time to Review Finances
Prepare financial statements and use them to manage your business. If you review your finances only during tax season, you’ll miss chances to spot errors and adjust.
Check your cash flow, revenue, profit margins, and expenses monthly. As you gain insights, make informed financial decisions.
Bookkeeping Technology and Tools
You don’t have to perform all bookkeeping functions manually. Many software tools are available.
Accounting Software
Accounting software helps with small business bookkeeping. There are simple entry-level apps and large management systems. Depending on your business’s volume of transactions, you can choose any.
Before choosing, ensure the tool has the necessary features and training resources. Check if it can connect with other tools you use for your business.
You can use some software over the Internet or download it. Whichever you choose, be sure you can afford the cost.
Popular options include QuickBooks Online and Wave. They both offer free trials, allowing you to explore before making a payment.
Receipt Management Systems
Managing receipts digitally reduces paperwork. Use a receipt management system to take pictures of receipts and collect information.
This tool can also group expenses with tags and link them to transactions. It can even create reports of your spending for tax purposes.
Most accounting software includes features for managing receipts. But you can use dedicated tools like Expensify or Receipt Bank.
Time-Tracking Tools
Businesses that offer services should check the time before sending bills to clients. Time-tracking tools help to check the number of hours your staff work for a client. These tools offer:
- One-click timers for real-time tracking
- Reporting and analysis
- Manual time entry for forgotten sessions
- Integration with invoicing systems
- Project and client organization
E-commerce Integration
Online businesses must connect their sales platforms to a bookkeeping system. This connection records sales, payments, and processing fees. It also makes it easy to check stock levels.
Proper connection simplifies the collection of tax from sales. Also, it makes financial reporting easy.
When to Hire Professional Help
Small business owners can sometimes handle bookkeeping. However, there are times when you’ll need the services of a professional.
Signs You Need a Bookkeeper
If you experience these signs, you need professional help:
- You’re spending hours on bookkeeping tasks every week.
- Your books are never up to date
- Your business is growing, and the volume of finances is increasing
- You don’t understand tax deductions and compliance needs
- Your previous tax filings are incorrect
Professional bookkeepers charge $30-$90 per hour. The exact rate depends on experience, location, and scope of work. You can manage costs by opting for part-time or as-needed deals.
Bookkeeper vs. Accountant: Understanding the Difference
Bookkeeping team members and accountants play different roles. Bookkeepers focus on recording transactions. They handle daily tasks to ensure your books are accurate and up-to-date.
Accountants interpret data and give financial advice. They also plan taxes and suggest ways to improve.
You can hire a bookkeeper for regular maintenance. But you’ll need an accountant to help you plan for tax and review your books regularly.
Cost Considerations for Professional Services
Getting professional help is like an investment. It offers time-saving, tax returns, and reduced mistakes. Different services have their prices. Some options are:
- Part-time bookkeepers ($30-$50 per hour)
- Virtual bookkeeping services ($200-$500 a month)
- Full-service accounting firms (depends on services)
- Bookkeeping software with expert support ($20-$150 per month)
Conclusion
Small business bookkeeping forms the foundation of financial success. Setting up a bookkeeping system and using good tools will help you control your finances.
As you monitor your accounts, you’ll make better decisions and tax plans. Get a bookkeeper and learn digital marketing strategies to grow your business today!
Next Steps: What Now?
Are you ready to practice what you’ve learned? If you are, here are the steps to take:
- Select a bookkeeping method
- Choose a tool and begin your free trial
- Set up your accounts and charts
- Start recording and reviewing transactions
Further Reading & Useful Resources
Read these resources to learn more about running a successful business.
