Bookkeeping basics: A guide for small businesses

Financial statements should be regularly prepared and used for decision-making. If you don’t, you’re not going to be able to file your business taxes. You can teach yourself bookkeeping in different ways (this guide gives you a solid start). Additionally, online courses (check Coursera and Udemy), workshops, and even free tutorials can equip you with the knowledge you need. You can also use bookkeeping softwares like QuickBooks, Xero, or FreshBooks to get hands-on experience. “Overlooking bank fees and inaccurate record-keeping” are also frequent pitfalls, Schmied says.

Accounting equation

Examples include the role of a bookkeeper, different bookkeeping systems, and common mistakes to avoid. The purpose of this guide is to ensure that bookkeepers are well-equipped with the knowledge to succeed in the role. The first step you’ll need is a business bank account, which allows you to keep your personal and business expenses separate. Bank accounts allow businesses to safely store their money and make transactions easily. There are several types of business bank accounts, each with its https://www.pinterest.com/kyliebertucci/stampin-up-business-tips/ own purpose and benefits.

Here’s a crash course on small-business bookkeeping and how to get started. Ultimately, the answers to these types of questions and more are found in your bookkeeping. The cash flow statement shows the movement of cash related to financing activities, investing activities, and operating activities. Performing a bank reconciliation at least monthly will help you catch errors or even billing mistakes made by your vendors.

• Spreadsheets, such as Microsoft Excel, can be used for simple bookkeeping.
• This way you can track how much you’re spending in each category.
• It’s important to track your AR to ensure you receive payment from your customers on time.
• To balance the books, you need to carefully monitor the assets, liabilities, and equity.
• In order to know what you earned, you have to know what your business earned first.
• The above systems are all essential to bookkeeping basics, but are not limited to these few.

Step 1: Choose software or manual records

Think of bookkeeping as the detailed management of your business finances. It involves systematically recording all financial transactions. Whether you’re making a sale, paying bills, or transferring money between bank accounts, bookkeeping keeps track of every financial move. As already mentioned, bookkeeping and accounting often overlap, although they are different processes.

Accountant vs. Bookkeeper

Bookkeepers apply the accrual basis of accounting when tracking the accounts receivable and accounts payable. Collectively, these reports provide an all-encompassing view of a company’s financial performance. These reports help stakeholders make informed decisions and identify potential areas of improvement.

Who should manage bookkeeping services?

The two key accounting systems are cash accounting and accrual accounting. If your business is still small, you may opt for ‌cash-basis accounting. If you carry inventory or have accounts payable and accounts receivable, you’ll likely use accrual accounting.

The End of Bookkeeping Basics….?

You want to make sure that none of your transactions are missing or double-counted in your bookkeeping program. The best part is that most of these programs enable you to connect your business bank account. Classifying transactions correctly is bookkeeping 101 in a nutshell. Owner distributions from the company or contributions to the company will typically impact the equity balance in your business.

FIFO accounting, or first-in, first-out, is a method of valuing inventory. It’s basically an assumption for cost-flow purposes that states the first goods you purchased are the first goods you sold. This assumption most closely resembles an actual flow of products earning it the distinction as the most correct valuing method in theory. Consider your local supermarket — the first gallons of milk the store purchased to sell to customers are the first gallons sold usually. Otherwise, a lot of milk (product) would spoil, thus creating a loss for the store. If you manufacture goods, your inventory accounting entries will reflect several stages of completion.

Records older than six years can be securely disposed of by hiring a professional document shredding company. For digital records, QuickBooks allows you to easily delete or condense historic transaction data to save you storage space and secure sensitive financial information. While accounting encompasses these data-gathering duties, this field also tends to involve analyzing the numbers and making profit and loss projections. However, bookkeeping as a term doesn’t necessarily include such long-term calculations and analyzes.

Use those financial statements to make critical business decisions. You have just learned the basics of bookkeeping in your business or bookkeeping 101 as we like to call it. As a business owner, you are faced with business decisions day in and day out. And in any decision you make, there are considerations, mostly related to finances. Each transaction needs to be classified as an asset, liability, equity, revenue, or expenses). In addition, setting up a bookkeeping system is knowing how you’ll classify your expenses.

These accounts and their sub-accounts make up the company’s chart of accounts. Assets, liabilities, and equity make up the accounts that compose the company’s balance sheet. You also have to decide, as a new business owner, if you are going to use single-entry or double-entry bookkeeping. Single-entry bookkeeping is much like keeping your check register. You record transactions as you pay bills and make deposits into your company account. It only works if your company is relatively small with a low volume of transactions.