Our Guide To Small Business Bookkeeping
Here are all of the steps required to ensure that your business’s financial activity is accurately recorded are included in bookkeeping.
As a small-business owner, you understand that your finances, and hence your bookkeeping practices, are a critical priority. Although it is commonly lumped in with corporate accounting, bookkeeping is an important aspect of managing your money and, eventually, supporting your business’s growth and longlisting success.
However, if you’re new to small-business bookkeeping, you might be unsure where to start: What is bookkeeping in the context of a small business? What is the mechanism behind it? What do you need to know about bookkeeping fundamentals? This small-business bookkeeping handbook will answer those and other questions.
The fundamentals of small-business bookkeeping
Small-business bookkeeping entails all of the procedures required to ensure that your business’s financial transactions are accurately recorded.
Bookkeeping used to entail physically recording a business’s day-to-day operations in a journal or daybook, hence the name “bookkeeping.” However, the process has evolved as technology has advanced and many organizations now use spreadsheets, accounting, or bookkeeping software. As a result, bookkeeping can cover a wide range of responsibilities, from simple data entry in a software platform to collaborating with certified public accountants, but at the end of the day, small-business bookkeeping is the foundation of your accounting and financial systems.
What does bookkeeping entail for small businesses?
Bookkeeping chores have gotten much more automated as accounting and bookkeeping technology has advanced, but this does not negate the importance of managing them and ensuring that everything is running smoothly.
Getting accounting software up and running and making it more efficient
Setting up and administering your bookkeeping or accounting software is one of the initial steps in bookkeeping for small businesses.
Connecting business bank accounts, entering any essential data, and reconciling transactions are all part of this process. Although some of these processes may be done by software, bookkeeping also includes double-checking for errors and ensuring that everything is running smoothly and accurately. In this way, knowing as much as possible about your specific software and searching for ways to automate and streamline certain elements of your accounting procedures should also be included in this part of bookkeeping.
If you’re working with a bookkeeper for the first time and need to set up a system, you may take advantage of their knowledge to choose the finest platform for your business.
Choosing a mechanism of entry
Determining your entry system, or whether you’ll use single-entry or double-entry accounting, is another important aspect of small-business bookkeeping.
Single-entry accounting entails recording all of your transactions only once, as either a cost or an income. This strategy is basic and quick, making it ideal for small businesses without a lot of inventory or equipment to deal with.
Double-entry accounting, on the other hand, entails entering every transaction twice in order to “balance the books.” As a result, each transaction is recorded as both a debit and a credit. Although more complicated, double-entry accounting is incredibly important and can help you avoid mistakes when entering transactions.
It is up to you which entry method you choose; nevertheless, the decision you make will have an impact on how you manage your finances and how your bookkeeping operations work.
Selecting an accounting system
Similarly, you’ll have to determine whether to use cash-based or accrual-based accounting.
Cash-based accounting implies you won’t record invoices your customers owe you or outstanding bills you owe until the customer pays you and you pay your debts.
In accrual accounting, on the other hand, you’ll record those invoices and bills even if the money hasn’t changed hands yet. In general, accrual-based accounting is suggested, but the choice is ultimately yours, just as it is with your input technique. And, once again, the approach you choose will have an impact on how you execute bookkeeping activities and manage your funds in general.
Taking care of transactions
Your small-business bookkeeping will mostly consist of managing your transactions on a day-to-day basis after you’ve made these key decisions about your software, input system, and accounting approach.
This entails ensuring that transactions are entered correctly and accurately, as well as categorizing them appropriately — assets, liabilities, equity, revenue, and expenses. In addition, basic bookkeeping entails reconciling these transactions and ensuring that they’re recorded correctly according to the entry system and accounting method your business employs.
Accounts payable and receivable management
Bookkeeping for small businesses tends to contain all of the activities involved in both accounts receivable and accounts payable, in addition to the broader process of handling transactions.
In the case of accounts receivable, this could entail estimating the final worth of a project, generating and mailing bills, and giving statements – in other words, ensuring that your business is paid for its goods and services.
On the other hand, small-business bookkeeping entails ensuring that your company pays its dues – and does it on time. As a result, your accounts payable department will be responsible for making correct and timely payments to your vendors, lenders, and landlords as needed.
Organizing your paychecks
Payroll setup and procedures range from business to business; some businesses’ payroll is integrated with their accounting software, while others use separate payroll software.
Your bookkeeping may include setting up your payroll system and coordinating the process with the rest of your bookkeeping and accounting chores, depending on your individual business.
Collaborating with your tax advisor
Whether you do your own small-business bookkeeping or hire a professional, tax compliance will be a part of the process. You should look for potential deductions for your business and collaborate with a tax professional to make your tax procedures as simple as feasible.
To complete your business taxes, the person in charge of your bookkeeping will need to serve as a resource for your tax specialist — whether a CPA or an enrolled agent — and be able to communicate and coordinate effectively with this professional regarding transactions and other financial information.
Keeping track of financial papers and statements
Finally, managing important accounting documents and maintaining the information — transactions, assets, income, expenses, and so on — that is used for financial statements such as the income statement, balance sheet, and other financial statements is an important aspect of bookkeeping for small businesses.
The person or business in charge of your bookkeeping will make sure that all of your papers are properly structured, kept, and available to any other team members or consultants who may need them.
Furthermore, while all of these components are often covered in small-business bookkeeping, the scope of the process will ultimately be determined by your corporation. At the end of the day, bookkeeping refers to any and all operations that are necessary to keep your money running smoothly and efficiently.
What is the difference between bookkeeping and accounting?
Accounting and bookkeeping go hand in hand, as you may have noted from our bookkeeping analysis of the various aspects involved in this entire process.
Although many individuals use the terms bookkeeping and accounting interchangeably, they are not literally interchangeable.
Starting with bookkeepers, there are a few differences between them and accountants:
The majority of bookkeepers have had on-the-job training. Some people may enroll in bookkeeping training programs in order to obtain certification.
Bookkeepers are familiar with a wide range of business software solutions, allowing them to make technology recommendations that may be used by clients and their workers, as well as the bookkeeper.
These experts are unable to conduct independent audits or attestations.
Bookkeepers are frequently familiar with a client’s day-to-day operations.
A bookkeeper’s knowledge of a client’s business finances is usually limited.
Other than payroll and sales taxes, bookkeepers don’t usually submit tax returns.
Accountants, on the other hand, can be identified by the following characteristics:
Accountants usually have a degree in accounting. Although not all accountants pursue this designation, many are certified public accountants, or CPAs.
Accounting software is used by accountants for tax preparation and other financial analysis; however, clients rarely use these tools.
Audits and attestations can be performed by CPAs and certified auditors, and certified financial statements can be produced.
In order to extract critical financial insights, accountants frequently have a higher-level understanding of a client’s business.
Business accountants frequently have knowledge of both a client’s personal and business accounts.
Accountants typically prepare tax returns for both businesses and individuals.
Why is bookkeeping vital for small businesses?
Business owners frequently make the mistake of labeling bookkeeping as merely “data entry” and delegating it to an employee with no prior bookkeeping training. Even though accounting software can make bookkeeping processes a lot easier than before, it’s still critical that your small business bookkeeping is done correctly.
What makes bookkeeping so important?
Listed below are a handful of the more compelling reasons:
Bookkeeping aids in the separation of your personal and corporate finances. This separation is important not only for the growth and success of your business, but it also ensures that you are not personally liable for any debts or troubles that arise from it.
Bookkeeping aids in the prevention and detection of accounting and financial errors. You can more readily identify a mistake made by your bank or through data entry if you manage your transactions and reconciliation, rather than discovering these types of blunders after they’ve already harmed your accounts.
Bookkeeping assists you in putting your business in the best possible position to streamline your tax processes, maximize deductions, and collaborate effectively with any tax professionals.
Bookkeeping can provide you a sense of your business’s development and financial health by constantly monitoring your financial data, allowing you to identify areas where you might be able to improve or practices you want to change. Overall, your small-business bookkeeping can assist you in planning and establishing a financial growth strategy.
When you’re seeking to receive a business loan, buy another business, buy new equipment, or take any other significant move related to your business, the organizing aspect of bookkeeping is especially vital. The process of asking for a loan, for example, will be considerably easier if you have all of your financial information kept, documented, and properly maintained. You’ll know that your documents are accurate, and you’ll be able to quickly find any information you need.
How to run a small business’s bookkeeping
In general, there are three methods for handling bookkeeping in a small business:
You can handle your own bookkeeping for your small business.
You can utilize an online bookkeeping service to keep track of your finances.
You can work with a bookkeeping expert face to face.
Let’s take a closer look at each of these alternatives and see how they could work.
Bookkeeping by yourself
The first option for managing your small-business bookkeeping is to do it yourself.
If you own a small business, you may believe that utilizing a manual book or spreadsheet is all you need to keep track of your finances. You may save a lot of time and work by using one of these platforms, such as Wave, which is free accounting software.
However, if you plan to handle your own small-business bookkeeping, keep in mind that it will require a significant amount of knowledge: If you’re conducting all of your small-business bookkeeping on your own, you’ll need to be able to run a profit and loss statement, create invoices, and set up payroll, to name a few hard skills.
If you use bookkeeping or accounting software, you can skip some of the more traditional bookkeeping abilities, but you’ll still need computer skills to run and streamline your business’s software. As a result, you should carefully consider your many bookkeeping software options, test them out, and select the one you believe will perform best for you.
Using an online service for bookkeeping
You can, on the other hand, outsource your small-business bookkeeping if you don’t want to handle it yourself. Working with an online bookkeeping solution like Bench or Bookkeeper360 is one method to accomplish this.
The specific bookkeeping activities involved will vary depending on the supplier, but in general, these services will take care of your business’s bookkeeping processes, relieving you of the load and obligation.
You will, of course, have to pay for an online accounting service, but this alternative will provide you with access to professionals who will manage your bookkeeping from a distance. You can communicate totally via email or phone with an online accounting service, and you won’t have to bring somebody into your office or travel to another office for help.
Bookkeeping with on-site assistance
You also have the option of outsourcing your bookkeeping but preferring to deal with a professional in person. You can engage a part-time bookkeeper to work for your business or a full-time in-house bookkeeper if you have the need and the cash.
Working with a professional in person will provide you access to their expertise whenever you need it, whether you hire someone part-time or full-time to handle your business’s bookkeeping. Working with this specialist in person will also allow them to gain a better understanding of your business’s finances, operations, and accounting tools and software.
However, even if you outsource your small-business bookkeeping, keep in mind that your bookkeeper will not be the only one working on your money, so you’ll want to know what questions to ask and what to look for in your business’ financial processes and documentation.
Where can I get bookkeeping help for my small business?
If you do decide to outsource your small-business bookkeeping, whether through a virtual bookkeeping service or an in-person expert, you must follow the correct steps in your search.
Referrals and networking
Reaching out to your network and asking for references is a tried-and-true technique to find bookkeeping (or any other type) support for your business.
You can contact a CPA, company lawyer, tax advisor, or other type of business professional for recommendations for a bookkeeper or accounting service if you already work with one.
Similarly, you may contact other small-business owners or industry associations to inquire about bookkeepers or bookkeeping services that they currently use or have previously used.
Someone in your small-business community will almost certainly have a referral and be able to lead you in the proper way for getting the greatest bookkeeping help for your business.
Looking for information on the internet
You might, on the other hand, want to go straight to the internet. You may readily discover bookkeepers or bookkeeping services online; nevertheless, you should take extra precautions to ensure that any individual or business you encounter is trustworthy.
As a result, you could wish to begin by going through the database of bookkeeping professionals accredited as experts on your accounting software. You might also go into professional bookkeeping networks, accounting blogs, or industry forums to see if you can discover a professional or service for your business.
However, if you find a bookkeeper or service through a web search, you should read their reviews and speak with them before making any final decisions.
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