Bookkeeping Basics for Small Business Owners
As a small business owner, you have to stay on top of your business’s finances to ensure that you have an accurate gauge of your company’s financial health. The way that you accomplish this is through careful and accurate bookkeeping. Through careful bookkeeping, you are better able to manage expenses, identify trends to grow your business and of course file your company’s taxes.
If this is your first time starting a business or simply aren’t very familiar with bookkeeping, it can seem confusing and easily overwhelming. To help simplify this process we’ve compiled some bookkeeping basics to help get you better understand the importance of bookkeeping.
Choose Your Accounting Method
The first thing you will need to do is set up the general ledger–this is the document that contains all of your business’s transaction data. How do you want to do that?
There are many options to set this up including using a software program like Excel, which is a powerful tool, but if you are new to the program, it can have a steep learning curve. The second is employing a software service such as QuickBooks, which has a desktop version and an online version and also takes some time to learn and become proficient at. The third is partnering with online platforms like Bench or Bookkeeping.com. Online platforms are the most user-friendly and time-efficent option for busy small business owners, but what works for you depends on your comfort level and preference.
Keep up with Your Accounts
The first rule of bookkeeping is to record all of your company’s “accounts" and categorize them.
What do I mean by “Accounts"?
In bookkeeping, “accounts" are types or categories of transactions.
To illustrate, the money your company earns through sales of its products and services constitutes an “income account". Meanwhile, the expenses you pay out via payroll, utility bills or vendor invoices fall under the “expense account" category.
In all, there are four different types of accounts your company might use.
- Asset account (cash or resources your company owns.)
- Liabilities account designated for debts your company owes and equity accounts. As its name implies, these take into account the value of your company after figuring in assets and liabilities.
Why categorize these accounts you might ask? Because it accurately measures the health of your business. By developing each of these accounts, it helps you make better sense of how much money your company has relative to its debts, making it easier for you to make day-to-day decisions and plan for the future.
Balance Your Books Often
Whichever program you choose, it’s important to understand that each transaction can affect your bookkeeping in different ways.
For instance, if you were buying new laptops for the office You would first record this transaction under cash (if you paid in cash) or liabilities (if you chose to put the expenses on a credit card.)
From there, you also want to add this transaction to your asset account since you’re adding new equipment. Because you created a debit and a credit, the transaction balances. And balancing is an integral part of bookkeeping.
Balancing ensures you have a thorough accounting for every transaction your company conducts, this ensures you have recorded and accounted for every transaction, so it is important to balance your books often, quarterly at a mimimum.
This is important for several reasons. For starters, it helps you keep meticulous detail of every financial transaction for your company. By keeping precise records, it makes it much easier for whoever files your taxes to do so accurately.
Prepare for Tax Season
Tax season can be difficult for small business owners, especially if you are not well-versed in all tax laws.
Regardless of wether you work through Excel, a physical ledger, or an online bookkeeping service, By remembering the 4 rules of bookkeeping you will help to ensure that your bookkeeping is in order you can make this a more seamless process by keeping organized records. If you use an online software like Bench, you can relieve the tax stress of compiling reports for your accountant.
Abide by the Four Rules
The four rules of bookkeeping are…
- Record every transaction
- Store transactional data in an organized and secure manner
- Keep accurate categories for all transactional data
- Get help when you need it
Bookkeeping or Bust
Bookkeeping is often overlooked or marginalized in the busyness of running a successful business, but it doesn’t have to be a stressor. The payoff of a well-organized business most often means even greater success.
With these easy principles employed, you will be able to balance books, create accurate financial statements, project future growth with greater clarity and success and sail through tax filings. Most importantly, you’ll have more time to focus on what’s most important, growing your business.
May 20, 2019
Dan is a financial research and analysis expert. He has been sharing his research on personal finance for years and has previously been published on Benzinga and Loan Gifting.