Bookkeeping Tutorial for Beginners
Many small businesses struggle to stay organized and manage their accounting systems. While it may seem like a pretty straightforward task to record and classify transactions and other accounting information, it can easily become overwhelming if you don’t take the right approach. When mistakes are made, it can even hurt your bottom line. This is why it is important to have a basic understanding of quality bookkeeping practices and the underlying principles of accounting that keep a business in the green. But what exactly is bookkeeping? And what bookkeeping practices can you use to keep your business running as it should?
What is Bookkeeping?
Bookkeeping involves the recording and categorizing of transaction information for a given business. There are various methods and practices for accomplishing this, but the same general principles apply for any business. Small business owners will either need to develop (or purchase) their own system, or they will need to hire someone to help track the company’s finances. However, when you are first starting off, you will almost certainly need to handle your own bookkeeping. In order to do this, you must decide if you want to handle your bookkeeping with or without the help of accounting software.
The Basics of Bookkeeping
Software generally handles 90% of the work for you. All you have to do is input the information. However, if you understand the basic principles of bookkeeping, you have the choice of handling your company’s finances without software, or the ability to make better use of software, if you prefer to use it. In any case, let’s break down some of the first decisions you will need to make and terms you should know before proceeding:
Cash vs. Accrual Accounting
Cash accounting is the simplest way to manage your companies finances, but it is not useful for every business. Essentially, using a cash accounting system means that you record every transaction from a customer (or to a supplier) as it happens. It doesn’t matter if it is actually “cash” or if it is an electronic transaction. If a customer pays for a product or service, or if you pay a supplier for materials, you record the transaction, and that’s pretty much it.
An accrual system accounts for businesses that need to extend credit to customers or request credit from suppliers. In this system, you still record the transactions as they happen, even if “cash” does not change hands. For example, you may need to acquire materials from a supplier, and the supplier lends the materials to you on credit. You will still record the transaction for the amount that is owed, even though the funds will not be paid until a later date. This is where the terms Accounts Payable (money your business owes) and Accounts Receivable (money owed to your business) come into play.
Assets, Liabilities, and Equity
Though these terms sound daunting, they are actually pretty simple. “Assets” refers to everything that you own. “Liabilities” are those things that you still owe (debt). Finally, equity is the degree of ownership in your company. Equity can be calculated by subtracting the value of your liabilities from the value of your assets. For most small businesses, equity refers to the investment made into the business by the owner (and any other investors). These three concepts are crucial for understanding the finances of your business. The easiest way to ensure that your bookkeeping has been done correctly is to use this formula:
Assets = Liabilities + Equity
This way, you know that all transactions and investments have been recorded accurately. These three categories are used to create what is known as a “Balance Sheet.” This is one of three important financial statements that every bookkeeper will need to understand. Now, let’s look at three more important terms that are used for the second kind of financial statement.
Revenue, Costs, and Expenses
Next, you will need to determine your revenue, expenses, and costs. Revenue refers to all of the income that a business receives. “Costs” refers to money spent on the merchandise, materials, or services that will be sold. Finally, “expenses” are all of the money spent to keep a business running, aside from the costs of procuring products or services (payroll, property, etc).
All of these categories make up what is known as an “Income Statement.” This statement records all of the profits and losses for a given business, in a given period.
Cash Flow Statement
The third and final financial statement that most businesses will need to make use of is the “Cash Flow Statement.” Your cash flow is essentially the difference between the amount of money coming into the business (through sales, investments, etc.) and the amount of money going out (expenses, payments, etc).
The information in this statement is put into three categories: operating activities, investing activities, and financing activities. In essence, this statement helps businesses evaluate variants in their cash flow over time, and is a great predictor for a business’ financial future.
How to Manage Your Bookkeeping Without Software
The above terms and categories are important for understanding your finances, but they do little to help you get started with your business’ bookkeeping. So, where should you begin?
Set Up Your Accounts
The term “accounts” can be a little confusing, because it does not mean your business’ bank account. For a small business, an account refers to transactions of a particular type, like payroll, accounts receivable, etc. Generally, your business will need to have at least one account for each of the following categories, though the size and scope of your business will determine how many accounts you actually need:
- Assets: This accounts will show how much cash you have on hand, as well as the value of all resources your business owns. In addition to cash and inventory on hand, this account includes Accounts Receivable, which refers to money owed to your business by customers.
- Liabilities: This will encompass any debts or pending obligations for your business. Aside from loans or credit card debt, this account usually includes Accounts Payable, which refers to the money owed (by your business) to suppliers or individuals for services rendered.
- Revenue: This refers to all of your business income. Revenue could be from direct sales, services, or interest.
- Expenses: This account includes any funds that must be paid to maintain the business, like payroll, utilities, property maintenance, etc.
- Equity: As we discussed above, equity is the remaining value after you subtract your liabilities from your assets. This number represents your ownership of the business.
These accounts are the bread and butter of your bookkeeping. These are how you will organize all of your transactions, and analyze the vitality of your business. If you do not want to use accounting software, it is common to set up one or more spreadsheets to input all of the information. Here is a helpful guide for setting up a bookkeeping system in Excel.
So, let’s move on to the next step: recording transactions.
Record Your Transactions
Once you have your accounts set up, you will need to begin inputting information. For this step, we will need to go over the method known as “double-entry accounting.” For a very simple business operation, you can just use single-entry accounting, where you record all transactions as they happen in a single account. Money goes in and money goes out, and everytime this happens, it is recorded as a single transaction.
With double-entry accounting, you record two entries for every transaction. For example, let’s say that your place of business needs a repair done. So, you call a repairperson, they complete the repair, and you pay them. When you go to record this transaction, you will need to subtract the amount of the payment from your “Assets” account (the debit entry), and add the same amount to your “Expenses” account (the credit entry). Every addition to one account means a subtraction from another, and vice versa. This is an essential approach to balancing your books, which brings us to the next step…
Balance and Close Your Books
Once you look back at your accounts for the quarter and calculate the total sum of debits and credits, all of the numbers should match. If they do match, your books are “balanced” and you can close your books for the quarter.
You should be adding entries to each account as the transactions take place. At the end of the quarter, you will need to apply these entries to the total balance of each account, and make sure that all of the numbers correspond. If they do not, you will need to review your entries and see where you made an error.
Prepare Your Financial Statements
This step brings us back to the statements we discussed before, specifically: the balance sheet, income statement, and cash flow statement. These statements help business owners make sense of their books and provide a summary of their business’ financial health.
- Balance Sheet: This statement shows your total assets, liabilities, and equity for a single period of time. Here is a helpful tutorial for creating a balance sheet.
- Income Statement: This statement shows the profits and loss for a business over a specific period of time. You can learn how to create an income statement right here.
- Cash Flow Statement: This statement combines the information from both the balance sheet and income statement to give an overview of your gross payments and receipts. Consult this helpful guide to learn more about this statement type.
How to Manage Your Bookkeeping with Software
Now that you understand the fundamentals of bookkeeping, and could do it on your own, let’s take a look at the software at your disposal. Bookkeeping and accounting software essentially take all of the information we have discussed and automate it for you, saving you a great deal of time and (possibly) money. Here are a few of the best brands of accounting software:
- Biller Genie
- Zoho Books
However, Quickbooks is easily the most popular and one of the most intuitive products on the market. There are numerous versions, each with their own pricing models and features to fit with the size and nature of your business. To learn more about getting started with Quickbooks, check out our Quickbooks Guide for Small Business.
Managing your bookkeeping with Quickbooks (or any other software) is much simpler because you do not have to keep track of accounting terms or worry about making errors when balancing your books. Additionally, Quickbooks offers a lot of great features to help you analyze your business, from automated financial statements to helpful charts and graphs.
With accounting software, you simply follow the prompts and input the necessary information. For example, if you need to set up payroll for your employees, you will be prompted to input information about each employee (name, pay rate, frequency of payments, etc.), and then let the software take care of the rest. It’s that simple. Check out our Quickbooks 101 for more information.
However, most software is not free. Many require subscriptions, with an average cost of $35 per month. That said, it is still much cheaper than hiring an accountant. Quickbooks and other accounting software also save you a great deal of time. This is time that you can put toward growing your business.
Online Bookkeeping Option
In any small business, while paramount in importance… managing the books can be a total time suck and one that many small business owners simply can’t afford. For busy owners one solution may be a virtual bookeeping service like Bench.co
Paying for software that you download on to your computer, or even a cheaper monthly subscription still requires you to do the input and managing of the day-to-day financials. This is where the Online or Virtual Bookkeeping Services can be the best of both the technology and affordability worlds.
Virtual services are like having an in-house bookkeeper handling all of your company’s day-to-day financials, but way less expensive and with more tools at your disposal. Many offer secure mobile APPs and a personal certified bookkeeper who oversees your account, Tax preparation and the price options that fit the size and scale of your company, making it affordable at every level.
While virtual bookkeeping might not make sense for every small business owner, it is an option definately worth checking out. See our 6 Things to Know About Online Bookkeeping Services for more information
Which Bookkeeping Option is Right for Me?
Ultimately, the answer to this question will vary from business to business. If you run a small, one-person operation with a low volume of customers or clients, you probably don’t need to invest in software or virtual bookkeeping services. You can manage the bookkeeping by hand without taking anything away from conducting your business.
However, if you have multiple employees, need to extend credit to customers or request credit from vendors, or simply have a high volume of sales, you will probably want to pay for accounting software like Quickbooks, or a service like Bench.co. In the end, it will save you a great deal of time and money, and will help you grow your business in the long-term.
October 9, 2019
Matthew is an experianced FiGuides writer and researcher. He holds B.A. in Philosophy from the University of Georgia and enjoys taking a deep dive on personal finace projects.