Bookkeeping is the process of recording and organizing the financial transactions of a business. It is essential for keeping track of the income and expenses, the assets and liabilities, and the taxes and compliance of a business. Bookkeeping also provides the basis for accounting, which is the process of analyzing and reporting the financial information of a business.
Bookkeeping can be done by the business owner, an employee, or a professional bookkeeper. However, regardless of who does it, bookkeeping requires some basic knowledge and skills, as well as some tools and systems. In this article, we will provide a practical guide for bookkeeping in a small business, and give a step-by-step guide on creating and keeping the right records required to create proper accounting books.
Bookkeeping Basics for Small Businesses
Before we dive into the steps and the records, let’s review some bookkeeping basics for small businesses. These include:
- Bookkeeping methods: There are two main methods of bookkeeping: the cash method and the accrual method. The cash method records transactions when cash is received or paid, while the accrual method records transactions when income is earned or expenses are incurred, regardless of when cash changes hands. The cash method is simpler and more suitable for small businesses that deal mostly with cash, while the accrual method is more accurate and more suitable for businesses that have credit sales or purchases, inventory, or long-term contracts. You should choose the method that best reflects your business operations and cash flow, and stick to it consistently.
- Bookkeeping accounts: There are five main types of bookkeeping accounts: assets, liabilities, equity, income, and expenses. Assets are the resources that the business owns or controls, such as cash, inventory, equipment, or accounts receivable. Liabilities are the obligations that the business owes to others, such as loans, accounts payable, or taxes. Equity is the difference between the assets and the liabilities, and represents the owner’s investment and claim on the business. Income is the amount of money that the business earns from selling its products or services, or from other sources, such as interest or dividends. Expenses are the amount of money that the business spends to operate and generate income, such as rent, wages, utilities, or advertising.
- Bookkeeping system: A bookkeeping system is the way that the business records and organizes its transactions and accounts. There are two main types of bookkeeping systems: single-entry and double-entry. The single-entry system records each transaction as a single entry in a ledger or a journal, and is similar to a personal checkbook. The double-entry system records each transaction as two entries in a ledger or a journal, one as a debit and one as a credit, and ensures that the total debits equal the total credits. The double-entry system is more complex and more suitable for businesses that have multiple accounts and transactions, while the single-entry system is simpler and more suitable for businesses that have few accounts and transactions.
- Bookkeeping tools: A bookkeeping tool is the software or the application that the business uses to record and organize its transactions and accounts. There are various types of bookkeeping tools, such as spreadsheets, desktop software, online software, or cloud-based software. The choice of the bookkeeping tool depends on the preference, the budget, and the needs of the business. Some of the factors to consider when choosing a bookkeeping tool are the ease of use, the features, the security, the integration, the support, and the cost. Some of the examples of bookkeeping tools are Excel, QuickBooks, FreshBooks, Wave, or Xero.
Bookkeeping Steps and Records for Small Businesses
Now that we have covered the bookkeeping basics, let’s look at the bookkeeping steps and records for small businesses. These include:
- Step 1: Set up your bookkeeping system and accounts. The first step is to set up your bookkeeping system and accounts, and choose your bookkeeping method, system, and tool. You should also create a chart of accounts, which is a list of all the accounts that the business uses, and assign a unique number and name to each account. You should also create a general ledger, which is a master record of all the transactions and balances of the business, and organize it according to the chart of accounts. You should also create a journal, which is a chronological record of all the transactions of the business, and record the date, the amount, the accounts, and the description of each transaction.
- Step 2: Record your transactions and entries. The second step is to record your transactions and entries, and enter them into your bookkeeping tool, either manually or automatically. You should also categorize your transactions and entries according to the type of account, such as income, expense, asset, liability, or equity. You should also apply your bookkeeping method, either cash or accrual, and record your transactions and entries accordingly. You should also apply your bookkeeping system, either single-entry or double-entry, and record your transactions and entries accordingly. You should also keep the source documents and receipts of your transactions and entries, such as invoices, bills, bank statements, or contracts, and attach them to your bookkeeping tool or store them in a safe place.
- Step 3: Reconcile your accounts and balances. The third step is to reconcile your accounts and balances, and compare them with the external sources and records, such as the bank statements, the credit card statements, or the tax returns. You should also identify and correct any errors or discrepancies that may occur, such as missing, duplicate, or incorrect entries, or unrecorded or unauthorized transactions. You should also adjust your accounts and balances for any events or changes that may affect them, such as depreciation, amortization, accruals, or write-offs. You should also prepare a trial balance, which is a report that shows the balances of all the accounts in the general ledger, and ensure that the total debits equal the total credits.
- Step 4: Generate and analyze your financial reports and statements. The fourth and final step is to generate and analyze your financial reports and statements, and use them to monitor and evaluate the financial performance and position of your business. You should also use them to make informed and strategic decisions and plans for your business. Some of the common financial reports and statements that you should generate and analyze are the income statement, which shows the income and expenses of the business over a period of time, the balance sheet, which shows the assets, liabilities, and equity of the business at a point in time, the cash flow statement, which shows the sources and uses of cash of the business over a period of time, and the budget, which shows the expected income and expenses of the business over a period of time.
We hope that this article has given you some useful and practical information on how to do bookkeeping in a small business. We recommend that you follow these steps and keep these records regularly and accurately, and consult with a professional bookkeeper or accountant if you need any assistance or advice. Remember, bookkeeping is not only a legal and financial obligation, but also a valuable and beneficial tool for your business success!
