BASIC BOOKKEEPING FOR SMALL BUSINESS
PART 1
A multi-part series with the option of AUDIO
SMALL BUSINESS BOOKKEEPING 101
If you are a small business owner and you want to do your own bookkeeping.
OK then, this is your 101 bookkeeping crash course, and just the basics.
This article will tell you exactly what bookkeeping is, and why it really matters to do it accurately for your business.
There are seven basic steps to doing your own bookkeeping.
What is bookkeeping?
It is defined as the process of tracking all of your company’s financial transactions so you can see exactly where your business is spending money, where your revenue is coming from, and which tax deductions you’ll be able to claim.
Additionally, it will reduce the cost of your year end filing with your CPA significantly if you keep highly accurate financial records.
So why does bookkeeping matter for your small business?
First, and most important, bookkeeping matters because it helps you catch more tax deductions.
When you record and categorize every transaction in your business you will be able to see which expenses are tax deductible so that nothing falls through the cracks.
Without year-round bookkeeping you’ll forget about one-off deductions, like lunch with a client eight months ago that you could have deducted.
Even with the best of intentions, some deductions will always all fall through the cracks at tax time, unless you have proper bookkeeping in place.
The second reason, bookkeeping matters because it can help you get a business loan if you’re applying for a small business loan.
Banks are going to need to see financial records and statements. Not the type that you can download from your online banking, you’re going to need to have something that shows your expenses and revenue. Otherwise known as an income statement. This is something you’re only going to be able to get through bookkeeping.
The third reason; bookkeeping matters because it can help you catch financial mistakes, and you will make them!
You are able to keep a close eye on the transactions in your business, which means you’ll be able to catch things like bank errors and invoicing mistakes, like paying somebody twice, and sneaky subscription fees for services that you forgot to cancel.
And number four; bookkeeping matters because it gives you a clear picture of where your money is going.
You will be able to keep track of your expenses so you can budget better, you’ll also be able to understand your cash flow so you can see what’s an expense versus a payment to a loan, or a credit card.
You can track your businesses growth, and improve it over time by accurately tracking what months are busy and slow. This helps you plan for future growth and expenses. You can also accurately separate your business and personal expenses so you don’t wind up in trouble at tax time.
You want to make sure that your business and personal transactions are not intertwined so it’s clear to the IRS what your business is earning and spending, and what your bottom line net profit is.
This is especially important for C corporations to have separate bank accounts for business and personal finances.
Corporations open themselves up to legal problems when their finances aren’t separate from personal transactions. Far too many businesses fall into this trap.
You must also choose between single entry, or double entry accounting.
Double entry is a system of accounting that tracks where your money comes from, and where it’s going to. This is where you record every transaction twice, taking assets from somewhere, called a credit, and putting it somewhere else, called a debit.
Your debits and credits should always equal each other, that’s how you know that your books are balanced.
For example say you buy a new laptop for your business and it costs $1000. You simply subtract $1000 in cash from your credit account, and add $1,000 in assets to your debit account. You may have lost $1,000 in cash but you gained $1000 in the form of a new asset.
Double entry accounting is kind of like double checking your homework, and helps you create financial statements which you’ll need to make smart financial decisions.
A single entry method it’s essentially just recording your transactions once as they happen. It’s less robust, and not as accurate, but if your business is a simple sole proprietorship with no inventory and no employees you can probably use the single entry method.
If your business is any more complex than that, your bookkeeper will probably recommend the double entry method, and at tax time, your CPA will love you for it! Plus, you will save a lot of money if your CPA doesn’t have to go back thru your books to correct any errors, a LOT of money!
The next step is choosing between the cash versus accrual method of accounting.
On a cash basis you only recognize revenue when you receive it. For example, when you deposit the check into your account on an accrual basis you recognize revenue when it’s earned. For example once you complete a project and write the invoice.
If you’re a small business, or just getting started, you can probably use the cash method.
It’s easy to switch from cash to accrual if you need to if your business is more complex. For example, if your business more than five million per year in revenue, or if you manage large assets or investments, you’ll probably need to use the accrual method. Either way you should talk to a bookkeeper or accountant to figure out which method will be best for your business.
The fourth step is to choose a bookkeeping system. Your options are to do it manually using something like Excel, just paper, or use an accounting software. The best example of course, to ensure everything is done right, is to have a bookkeeper.
If you do it in Excel, you can use something like an income statement template for a simple bookkeeping setup. All you have to do is enter each transaction as it happens. If your bookkeeping means are straightforward this is the easiest cheapest way to go.
If you choose to use accounting software there are a few options for small businesses such as QuickBooks and Xero. There are others of course, it depends on the learning curve and time you want to take to learn how to use bookkeeping & accounting software. You’ll pay a monthly fee for the better software which you can use to produce simple financial reports.
Keep in mind though, you may need to have an bookkeepers or accountants help to learn how to properly use the software.
The fifth step is to categorize your transactions.
Categories are essentially classifications for your transactions.
To understand what you’re spending on these types of categories can help you understand what your tax deductions are.
Not all transactions are equally tax deductible, so you’ll want to know what you’re spending on office supplies, versus what you’re spending on meals. For example if you buy a box and pens for the office you’ll categorize it as office supplies. At the end of the year you’ll be able to see the total amount you spent on office supplies, and you’ll be able to deduct that cost on your taxes.
We’re getting closer to the end of simple bookkeeping for small business.
The sixth step is to organize and store your documents.
You need to keep records for your bookkeeping, but there’s a bit more to it than just storing all of your receipts in a shoebox.
There are two important rules for your record-keeping.
- Rule one, if the expense is over $75 you should keep a record to prove the expense.
- Rule two you should keep every receipt and financial record for three years.
We recommend storing them digitally. The IRS is totally fine with that. You won’t need the receipts to actually file your taxes, but you will need them if you get audited.
Some tools you can use to keep your records digitally include receipt banks, Evernote, and shoebox.
And finally, the last step is to make it a habit.
Bookkeeping isn’t the most exciting thing, but if you do it consistently, you’ll have smart financial insight into your business every month of the year.
And you’ll save yourself a lot of time and headaches come tax season and be less fearful of a tax audit.
At minimum we recommend entering in all your transactions at least once a month. Block out a recurring time in your calendar. No one likes a stressful bookkeeping binge.
Should you do your own bookkeeping or hire someone? It depends on how much time you have to keep an accurate track of your business and if you think of outside help as an expense or an asset. Bookkeepers, accountants and CPA are assets. They actually save businesses a LOT of money.
Is doing your own books really free?
It depends. It’s not free if you make major mistakes and pay more taxes at the end of the year, or if it hinders your business growth in any way. You can’t really control your business if you don’t have a handle on your monthly expenses, or can plan ahead for growth. And, bookkeeping takes away from your time to do the things you need to grow your business. It can be complicated and time-consuming.
This Small Business Bookkeeping Guide Will Help
Please contact us if you have a bookkeeping question -Judy@pinnaclebookkeeping.us