If you dread accounting but feel it’s not worth it to outsource, you’re not alone. many entrepreneurs successfully manage their own financial books.
The good news is that when you learn small business bookkeeping, you make important decisions easier and minimize preventable financial mistakes.
You are reading: How to keep books for a small business
Good bookkeeping, that is, keeping records of your company’s financial information, organizes your data, files, routines, and workspaces (which, depending on what you do, can take you anywhere). the benefits are important:
sound like the things you want? Then you’ll be ready to learn small business bookkeeping. Start by implementing these 13 bookkeeping and accounting fundamentals.
1. learn accounting basics
The first step is to become familiar with some basic accounting concepts.
First, you’ll need to expand your definition of the word “accounts.” In accounting, accounts are categories such as income, expenses, assets, liabilities, or equity. accounts are also called diaries. In this article, we will continue to use the term accounts for simplicity.
Another concept you should be familiar with is the idea of double-entry bookkeeping. double-entry bookkeeping is the discipline of recording each transaction twice: once where the value came from and once where it went. (We cover double-entry bookkeeping in more detail later in this article, so wait a bit.)
Most companies use double-entry bookkeeping because it provides a second layer of verification and documentation. this gives you a second path to follow when you notice discrepancies, look for trends, and thwart fraud.
Of the other important accounting terms to learn, there are two you should memorize early on.
- accrual accounting: this is when you record transactions when they are made rather than when the cash, products or services are delivered. practice gives you a better picture of how income, expenses, assets, and liabilities can work together.
- Cash-Based Accounting: In contrast to accrual-based accounting, it is when you record transactions that cash is exchanged instead of when products or services are delivered.
For even more helpful context, read our elegant glossary of accounting and bookkeeping terms, which delves into common words and processes you can use as you begin to dive into the financial side of running your business. .
2. open a separate business bank account
experts in the usa The Small Business Administration (SBA) says that using a business bank account provides your business with personal liability protection, superior professionalism, preparation in the form of credit, and purchasing power. It’s also important to keep your personal expenses separate from business expenses for reporting and liability reasons.
To find the best bank account for your business, look for more benefits than just low fees (as tempting as that may be, because who likes fees?). Find an account that provides you with relevant and immediately applicable benefits that directly correspond to your goals. For example, minimum monthly fees may be better for companies with a high volume of transactions, but not for companies with few clients based on advances.
3. develop an accounting database that works for you
next? Decide how you’ll organize your records, how you’ll keep track of new daily transactions, and a routine (at a cadence you can realistically follow) to help you stay on top of your company’s money.
In terms of tools, there are two viable options that simplify tracking expenses, income, and cash flow:
so… you may notice that spreadsheets aren’t listed as a viable option. Spreadsheets are simple, free, and seem like a reasonable option for a new business or venture into the informal economy, right?
well, not quite. spreadsheets can be a good option as a temporary solution to having absolutely nothing (if that’s you, we see, you can use the templates we created for your invoices, income statement and balance sheet), however:
- they are simply not sustainable to stay current in the medium to long term and
- they are likely to leave you overwhelmed in the midst of the other management tasks you have to do without a true understanding of top level of what is important or trending in your business over time.
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If you’re still using Google Sheets or Excel and feel like you don’t know what the heck is going on with your company’s finances, it may be time to upgrade to software that gives you relevant, actionable insights.
Whatever accounting software you choose, it’s very important that it automates time-consuming, repetitive accounting tasks like data entry and comparing transaction records (because starting or running a business is hard enough, you’ll want time to recover by doing something fun).
Automation is ultimately related to business growth. sales force research reveals that “…growth SMBs [small and medium-sized businesses] are 1.6 times more likely than their stagnant/declining counterparts to say they are using technology to automate business processes” .
source: salesforce small & midsize business trends report
for example, Tidy, our own accounting app for small businesses, automates accounting tasks and stores transaction data in a tidy, secure, cloud-based system that you can access from your laptop or phone .
With today’s mobile and intuitive tools, you don’t need accounting skills or hire a professional bookkeeper to record, categorize and collate transactions. apps like clean books free up time that you can spend on other tasks (like selling more of your products/services or finally watching that gerbil video your friend sent you four days ago).
4. trace your accounts
As the payments start to come in and the expenses start to add up, you’ll find that you need to do more than just record them—you’ll need to sort them into their own categories. By sorting your transactions into categories, at the end of a month or year, you can see how much money each category added to your income or costs.
remember that these categories are called journals or accounts. if you organize those categories in a table, you have a chart of accounts (case sensitive).
Common accounts represented on the chart of accounts include:
When you’ve created these buckets, you’ve positioned yourself to start placing trades in those buckets on a regular basis. Over time, you’ll see how much you’ve gone in or out of each, how the accounts relate to and impact each other, and even how to nurture one or two for a while to meet a specific business objective (such as growth, operations efficiency, funding or customer retention).
As you grow, depending on your business, you may want to get more specific to collect even more interesting data at the end of any time period. therefore, each of the above categories can, and usually does, be broken down into explicitly descriptive classes like:
add descriptors (such as account number and account name) as shown in the example below, and you’re done! It has a robust chart of accounts, something that would impress any accountant. you can sort your chart of accounts by any heading you choose. the typical view, however, is to group records by category (sometimes called “codes”).
source: restaurantaccounting.net
One of the main reasons you need a chart of accounts is because without it, your ledgers will easily become disorganized. What? Suppose you classify an equipment expense as a “fixed asset: office equipment,” while a well-intentioned clerk or accountant classifies an identical expense as a “current asset” based on its book value. immediately, he loses the ability to trust his reports.
5. record expenses to track
Now that you’ve chosen and configured your system, it’s time to create processes.
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Start by planning a routine for recording your expenses. all costs must be recorded in your new accounting tool in the expense account. Depending on the size and maturity of your business (or even if you work from home instead of a physical location), you can spend on things like:
each type has its own accounting category, also known as “code”. (sound familiar?)
Depending on the software solution you choose (see step 3), you’ll do it manually or automate it.
In textbooks, for example, you can upload an image of any bill, receipt, bill, or other source document from your phone. When you get back to your car, office, or couch, you’ll find that the data in that file has been automatically extracted, analyzed, categorized, compared, and stored for future retrieval.
6. record and control accounts receivable
When you’re learning how to do small business accounting, revenue is your top priority (naturally). but you can’t improve what you don’t measure. meaning, to control long-term income, you need to keep a close eye on your accounts receivable.
Your accounting system should make recording your income as simple as recording your expenses. As data comes in, you’ll see your accounts receivable (AR) category grow. this account is simply the total amount of funds owed to your business.
what, exactly, are you regularly scanning your ar? two details:
earnings
Here’s the deal: When customers ask for changes, extras, and add-ons, you can celebrate. after all, that’s income.
But if a customer’s bill skyrockets without a healthy deposit, a regular retainer agreement, or a solid personal history, beware: they could be thrown off the rails and leave you in the lurch. In general, a trend of bloated accounts means a problem with payment terms and communication.
old accounts
some customers let their old unpaid bills remain. your job is to nip this in the bud before it becomes a problem.
In the short term, unpaid bills weaken your cash flow. In the long run, they damage your vital customer relationships by putting you in the awkward position of nagging customers into paying. no thanks.
The age of accounts receivable does not indicate a management problem. they signify a failure to qualify or clarify the initial selling relationship in the first place. set reminders for yourself on your calendar or use the bill reminders feature in order books to keep track of customers who are close to their bill due date and past due.
7. record invoices and receipts, but treat them differently
let’s get it right from the start: invoices are not the same as receipts and vice versa. Too often, business owners confuse the two file types with one or the other or treat them as synonyms.
invoices are a request for payment. they come to your business from vendors, service providers, manufacturers, and other partners. these files include details like:
When you receive an invoice, post it as an open vendor invoice and as a credit to your accounts payable account.
then when you pay that invoice, you’ll get a receipt from the company associated with the invoice.
Receipts are a record of payment, also called proof of purchase (if you’ve been to a grocery store, you’re familiar with this). they can come from the same entities as the invoices. receipts show:
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