How to Do Bookkeeping for a Small Business
This means analyzing your bank statement and your accounts to make sure the same transactions appear on each. This option will not be for everyone, for example—extremely large and complicated corporations or accounting firms (just covering our bases). However for the other 90% of business owners—this bookkeeping framework is likely to be the most inclusive and cost effective.
Let’s start from the beginning, bookkeeping is keeping track of the financial records of your business. These records include all financial transactions in your business.
Your total assets should equal the sum of all liabilities and equity accounts. The balance sheet provides a look at the current health of your business and whether it has the ability to expand or needs to reserve cash. Now that you’ve balanced your books, you need to take a closer look at what those books mean. Summarizing the flow of money in each account creates a picture of your company’s financial health.
They can do this by watching the balance of revenues to expenses. Then they can take action or offer advice if it looks like the company needs more ready cash.
Even if your business didn’t make much money this year, if you have the records to prove that your company is profitable overall, you can give investors the boost of confidence they need to make a decision about supporting you financially. Replenish by writing a check to yourself.
With the help of cloud accounting software for small-business bookkeeping, you can pretty much automate the process. It’s also possible to link your cloud accounting software to other financial programs that your business uses, like your online banking or mobile payment application.
The cash method of bookkeeping is undeniably easier. By recording cash transactions when the money actually changes hands, you can simply cross-reference your bank statements with your bookkeeping records to ensure accuracy. That said, the cash method also has the potential to be slightly misleading — if you were late on a bill payment one month, for example, your records might end up showing a large sum paid for utilities one month, and nothing at all another month, leading to confusion. This method also doesn’t account for inventory loss. Maybe you ordered some supplies but didn’t end up using them.
Everybody hopes for a big tax return come springtime. As a small-business owner, solid bookkeeping is the best way to ensure that you get the most out of your return.
That said, good bookkeeping ensures that you have the numbers and data that you need to help your accountant make predictions about your business’ future, and diagnose your business’ financial health. Reconcile your books. You need to make sure that your monthly recording of expenses is the same that shows up on your bank records.
Bookkeeping is a time consuming task—business owners need to ask if reconciling transactions is the best use of their time. Having a good piece of software doesn’t make you knowledgeable about the US tax code, regulations or requirements. Business owners can online accounting services miss out on deductions, disqualify themselves as a compliant business, and face IRS auditing through improper tax filing. Having simply taken an accounting class in college is no substitute for the wealth of knowledge an accountant brings to the table.
Reconcile your ledgers with your bank statements. This is where accounting software truly shines over paper ledgers; most software will automatically download your bank records and allow you to quickly mark which payments and deposits are already recorded in your ledger, and which must be separately accounted. This is typically done on a monthly schedule, but with software and online banking, it is not onerous to do this on a weekly or even daily schedule – and this is not too often for a small business.
You can download almost any component in PDF or an image format. Some modules are interactive, giving you a “Large View”—for example, a close-up look at working capital or accounts receivable. Expensify has another use not many people think of. It has to do with the business expenses you charge on a personal credit card.
While accounting encompasses these data-gathering duties, this field also tends to involve analyzing the numbers and making profit and loss projections. However, bookkeeping as a term doesn’t necessarily include such long-term calculations and analyses.
2. Track your expenses
Businesses and individuals must keep a record of any paperwork used for calculating taxes. This paperwork includes bank statements, invoices and receipts that you receive throughout the year. In other words, this is a record of all sales and purchases, any money received and paid out by the business. Bookkeeping is often mentioned when people talk about accounting and compliance obligations.
- You paid for the system, which cost $2,000, in cash.
- This may seem simple but it’s super important to keep up with activity for tax purposes and profit monitoring.
- Bookkeeping apps can make you or your bookkeeper a lot more efficient by organizing and presenting your financial information in a way that’s accessible and easy to understand.
- User-Friendliness – The whole point of using bookkeeping apps is to free up your time and give you better insight into your business’s finances.
- If you have an accountant, they will need all your books and records before they can prepare your financial statements.
- In addition to these basic bookkeeping activities, your costs will be impacted by how your accounting systems, policies and procedures, and reporting needs are set up and administered.
Seth David is the chief nerd and president of Nerd Enterprises, Inc. which provides consulting and training services in accounting and productivity based software. Consulting services range from basic bookkeeping to CFO-level services such as financial modeling. Just as importantly, your business has a legal obligation to accurately record its accounts and file company reports to the tax office. So it pays to get this right. Without proper bookkeeping, your accounts will not be accurate.
If you’re growing, the outsourced bookkeeping service should be able to help you scale by adding full service accounting when you are ready for it. If either part-time or in-house bookkeeping is not the ideal solution, switching to outsourced bookkeeping or accounting could be your best option. Many businesses are concerned about switching over to outsourcing, not understanding how the pieces fit together with this model. But with today’s advancements in technology, outsourcing has never been easier.
Broad categories are all the IRS really needs come tax time. Many bookkeepers use general categories.
For example, if you have a high number of invoices online accounting software will benefit you. Or, if you have very little invoices Excel might be perfect for your business. Good bookkeeping can be anything from a regularly updated Excel spreadsheet to an online accounting software. Bookkeeping can be a very time-consuming task if you’re not properly trained.
As a small business, you don’t have a big accounting or bookkeeping department to balance your books and help with financial planning. This is where bookkeeping apps can help. The accountant will use the information prepared by the bookkeeper to write the company reports. These reports will include information about income and expenses, net profit, assets, liabilities and tax.
Let’s demystify things. Single-entry bookkeeping is simpler — you only have to record each transaction once. This can be sufficient for very small businesses that aren’t incorporated. For example, if you work full time but have a side business selling handmade jewelry, single-entry bookkeeping is probably enough to record your profits and expenses from that side business, so you can claim the amounts on your taxes.
Accurate bookkeeping also protects your business. For example, you may find yourself in a dispute with a vendor or under audit by the government. Without clean financial records, you may be at risk of paying settlements or tax penalties for avoidable financial errors.
In combination, a balance sheet, income sheet, and cash flow sheet provide an accurate picture of not only how much money your business is making and spending, but exactly where that money is coming from and going. The costs you list on an income sheet might include business expenses, maintenance and rental fees, and employee salaries. Your income can comprise all your sales, as well as any money you made from foreign exchange or business-related investments. Hiring an experienced accountant to do your bookkeeping for you can be helpful, especially in your first couple years of business when your focus might be diverted to other areas of your company.
Tracking the financials can be a chore though, and one of the biggest questions you might have is who you get to help with your accounts. Do you need an accountant, a bookkeeper or both?
We recently revised this page to include a few more bookkeeping tips. We also added an FAQ section to help explain why bookkeeping is so important for small businesses and when it’s time to hire a bookkeeper or accountant instead of going it alone. Before you set up your bookkeeping system, you have to understand the firm’s basic accounts – assets, liabilities, and equity.
These are fees that your country imposes on incoming goods. Take the time to learn about importing goods into the US and Canada, and the associated taxes, so that you know the rules from the get-go.
Relax about tax
The accountant will also file the company tax return forms and arrange for tax payments to be made. The accountant will report to the business owner and the board members. The accountant will report on the state of the accounts so that the board and owner have a clear picture of the financial health of the business. A bookkeeper can also provide reporting, but in a less formal way on a more regular basis with what is called management accounts.
FreeAgent makes it easy to manage your daily bookkeeping, get a complete view of your business finances and relax about tax. If your business is small a yearly folder should be more than enough to keep all your financial records. If you want to keep your business records digitally it’s important to invest in a scanner. It’s also a good idea to use an online backup service to store your bookkeeping files in the cloud so that you know they are always there. Previously we looked at the benefit of blocking off time to spend an hour a week on your https://business-accounting.net/, but it’s also a brilliant idea to spend just a few minutes a day on managing those fiddly little tasks.