Whether you run a small enterprise, a restaurant, a construction company, or you’re a founder of a promising startup, one thing is certain — knowing the basics of business bookkeeping is essential for any type of business.
Mundane and time-consuming business bookkeeping may seem, it is one of the necessary evils that will help you be on top of your finances and also stay on the good side of the IRS.
However, it’s also an advantage to know the basics of business bookkeeping, especially if you decide to do your own books.
What is bookkeeping?
Before we dive into the basics, let’s take a look at the definition of bookkeeping.
Bookkeeping is the process of recording all the business transactions of a company in an organized manner. In the past, transactions were recorded by hand in a journal or manually entered on a spreadsheet, such as Microsoft Excel.
Nowadays, with technology, financial transactions are entered into cloud-based accounting software so owners can easily track where the business is spending money, where profit is coming from and what tax deductions can they claim.
Typically, a bookkeeper will keep track and record transactions, manage accounts, sends invoices, prepare financial statements, and may even handle payroll.
For a smaller business or solopreneurs, it is possible for owners to manage their own records, keeping in mind that the most important thing is that they need to ensure that their books are correct and updated.
Why does bookkeeping matter for your business?
Ever driven a car that has a broken gas gauge? We hope not. But, this is exactly how you’re running your company without bookkeeping — you won’t know how much gas you have in the tank and how long you can keep it running.
With proper business bookkeeping, you don’t need to do the guesswork. You exactly know what goes in and what goes out of your business, giving you an advantage of better managing your business and its resources.
Let’s quickly take a look at the top five reasons why bookkeeping is important for your business:
1. It is essential when doing your taxes
To file the right taxes, you need to know your net profit. To come up with that, you have to know your overall income and expenses, which you can only get through updated records.
2. You don’t miss any tax deductions
Keeping your books up-to-date also helps you keep track of tax claims that your business is entitled to. The more information that you have, the bigger deductions you can legally claim, the bigger tax returns you will receive.
3. You can budget accurately
When you have a clear picture of your company’s income and expenses, creating a budget for your business is much easier. With an accurate budget in place, you can plan future expenses and possible investments to help the company grow.
4. Secure a business loan
Applying for a business loan from a bank or seeking funding from investors would require you to provide several documents, including standard financial reports. Naturally, lenders would want to get an idea of the financial state of the company before giving the business any money. Keeping accurate and up-to-date records is the prerequisite of providing these requirements.
5. Catch financial mistakes
When you regularly reconcile your business’ transactions, you can easily spot mistakes, like bank errors, errors in invoicing, and unnecessary costs that could put a dent in your bank account.
What are the basics of business bookkeeping? [Infographic]
Even if you decide to hire a bookkeeper to take care of your records or you decide to do it on your own, as an entrepreneur it will give you an edge to know the basics. Here are the seven things you need to understand about business bookkeeping.
1. Business and Personal Expenses should be separate
An important thing to remember if you want to make bookkeeping easier is to have a clear distinction between your business and personal expenses. It would be ideal to open a business bank account (and credit card) that is separate from your personal account.
Doing this prevents the messy work of going through each transaction and identifying which ones are personal and which activities are for business.
2. Decide on a bookkeeping method
If you are planning to do your books on your own or hire an in-house bookkeeper, you have to make a crucial choice of deciding whether you’re going to use single-entry or double-entry bookkeeping.
Single-entry bookkeeping refers to recording each transaction once in a journal either as an expense or an income. For example, if a client pays you a sum for a product, you record this entry as an asset. This method can work for businesses that are just in the hobby stage.
Double-entry bookkeeping, on the other hand, this method is more complex but is suitable for enterprises that are past the hobby stage. With this double-entry, all transactions are recorded into a journal where each item is entered into the ledger two times as a debit and a credit.
The majority of accounting software is based on this method, so if you are going to use a tool or hire a bookkeeper to take care of your records, then this is the method that they will utilize.
3. Choose between accrual or cash accounting
Another decision you have to make when you set up your bookkeeping is deciding on whether your accounting process will be accrual or cash-based.
With cash accounting, you will only record transactions once they happen. For example, an income will be recorded in the ledger only when the business receives the money or if the payment is already reflected in the company’s bank account. This type of accounting methodology is suited for small companies.
In accrual accounting, revenue is recorded when they occur. For example, a sale will be recorded (as accounts receivable) when the business sends out an invoice to a customer. This type of accounting provides the company with a realistic idea of the business’ income and expenses for a certain period.
4. Choose your bookkeeping tool
When choosing a bookkeeping tool, you have three options:
- You could use popular accounting tools like Quickbooks, Wave, Xero, or Freshbooks. However, if you don’t have proper knowledge on how to utilize these, you might end up using them incorrectly.
- Another option is to go old school and do everything on a spreadsheet.
- The third option, and probably the most convenient is to engage with a virtual bookkeeping company, like miplly. Here, we will set up your accounts and take care of all your bookkeeping needs. You can just easily monitor your finances through your dashboard.
5. Categorize transactions
Remember that if you want to accurately record your transactions, you want to make sure that you categorize them correctly. Categorizing will depend on your business and which industry it belongs to. Generally, there are five main account types, which are: assets, liabilities, equity, revenue, and expenses.
Assets – refers to the company’s cash and resources (e.g., cash, inventory, accounts receivable)
Liabilities -these are the obligations and debates that the business owes
Revenue – money earned by the business (usually through sales)
Expenses – refers to the money that goes out of the business to pay for something
Again, the assistance of a professional bookkeeper will help can ensure that you’re properly categorizing your transactions.
6. Use receipt management platform
When tax time comes, you want to have your receipts intact. One way to do this is to keep digital records of your expenses. You can use cloud-based file hosting platforms like Dropbox or Google Drive or use receipt management apps like Shoeboxed or Dext Prepare.
When you work with us, all you need to do is to take a photo of your receipts with your smartphone and directly upload them to your miplly dashboard, which your assigned bookkeeper has already set up for you.
7. Keep your books updated
It could be easy to fall behind your books, especially if you have a lot on your plate.
To avoid this, make it a habit to undertake business bookkeeping at least one day at the end of the month so you can stay on top of your finances.
Set a time where you will dedicate yourself to entering missed transactions, reconciling your bank statements, and also reviewing your financial records.
Don’t do it alone!
Unless you have the time and expertise to keep your records accurate, bookkeeping could be a tall order.
Hiring an expert bookkeeper to take care of your books ensures you of the benefits of proper bookkeeping and also gives you more time to take care of areas that will bring growth to your business.
Ready to start your free 7-day trial? Click here!