You did not start your business to become a master in bookkeeping. But learning some basic accounting rules to keep your books can help your business grow. Bookkeeping helps you manage your business more efficiently. Organized books give you a clear sense of your cash flow.
What is bookkeeping?
When you do bookkeeping, you record your business’s transactions. Bookkeeping is the first step in your accounting process.
When you do your bookkeeping, you do not report or analyze the financial information. You use information from your books to do your accounting, which is where you prepare financial statements. You can use small business accounting software to keep track of your books.
What to put in your books
To begin bookkeeping, you will want to separate your business’s transactions into categories. This way, your finances are easier to track. These are common accounts that you will likely use in your books:
- Revenue: The amount of money you made from sales.
- Expenses: Money that leaves your business.
- Cash: Your cash on hand, or money in a checking or savings account.
- Inventory: The raw materials and finished products you use to make sales.
- Payroll: The compensation you pay to employees and payroll taxes.
- Liabilities: Money you owe to another business.
You may have more accounts than those listed above. You can divide your main accounts into smaller, more specific accounts. For example, within your expense account you could have accounts for overhead, cost of goods sold (COGS), and advertising.
Record every transaction in your books under the correct account. Your books will not be helpful if they are incorrect or missing information.
There are two common bookkeeping methods you could use for your small business books.
1. The cash method is the easiest way to do bookkeeping. You follow cash as it moves in and out of your business. Record revenue when you receive money. Record expenses when you pay for something.
2. The accrual method is a little more tricky. You record revenue when you earn it, not when you receive it. If you design websites, record revenue when you finish building a website and invoice the customer, not when you are actually paid. You also record expenses when you incur them, not when you pay them. Let’s say you are sent an invoice for materials you bought. You record the expense when you receive the invoice, not when you pay it.
You can use either the cash method or the accrual method to do your bookkeeping. Small businesses often use the cash method. The method you choose will also be the method used for your accounting.
The Internal Revenue Service (IRS) does not allow you to change bookkeeping methods easily. You must request to change your method. Look into both methods before choosing how you will keep your books.
Bookkeeping vs. accounting
Bookkeeping and accounting are related, but serve different purposes for your finances. When you do your bookkeeping, you record your business’s transactions and perform day-to-day financial tasks (e.g., send invoices). When you do your accounting, you create and analyze financial statements (e.g., profit and loss statement for small business).
Think of bookkeeping and accounting like this:
Imagine there is a dress shop. You need a tailor and a designer to make the dresses. The tailor does the day-to-day tasks of putting the dresses together.The tailor is like the bookkeeper.
The designer looks at the bigger picture and makes decisions about what kinds of dresses the shop sells. The designer is like the accountant. Both jobs involve different tasks, but both are important and necessary.
Why handle your bookkeeping?
You are a business owner, not an accountant. You may not have some of the skills required to compile financial documents and make decisions from them. But by learning some accounting basics, you can do your bookkeeping.
Doing your own bookkeeping could help you save money. You will not have to pay someone else to do your bookkeeping. Many bookkeepers and accountants charge hourly, so this could save you hundreds of dollars.
Are you worried about handling all of your finances? Hire an accountant to do the tasks beyond the accounting basics. You can show your books to an accountant, who can prepare financial statements and advise you. You cut costs by doing your own bookkeeping, but still have a professional eye analyzing your books.
Do you need an easy way to do your bookkeeping? Try our online cash basis accounting software. You can use a simple cash method to track your finances.