Small Business Bookkeeping: The Complete Guide

Although every aspect of overseeing a small business can be challenging, financial management is often uniquely complex. Even though a basic understanding of financial management may bring an entrepreneur through the first stages of business development, a comprehensive understanding is eventually required. In the content below, we seek to provide a helpful small business bookkeeping guide for startups looking to pave the way to long-term success.

Understanding the Basics

As with any subject, a thorough, actionable knowledge begins with understanding the basics.

What is Bookkeeping?

Bookkeeping is the process of recording the financial affairs of a business. Therefore, a bookkeeper is responsible for completing this activity. Designed to help business owners consistently determine company profitability, bookkeeping requires a constant monitoring of the numbers.

Bookkeeping is designed to provide clear financial reports for interpretation and action. Small businesses owners often take the role of bookkeeper in the earliest stages of company development.

A knowledgeable bookkeeper can analyze the data and spot potential financial challenges before they implode and, potentially, cripple a business. Additionally, data analyzation also reveals areas of opportunity for business expansion or optimization.

What Bookkeeping Terms Should You Know?

A few items in the follow list of bookkeeping lingo are probably familiar. However, don’t bypass any definitions! As mentioned, a firm foundation for small business financial success begins with understanding bookkeeping basics.

• Sale: A sale, or “money in,” is a transaction that produces cash for your business. The act of selling a product or service is a sale.
• Expense (or expenditure): An expense, or “money out,” is a transaction that your business pays for. Common business expenses include supplies, rent, salaries, or marketing.
• Asset: An asset is any item owned by your business. Assets can range from desks and computers to software and online programs.
• Accounts Receivable: Accounts receivable is cash owed to your business by a customer or client when an invoice is sent.
• Liability: A liability is something your company owes money towards. Unlike an expense, this is often a long-term payment process, like a business loan.
• Revenue (or income): Revenue is income made from sales. Although commonly confused, revenue differs from profit.
• Profit: Profit can be calculated by subtracting expenses from total revenue.
• Business Equity: Equity helps determine the value of your business at any given time. Calculate equity by subtracting business assets by liabilities. Additionally, equity represents your held business interest.

What is the Difference Between Bookkeeping and Accounting?

Although similar, bookkeeping is simply one part of the comprehensive accounting process – at times, work can overlap. Bookkeeping tasks lay a firm foundation for the accounting process, a process that involves additional analyzation, summarization, and interpretation.

Three further differences, objective, financial statement preparation, and educational experience are briefly compared below.

1. Objective: While bookkeeping is meant to keep accurate records of financial transactions, accounting further gauges financial situations and suggests changes accordingly.
2. Financial Statements: Bookkeepers do not regularly prepare financial statements as part of the bookkeeping process, while accountants do.
3. Education: While bookkeepers have specialized knowledge of complex financial topics, accountants often receive the title of Certified Public Accountant (CPA) with educational experience.

Essentially, accountants expand on the tasks performed by bookkeepers. While a full-time CPA is not required for small business success, a bookkeeper certainly is.

Getting Started

Determine Whether You Need to Report Cash Basis or Accrual.

Businesses use two primary methods to document revenue and expenses and report to the IRS: cash basis or accrual. Depending on the proper method for your company, every other bookkeeping task is affected. Thus, selecting the proper type of accounting immediately is important.

The cash basis reporting method can be utilized for small business that do not stock inventory items and have acquired less than $25 million within the past three years. If your company does not fall into this category, you must utilize accrual basis reporting.

Create Three Documents.

Creating three basic documents is essential to begin accomplishing bookkeeping tasks for your business: the balance sheet, the profit and loss statement, and the cash flow statement. In the beginning, free document templates available online should suffice.

• The Balance Sheet helps determine what your business is truly worth. The balance sheet lists assets, liabilities, and equity. As mentioned, equity takes business assets and liabilities into account to determine business value, so keeping careful record of each item is important.
• The Profit and Loss Statement helps determine if your business is profitable. Once again, profit is calculated by subtracting expenses from revenue for a specific period of time. Business often create quarterly and yearly profit-loss statements.
• The Cash Flow Statement documents where your business’s cash goes. This statement helps business owners understand how much cash the company makes daily, how much cash is owned in purchased assets, and how much cash is invested in the business – including business loans.

Always keep these statements up-to-date.

The Role of the Bookkeeper

Saving Bookkeeping Records.

As a rule of thumb, a bookkeeper should save every important business document from the beginning of company development. If you are ever unsure if a specific document is worth saving, lean towards always making a digital copy and storing in a safe, organized location within a computer. Excessive documentation is better than missing an important record during tax time.

A few of the most important documents to save include:

• Payroll documentation
• Sales receipts
• Tax returns
• Deposit slips
• 1099 forms
• Receipts
• Bills
• Canceled checks
• Credit card statement
• Bank statements
• Client payments
• Client invoices

Making Good Predictions.

Although an accountant performs in-depth analysis of financial documents, a bookkeeper is often capable of examining the prepared data and making predictions about business health and potential financial challenges. 

Preparing for Taxes.

Bookkeeping is a crucial step in tax preparation. As an individual or small business, waiting until the last minute to perform preparation is unwise, as unexpected errors easily arise. Bookkeepers should prepare in advance for income tax, payroll tax, and sales tax.

• As the name implies, income tax is usually the amount that must be payed based on business income. Depending on the legal structure of your business, income taxes may be paid as personal income. For example, sole proprietorships pay a personal income tax, while LLCs pay self-employment taxes.
• Payroll tax applies to businesses with employees. Filing payroll tax returns is a multi-step process, often completed semiweekly or monthly.
• Sales tax is the amount collected on sold products. If your small business stocks inventory and sells product, understanding the right sales tax to charge is critical – especially as sales tax varies by city, county, and state.

Balancing Books

Bookkeepers are responsible to regularly “balance” the books. This means that account debits and credits should match. If they do, your books are “balanced.” If these numbers do not match, you must review past documentation and complete the process again.

Why is Bookkeeping Important?

1. Tracking Business Profitability

Understanding the profitability of your company at any given time significantly aids in improving and optimizing in the future. In fact, without an understanding profitability over time, optimizing process, products, and methods is virtually impossible.

2. Taxation Preparation

As mentioned, bookkeeping is a crucial step in preparing for taxes! Without a method to track important financial documents and transactions, income, payroll, and sales taxes would be difficult (if not impossible) every year.

3. Simplified Reporting

Bookkeeping methods designed to improve the communication of crucial financial data makes reporting to stakeholders and attracting additional investors easier. If working with a team, simplified financial reporting helps employees feel informed about the financial state of the company.

4. GL & Workers’ Comp Audits

Operating as a business means the potential of having employees. Beyond the need for accurate taxes and justification, business owners need to carry Workers Compensation and General Liability Insurance, both of which rely on post-activity audits. Having accurate reports ready assists with proper preparation when these audits come.

Bookkeeping Tips

Separate Personal and Business Expenses

A crucial yet challenging bookkeeping best practice involves keeping personal and business expenses entirely separated. This can be challenging, especially as a small startup testing the waters. Help keep personal and business expenses separate by immediately setting up a separate company bank account.

Keep an Emergency Fund for Your Business

Especially as a startup, financial hiccups – such as a late invoice payment – can severely disrupt operations. Even after the startup phase, businesses of any size face the possibility of major unexpected expenses or emergencies that disrupt cash flow. Setting aside an emergency fund can significantly reduce the effects of unexpected financial disasters.

Make a Schedule – and Stick With it

As a small business owner, the daily challenges of company management can be overwhelming. The idea of adding bookkeeping tasks into your schedule may seem impossible. To help balance tasks, create a schedule and stick with it.

For example, record financial transactions weekly. Every month to three months, balance your books. If you work best in the early morning hours, schedule time to complete financial management tasks then, rather than at the end of a busy workday.

Regardless of the precise schedule you choose, setting a routine that works best for you will help incorporate important bookkeeping duties into the completion of other business management tasks.

When Possible, Pay with Cash

Eliminating debt will aid in maintaining the financial health of your business. Whenever possible, pay company expenses in cash, keeping careful track of every transaction.

MyRQB: Bookkeeping Services for Small Business Success

In the beginning of business development, small business owners often tackle every role themselves. However, as the company grows in revenue, staff, and complexity, a professional is often required to manage business finances effectively. At the same time, we know small businesses often cannot afford a full-time bookkeeper.

At Remote Quality Bookkeeping, we provide remote bookkeeping services for small business poised to grow and succeed. Our team saves businesses time and headaches. If you are interested in reaching out for professional financial assistance, please feel free to request a quote, schedule a free demonstration, or simply give us a call at 866.567.4258!