Step 1: Choose a Bookkeeping Method
The single- and double-entry methods are the most commonly used bookkeeping methods with the former being ideal for a business that has a very simple structure and a low volume of activity.
Most business owners who use single-entry bookkeeping will record money as it comes in and out of the business in a simple spreadsheet, with a single entry for each transaction. However, it’s important to note that this method does not allow you to anticipate your cash flow needs as it does not track accounts like inventory, accounts payable or accounts receivable.
If you wish to benefit from these insights then you need to use double-entry bookkeeping. With this methodology, every transaction affects two accounts — in other words, for every debit in one account, there must be an equal credit in another.
For example, let’s say you purchase $5,000 worth widgets from a vendor and will settle the invoice 30 days from today. With the double-entry method, you will debit Inventory $5,000 (to show an increase in the asset) and credit Accounts Payable by the same figure (as the amount of your liabilities has also increased).
As you can see, the double-entry method allows you to keep track of and plan for bills that need to be paid at some point, whereas the single-entry would only account for the cash outflow at the moment it occurs.
Step 2: Properly Categorize Transactions
Recording transactions in the appropriate account is one of the most fundamental principles for small businesses who use the double-entry method described above.
There are five account types:
- Assets are resources owned by your business that can be measured and have value. Examples include cash, accounts receivables, inventory, land and equipment. Assets also include prepaid rent.
- Think of Liabilities as the obligations of your business — amounts you owe to creditors. Liabilities usually have the word “payable” in their accounting entry. Some examples are: notes payable, accounts payable, interest payables and salary payable.
- Equity is what is left over when you subtract your liabilities from your assets. In other words, rearranging the Balance Sheet equation* as follows:
Equity = Assets – Liabilities
*Breaking down the balance sheet: The balance sheet gets its name from the fact that both sides of the Assets = Liabilities + Equity equation must balance out. According to Investopedia, “This is intuitive: a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or [through equity investments].”
- Revenue represents the sales a company earns from providing a service or delivering merchandise. Revenue is the first line that appears in the Income Statement.
- An Expense refers to costs incurred to generate revenue. Examples include wages, utilities, office supplies, marketing and so on.
The account type determines which financial statement the account will appear on — i.e. The Income Statement, Balance Sheet or Statement of Cash Flow.
Therefore, if you set up your bookkeeping system and accounting processes using the wrong account type, it will lead to inaccurate financial statements and headaches come tax time. To avoid these missteps, we recommend investing in accounting software like QuickBooks which will help you to select the right accounts based on your industry and transaction type.
Step 3: Track Accounts Receivable
More than likely, your business does not always collect payment the very instant you deliver a product or service to a customer. And without a strong accounts receivable system, you may run into cash flow problems very quickly. The accounts receivables management process must include:
- An efficient invoicing platform that allows you to bill customers quickly; and
- A robust collections system to follow up with late paying clients.
Working with an online bookkeeper will help you to streamline the steps involved in billing your clients. For example, Remote Quality Bookkeeping can customize and send out invoices on your behalf in a timely manner. Furthermore, we can send collection notices to delinquent customers so you don’t have to spend precious time chasing payments each month.
Step 4: Manage Accounts Payables
If you manage a large volume of bills and vendors, then you need to build an accounts payable platform to track your cash outflows. This is where virtual bookkeeping services come in handy to ensure your bills are paid on time and that you maintain good vendor relationships.
For example, Remote Quality Bookkeeping can take control of this process for your small business and post your bills to QuickBooks. Thereafter, we will schedule a remote session with you to determine which bills you want to pay and when. Once you’ve approved the bills that need to be settled, we will pay them on your behalf. Alternatively, you can use our mobile solution to approve payments from smartphone for an even more convenient experience.
Step 5: Reconcile Your Accounts
Whether you use a bookkeeping program like Quickbooks, an Excel spreadsheet or just a good old fashioned ledger book, the ultimate goal of bookkeeping is to reconcile a trial balance, which means the final total of debits and credits must match.
This can be a tedious process since it involves comparing your record of transactions to your bank statement and being able to explain any discrepancies but it is essential if you want to have an accurate view of your cash flow position and know exactly where your business stands each week or month. In addition, it also provides an important starting point for you to forecast cash flow and plan for future expenses. Finally, bank reconciliation also helps you to detect fraud, prevent overdrafts and identify any banking errors.
Next Steps: Consider Outsourcing Your Small Business Bookkeeping Needs
For some business owners, keeping up with the steps described above might sound like a fun challenge; but for most, it sounds like a nightmare. If you fall into the latter category, the good news is that the team of experts at Remote Quality Bookkeeping can take these small business bookkeeping tasks off your plate so you can focus on forging a lasting competitive advantage in your industry.
Contact us today to see how we can help you save time and money with our small business bookkeeping solutions.
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