Bookkeeping might not be the most exciting part of running your small business, but it is an absolutely essential task that undoubtedly plays a big role in your financial success. Bad bookkeeping can lead to a myriad of problems down the line, such as missing out on tax deductions or having to pay unexpected penalties. Meanwhile, great bookkeeping helps you to maintain control and visibility of your finances, plan for the future, and make accurate decisions.
What is Bookkeeping?
Bookkeeping is the process of tracking and recording all your financial transactions and is the foundation for all your accounting tasks. The end goal of any bookkeeping system is to have accurate financial records that you can use to make informed decisions.
Bookkeeping Terms to Know
Accounts payable are the amounts of money that you owe to vendors and suppliers. This typically includes things like the bills from the website hosting service or your office supplies provider.
Accounts receivable are the amounts of money that your customers owe you. This includes things like customer invoices, deposits, and payments towards services or products that you provide.
Assets are the items that your business owns. This includes physical assets such as computers, furniture, or vehicles, as well as intangible assets like intellectual property or software.
A balance sheet is a financial statement that summarizes the assets, liabilities, and equity of your business.
Cost of Goods Sold
The cost of goods sold (COGS) are the direct costs associated with producing goods or services, such as materials and labor.
Expenses are the costs incurred in order to run your business, such as rent, office supplies, salary, or advertising.
Equity is the amount of money that your business has earned through profit or reinvestment.
Liabilities are debt that your business has taken on, such as loans, credit card balances, or lease payments.
The general ledger is the main record of your financial transactions, and it serves as a master account book for your business. It includes all accounts for your income, expenses, assets, liabilities, and equity.
Journals are used to record financial transactions in chronological order. These include cash disbursement journals, accounts payable journals, and accounts receivable journals.
Reconciliation is the process of making sure that your financial records are accurate and up-to-date. This involves reviewing transactions, statements, and other documents to verify that they match up.
Revenues are the income that your business earns from sales, services, or other activities.
Payroll is the process of calculating and distributing wages to your employees.
How to Get Your Bookkeeping Right
Now that we’ve established some basic bookkeeping terms that you need to know, let’s turn our attention to the actual process of getting your bookkeeping right. Here are some tips to help you get started.
1. Choose the Right Bookkeeping Software
There are plenty of great cloud software solutions and apps that make bookkeeping easier. Choosing the right one for your business will depend on a few key factors such as budget, features, and ease of use.
2. Set Up a Separate Business Bank Account
If you’re using the same bank account for your business and personal transactions, or two businesses at once, that’s a surefire way to make your bookkeeping far more complicated and frustrating than it needs to be. Setting up a separate bank account for your business will help you to keep everything organized and make tracking expenses much easier.
3. Automate as Much as Possible
Having chosen the right bookkeeping software, it’s important to take full advantage of its features. Look for ways to automate tasks like recurring bill payments, credit card charges, and customer invoices. Automating these processes can save you a lot of time and effort.
4. Stay on Top of Your Records
Bookkeeping is an ongoing process, so it’s important to stay on top of your records. Make sure to update your accounts regularly, reconcile discrepancies in your bank statements, and review any invoices or receipts.
5. Create a Process for Document Management
Accurate bookkeeping requires that you keep up with all of your incoming and outgoing documents. Creating a process for document management will help you stay organized and make filing your taxes easier.
6. Budget for Taxes
One big mistake that many new business owners in particular tend to make is failing to budget for taxes. Set aside some money each month so that when tax season comes, you won’t be caught by surprise.
7. Daily Records
A little-and-often approach to bookkeeping is the best way to ensure that you stay on top of your records. Make sure to keep a daily record of all transactions and reconcile your accounts weekly.
8. Track Expenses Carefully
Having a clear record of all your expenses can help you to identify any potential problems or areas for improvement in the future. Take some time each month to review and categorize all your expenses.
Bookkeeping is an essential part of running any business, and it’s important to stay on top of it by taking the time to understand the basics and setting up a system that works for you. With the right tools and processes in place, bookkeeping can be manageable and empower you to make smarter decisions, creating a stronger and more financially solid business.
Book a free consultation here, to learn more about how our bookkeeping services can support you.