- Bookkeeping is the process of recording a business’s daily transactions and the first step in the accounting process.
- Good bookkeeping allows a business owner to track their company’s financial position and prepare for taxes.
- With proper know-how, it’s possible to perform many facets of your business’s bookkeeping yourself.
Each day, small businesses incur a variety of expenses. Staying on top of these expenses is a core part of managing finances to strategically maintain and ultimately grow your business in good financial health. This is where small business bookkeeping comes in.
As a business owner, you need a dedicated system to track and categorize your expenses. Small business bookkeeping may seem complicated at first glance, but there are a variety of tools and services available to help companies set up and keep a strong system going. This comprehensive guide can be a great starting point.
Bookkeeping is the process of recording daily business transactions. It helps business owners maintain their history of financial transactions. Each small business may set up its own bookkeeping system differently. This can depend on the type of company they operate and the industry in which they operate. Of course, this means that small business bookkeeping systems can also vary in terms of their breadth and complexity.
Bookkeeping is a smaller part of the small business accounting process as a whole that helps businesses make key financing and operating decisions.
Bookkeeping vs. accounting
Small business bookkeeping and accounting are similar, but they have distinct key differences. Foremost, bookkeeping is how businesses record transactions, whereas accounting uses bookkeeping as a first step to interpret, classify, analyze, report and summarize financial information.
Recording, measuring and classifying financial data
Analyzing and summarizing financial data
Performed by a bookkeeper, who records and classifies transactions
Performed by an accountant, who analyzes and interprets financial data to advise businesses
No certifications are required, but licensing options are available
Bachelor’s degree required at minimum, with additional certifications available
Overseen by accountant
Doesn’t prepare financial statements and reports
Prepares financial statements and reports
Not involved in preparing taxes
Involved in tax preparation
Why is bookkeeping important?
Good bookkeeping can help set your business up for success. Documents like balance sheets and cash flow statements allow you to track your financial position, so you can make sound financial decisions and prepare yourself for tax season.
Although the topic can seem dense at times, the importance of bookkeeping in small businesses cannot be understated. Luckily, business owners don’t have to get their bookkeeping set up on their own: There are a variety of options for smaller businesses to help maintain a company’s daily finances, such as using bookkeeping software or online tools or hiring a dedicated bookkeeper.
Even if you haven’t started bookkeeping yet, you can start now to get a clear picture of your company’s finances.
Key bookkeeping terms
Before you dig in and learn more, here are some basic bookkeeping terms you should be familiar with.
- Accounting equation: Assets = Liabilities + Equity, the basis for constructing a balance sheet
- Accounts payable: Money you currently owe vendors or suppliers
- Accounts receivable: Money you haven’t received yet from your customers for either your product or service
- Accrual basis and cash basis: The two types of accounting — in the former, revenue and expenses are recorded upon transaction, while in the latter, they are recorded only upon the cash delivery
- Assets: Any resource that a business owns or controls and yields economic value
- Balance sheet: Financial report listing your business’s assets, liabilities and equity
- Cash flow: Money going in and out of your business
- Chart of accounts: An index of every account in an accounting system
- General ledger: A complete record of a business’s financial transactions over time
- Income statement or profit and loss (P&L) statement: Financial report listing what you’ve earned and what you’ve spent in a set period of time
- Liabilities: Items you owe such as unpaid invoices, credit card balances and business loans
This isn’t an exhaustive list of all bookkeeping terminology, but having a solid knowledge of these terms will provide you with a strong foundation in understanding small business bookkeeping.
Types of bookkeeping
There are two main types of bookkeeping. Your preference may depend on the size of your business and your business needs.
For smaller businesses with fewer transactions, the single-entry system may be preferred. Using one journal entry for each transaction, both income and expenses, the bookkeeper records everything in one location over a period of time.
Businesses with more complicated transactions may prefer the double-entry system, in which income and expenses are recorded separately as credits and debits, where each side must match the other. This method requires more documentation and attention to detail.
What does a bookkeeper do?
Proper bookkeeping involves many parts. Here are the bookkeeping basics:
- Data entry: Recordkeeping in either the single-entry or double-entry accounting style
- Bank reconciliation: Confirming the books match the corresponding bank account statements to ensure accuracy
- Prepares financial reports and statements: Tracking the business’s financial position over time
- Oversees incoming and outgoing money: Managing accounts receivable, accounts payable and payroll, obtaining payment from invoices, and making sure employees and vendors are getting paid
Small business bookkeeping tips
Although any financial task can be daunting, bookkeeping can be accessible for all small business owners. Bookkeeping doesn’t require a formal training. There are several tips and tricks that can make bookkeeping tasks easier:
- Use a filing system to keep track of financial statements
- Track all expenses and income
- Keep records of all expenses, like receipts
- Track outstanding invoices
- Keep personal and business finances separate
- Use a business checking account and other business banking tools
- Use small business bookkeeping software and/or accounting software
- Use automation and tracking software when possible
- Complete regular financial reviews, including quarterly and monthly
- Stay on top of tax deadlines
- Use professional resources
Online bookkeeping tools
Bookkeeping can be complex, but there are several online tools that take out the guesswork. Some are simple ledger templates, while more interactive and assistive bookkeeping software can provide deeper, more personalized guidance. Tools can range in complexity based on your business’s needs and finances.
Should I do my own bookkeeping?
It’s certainly possible for business owners to do their own bookkeeping. However, there are a couple of questions you should ask yourself before deciding:
- Do I have the expertise to execute my bookkeeping well?
- Does my company’s bookkeeping require a full-time commitment or would my time be better served elsewhere?
You may decide that enlisting bookkeeping services allows you to focus on the other aspects of running your business. A business banker may have specific recommendations for your situation.
Either way, remember that small business bookkeeping is only the first step in the small business accounting process, so you may well still need to hire a certified public accountant (CPA) to file your tax returns using the financial records you provide. A CPA is more knowledgeable about tax codes and can represent you in case the IRS audits your business.
First Republic Bank understands that propelling your business forward requires a great toolkit. Your banker can provide offers for online bookkeeping and other tools that support your business.