Bookkeeping for Small Businesses: A Crash Course
Updated: May 26
If you own a small business, you may feel that bookkeeping is just a simple task of writing your expenses and income in a spreadsheet. But it transcends more than that. Bookkeeping for small businesses can become a daunting task if you do not possess the hard skills to keep it organized. In this Crash Course, we will be going through some topics that you need to understand so that your finances will run smoothly and your business will thrive.
Differences between a Bookkeeper and an Accountant
Before getting into the actual source of the matter, we need to understand the differences between Bookkeeping and Accounting tasks. Although many people use these terms interchangeably, there are a few distinctions between them.
On-the-job training. Bookkeepers typically gain experience through on-the-job training. While they are not required to have formal education, most are certified through accredited training programs.
Software acquainted. Bookkeepers know about a variety of business software solutions. They can provide you with different programs to help you keep your finances in check.
Daily Basis. Bookkeepers are professionals who are aware of a business's finances, from simple day-to-day operations to higher and more complicated monthly active and passive incomes.
No tax preparation. Bookkeepers don't file tax returns other than payroll or sales taxes.
College education. Accountants often possess an accounting degree. Some of them are also certified public accountants or CPAs and enrolled agents or EAs
Financial Insights. Accountants employ programs for tax planning and other financial solutions. However, It is not common for clients to work with these strategies.
Auditable. Most certified accountants can perform audits, provide attestations and produce certified financial insights.
Personal and Professional. Accountants often have a record of personal finances as well as company economics from the same individual.
Tax preparation. Accountants can file personal and business tax returns.
When choosing between a bookkeeper and an accountant, it's important that you keep in mind these differences. If your small business is not that small, you may consider getting both services.
Now that the differences between a bookkeeper and an accountant are clear. We can move on to the different services you can acquire for your small business or startup. Some services can provide alternate assistance; here are the most common of them. Keep in mind that none of these solutions are better than the other. It all comes down to personal preferences.
Doing Your Own Bookkeeping
Performing bookkeeping yourself may seem like an obvious choice when starting a small business, and it may be the only way to go for a few months. But as your business grows, you might want to reconsider this task as other duties might become more time-consuming.
If you manage your own bookkeeping, you must consider a few skills and knowledge that come with the task at hand. Creating invoices, managing payrolls, and keeping track of your profits and losses are just some of the tasks you'll have to deal with every day. Fortunately, there are a few programs and apps that you can use to make it easier. Quickbooks and Wave may seem like the way to go, but you'll still need to understand the program entirely.
Taking care of bookkeeping yourself will let you save a little money on the first stages of your business plan. But as your skills develop and your business grows, you may consider some of the options below to focus on different labor, like getting more sales or Customer Support.
Whether you live in a big city or a small town, chances are you have seen an advertisement for bookkeeping or have a contact who knows a bookkeeper. You can hire a part-time bookkeeper to work for your company through an outsourcing company, or if you have the means necessary, hire one in-house.
Working with someone that already knows the ropes will benefit you and your company. They are knowledgeable and will guide you in all of the financial processes that you need to go through when managing your own company. They can provide you with accounting tools, saving methods, and relevant software to keep your company updated with the current economy.
Something to consider about outsourcing your bookkeeping to another company is that you may not have a personalized service. Most bookkeeping and accounting companies have different professionals for diverse tasks. Keep this in mind to get the most information out of a representative before contracting this service.
During the last two years, online services have grown up to 50% and have become a stable income for many. Outsourcing your company's bookkeeping to an online service may be the best way to go. There are specific bookkeeping tasks that can be performed by a Virtual Assitant, although they might vary from company to company.
Online services stand between the options above regarding price range, but they will give you access to professionals who will manage your bookkeeping remotely. You can communicate with your bookkeeper via email, phone, or, in some services, a quick chat. Effective communication will eliminate the need to commute and go through a lengthy screening process when hiring someone in-house.
These are the most viable options when choosing a bookkeeping provider. On one hand, you can get personalized attention for a small price; on the other, you might need a mixture of some of these services to satisfy your bookkeeping needs. As we said before, it is a matter of personal choice.
What is bookkeeping? Really.
Whether you choose an online service, hire an in-house bookkeeper, or take care of your company's finances yourself, there are a few points to be considered when managing your business's economics. By now, you must be wondering, what is bookkeeping? Really. In this next section, we will cover factors that you should take into account when deciding how to do your bookkeeping.
Company bookkeeping. Bookkeeping helps you separate your business bookkeeping from your personal finances. This separation is necessary to measure the success of your company. It will also ensure that you will not be held liable for any issues related to your company.
Taxes. Keeping the numbers tidy will also help with the company's taxes. You have more possibilities to maximize your deductions and speed up the tax return process. Organizing your taxes will let you work more efficiently with any accountant or tax professional.
Identify errors. We all dread errors within our finances because any mistake can become fatal. Bookkeeping helps you identify these errors and prevent them from happening. By managing your transactions, you can easily notice inaccuracies and where they come from (bank entities, a supplier, or customers.)
Organization. Bookkeeping consistency and organization are keys to its development. It will come in handy when applying for a business loan, buying new equipment, or taking any other important action for your company. If you possess all the financial information of your business, you will make better choices that will impact growth and stability.
According to Financial Accounting, bookkeeping is the recording of financial transactions and is part of the process of accounting in businesses and other organizations. With the facts stated above and this definition, we can move to the article's main topic—all the things you need to know about bookkeeping for your small business.
Bookkeeping for small businesses
Nowadays, getting bookkeeping or accounting software is fairly simple. Bookkeeping tasks have become much more automated, but it is still essential to learn how to manage them.
Choosing an accounting software
Whether you try one of the professional software online or use an excel sheet, one of the very first things to do when keeping track of your small business finances is choosing a platform. Learning a specific platform takes time, so make sure you commit to a program that is useful, resourceful, and easy to manage.
This software will not only help you keep an eye on your incomes and expenses, but it will help you to connect your business bank accounts, data entry, and reconciling transactions. In some cases, these tasks are tracked automatically by the software of your choice. But it is still recommended that you check for errors and that everything is completed correctly and on time.
If you are working with a professional, try to ask about programs or apps that are not only useful but also, both of you can handle. Take advantage of the individual's expertise and ask for a little walkthrough of the software you both chose.
Defining an entry system
Within accounting, there are two types of entry systems: Single-entry and Double-entry accounting. The differences between them will make an impact on the way you handle your finances in the long run. Study them in an extensive matter; both have pros and cons.
Single-Entry accounting. You'll need to record all of your transactions once in this system, divided into incomes and expenses. Single-entry accounting is the simplest of both methods and, likely, will be the one you choose when starting your small business. In this method, you only need to keep a record of payments you make (suppliers, landlords, employees, etc.) and payments you receive for products or services. As your company starts to grow, you may opt for the second option.
Double-entry accounting. The name is self-explanatory. In this method, you will have to enter every transaction twice. Data is written down both as a debit and a credit, commonly known as balancing the books. Debit is an entry that either increases an asset or expense account. Credit is an entry that either increases a liability or equity account or decreases an asset or expense account. Double-entry accounting is a better method because of its accuracy, although it is more complicated when you don't have an accounting background.
After defining the system you would like to use, you will want to look at the accounting method. Just as an entry system, there are two popular and effective options you can choose from. But just as with the entry system, whichever you choose will influence how you handle your company's economics.
Cash-based accounting. The cash-based method only records transactions when money changes hands, like paying suppliers or customers paying for a product. One of the advantages of this method is that you will not have to deal with "imaginary money." If you owe your supplier or a customer did not pay on time, you will keep it separately and only record it when the transaction completes. On the other hand, you'll need to keep track of invoices separately.
Accrual-based accounting. The Accrual-based accounting method is a mixture of the cash-based process and the invoices you are keeping separately. You will record invoices and bills even if the funds do not exchange on time. Accrual-based accounting is the most recommended method.
Now that the set-up is complete, you will need to ensure your transactions are correctly imported and accurate. It is recommended that transactions are recorded as soon as they happen or at the end of the day. Recording transactions on time will prevent mistakes and will help you in the next steps of the process.
Transactions include the following:
Remember to balance transactions and record them according to the entry system and the accounting method you chose.
Strategizing budgets and bills
Besides managing transactions, bookkeeping for small businesses also includes estimating budgets and keeping track of the dues and bills. These are called receivables and payables.
Receivables include payments for finished products or projects. For receivables, you must monitor the transactions you receive. Invoices and statements are the best way to do so.