Running a small business can be an exciting yet exhausting journey, and one of the most critical aspects is managing your finances; specifically “what is book keeping”. But don’t worry, by understanding a few basics and implementing simple steps, you’ll be well on your way to taking control of your business finances and setting yourself up for long-term success.
Let’s learn how to do bookkeeping like a pro.
Table of Contents
What Is Bookkeeping?
Before we get into the “how,” let’s clarify “what is book keeping?”
Bookkeeping is keeping track of your business’s financial transactions—things like sales, purchases, income, and expenses. When you keep your financial records organized, it becomes easier to monitor cash flow, prepare for taxes, and make decisions based on clear, real-time data.
Why Is Bookkeeping Important?
Imagine trying to file your taxes without knowing how much revenue you made last year or how much you spent on business-related expenses. It helps you with your taxes. To know your net profit, you need to track your total income and expenses, which can only be done with accurate and up-to-date records. Without this, you won’t know your taxable income and could risk missing out on deductions. Speaking of deductions, maintaining organized books ensures you won’t miss any tax breaks, which can reduce your taxable income and increase your return. Another key benefit is understanding where your money is going. Having clear financial records helps you evaluate your business’s health, including whether sales are up, shipping costs are too high, and if you have enough cash flow to cover payroll. Additionally, keeping your books in order is crucial when you need to borrow money. Banks and investors require financial statements to assess your business’s financial standing before approving loans or investments.
Bookkeeping Basics For Small Businesses
Now that you know what is book keeping, let’s break down the bookkeeping basics every small business owner needs to grasp.
Think of this as your foundation: build it strong, and your business will grow.
1. Chart of Accounts
This is essentially a list of all the categories you’ll use to classify your financial transactions. It could include things like “sales,” “supplies,” “expenses,” or “loans.” When setting up your chart of accounts, make sure it reflects your business structure. This will help you categorize transactions more easily.
Tips for you: Keep your chart of accounts clear and simple. The less cluttered it is, the easier it will be to track your finances.
2. Recording Transactions
Every time your business makes or receives a payment, it needs to be recorded. Sales, purchases, expenses: everything counts! By categorizing transactions properly, you ensure your financial picture remains crystal clear.
3. Debits and Credits
These terms might sound intimidating, but they’re simple once you understand them. A debit increases an asset or expense, and a credit increases a liability or income. Keeping track of these properly will ensure your books stay balanced.
Did you know that 21% of small and medium business owners say they do not know enough about bookkeeping basics?
4. Double-Entry Accounting
Don’t let the term confuse you—double-entry simply means that every transaction is recorded in two places. For example, when you make a sale, it’s recorded as income in one account, but you also note it in your cash or receivables account. This process helps keep your books balanced.
5. Financial Statements
These three reports: Income Statement, Balance Sheet, and Cash Flow Statement are your financial health check-ups. Each one tells you something different about your business, like whether you’re profitable, what you owe, and how cash moves in and out of your accounts.
6. Reconciliation
Your business bank account not being able to match your books is the worst nightmare. Reconciliation is simply the process of comparing your records with your bank statements to make sure everything adds up.
Steps To Do Bookkeeping For A Small Business
Now that we’ve covered the bookkeeping basics, it’s time to put this into action. Here are the steps to implement a solid system for your small business. These actionable steps will help you stay organized and ensure your finances are always in check.
1. Set Up Your Books
The first step is choosing your bookkeeping method. Whether you go with accounting software or a spreadsheet, it’s crucial to set up a structure that works for you. Don’t skip the chart of accounts, this is your blueprint for keeping everything organized.
2. Record Financial Transactions
Once your system is in place, start recording your financial transactions. Every sale, purchase, or payment needs to be tracked accurately. Categorize each transaction properly so that you have a clear overview of where your money is going and coming from.
3. Reconcile Your Accounts Regularly
Reconciliation is a critical step. Comparing your records with bank statements will help you catch errors, discrepancies, or unauthorized transactions early on. Do this regularly to ensure your financial data is correct.
4. Generate Financial Reports
Once your transactions are recorded and reconciled, it’s time to generate financial reports. This will include an income statement, balance sheet, and cash flow statement. These reports give you insights into the health of your business and help you make informed decisions.
5. Track Payroll
If your business has employees, keeping track of payroll is essential. This includes calculating wages, tax withholdings, and deductions. Be sure to update your payroll records regularly to ensure compliance with tax laws and timely payments.
6. Prepare for Taxes
Good bookkeeping ensures you’re ready for tax season. With accurate records, you’ll have all the necessary information to file taxes correctly and on time. Plus, you can identify any tax-deductible expenses throughout the year, which could save you money.
7. Review and Update Regularly
Bookkeeping isn’t a one-time task. Set aside time each week or month to update your records. Regular reviews will help you catch issues early, stay on top of your finances, and avoid surprises when it comes time to file taxes or make business decisions.
Simple Bookkeeping Template
A simple bookkeeping template is your financial companion, simplifying the way you track, organize, and manage daily transactions. It’s like a ready-made roadmap to keep your business’s finances in check without breaking a sweat. From tracking income and expenses to creating reports, they free up your time so you can focus on growing your business with ease.
How To Spot The Perfect Simple Bookkeeping Template?
- Sleek Design: Look for a clean and easy-to-navigate simple bookkeeping template design that keeps things simple and organized.
- Flexibility: Pick one that allows you to customize fields, add rows, and adjust formulas to fit your specific needs.
- Helpful Starter Guide: Check if it includes a quick guide to help you get started confidently and make the most of its features.
A good template saves you time keeping your finances tidy, and leaves you free to focus on your next big idea!
Tips for Effective Bookkeeping
Let’s make sure you’re set up for success with these tips to keep your bookkeeping basics for small business on track:
1. Stay Consistent
Make bookkeeping part of your routine. Consistency is key to staying organized and on top of your finances.
2. Use Accounting Software
Consider using accounting software with reliable features. These tools automate many aspects of bookkeeping, saving you time and reducing the chances of human error.
Tips for you: Accounting software is especially helpful if you’re handling payroll or managing multiple accounts. It helps keep everything in one place.
3. Separate Personal and Business Finances
One of the easiest ways to simplify bookkeeping basics for small businesses is by keeping personal and business finances separate. This prevents confusion and ensures that your business expenses are tracked accurately.
4. Regularly Back Up Your Records
Whether you use digital tools or paper records, make sure to back everything up regularly. This will protect your data in case of any technical issues or natural disasters.
5. Hire a Professional if Necessary
If bookkeeping feels like too much to handle on your own, don’t hesitate to reach out for help. Hiring a professional accountant or bookkeeper can give you peace of mind and ensure your books are in tip-top shape.
Conclusion
So, the answer to “What is book keeping?” might feel overwhelming at first, but once you understand the basics and create a simple system, it becomes an invaluable tool for your small business.
If you’re looking for professional help or just need a hand getting your bookkeeping system in place, don’t hesitate to get in touch with Orbit Accountants today.
Frequently Asked Questions:
Q. What is bookkeeping, and why is it important for my small business?
Bookkeeping is the process of recording your business’s financial transactions. It’s essential for maintaining accurate financial records, managing cash flow, preparing taxes, and making informed business decisions.
Q. How can I track income and expenses using bookkeeping basics?
Track income and expenses by recording each transaction and categorizing it. Regularly update and reconcile your records to keep everything accurate.
Q. How do I set up an effective bookkeeping system for my small business?
Set up a bookkeeping system by creating a chart of accounts, choosing between manual or software-based tracking, and categorizing transactions. Regularly update and reconcile your records.
Q. How can bookkeeping help with taxes and financial planning for my small business?
Bookkeeping helps by keeping your financial records organized, making tax filing easier, and identifying deductions. It also provides insights to help with financial planning and decision-making.
