bookkeeping 101

Looking to take up bookkeeping for small businesses? Read our guide to bookkeeping 101 & get insight into everything you need to know.

Small business owners face a lot of challenges. Almost 40 percent agree that the worst part is dealing with accounting and taxes.

If you’re a business owner, that might be because your expertise is somewhere else. You might be a graphic designer or an engineer.

You may also be someone looking for a great business opportunity yourself. If you’re good with numbers and have a penchant for organizing, then this guide could help you get started.

Think of it as bookkeeping 101. You’ll learn the basics of bookkeeping for small businesses.

Bookkeeping 101: Definitions

Before diving in, it helps to answer a few basic questions. So, what does a bookkeeper do?

On the surface, the name is self-explanatory. The bookkeeper keeps the books. “The books” in this case refers to your financial records.

The bookkeeper’s job is to keep track of all ins and outs, or debits and credits as they termed. If you’re running a store and you have to pay for your inventory, that’s a debit against your account. Every time you make a sale, that’s a credit.

In the past, this task would have required manual entry for each debit and credit. Today’s bookkeepers use technology to help them. In our retail store example, the registers used at checkout track transactions.

The bookkeeper does a lot more than this. They also send invoices and make payments. Finally, they prepare financial statements.

Bookkeeping Versus Accounting

One of the biggest questions people have is about the differences between a bookkeeper and an accountant. A bookkeeper keeps your financial records straight.

Isn’t that what an accountant does?

Both of these professionals work with financial data, but their roles are a little bit different. A bookkeeper’s primary role is to record information. This includes when you receive payments when you pay bills, and so on.

An accountant is trained to analyze that data. They’ll help you look for trends in your payments and make projections about the future of the business. They may also make recommendations for how to manage your money.

None of that is possible without good bookkeeping. If your books aren’t in order, it’s difficult to see patterns and make predictions. It’s also difficult to spot problems where they’ve started and think of solutions for them.

The Ledger

Now we’ve covered what a bookkeeper does, and how their role is different from an accountant’s. So, how does the bookkeeper go about their job?

The bookkeeper will likely have a ledger, which includes all the ins and outs from your business. The ledger keeps a running tally of your working capital, as well as records of each transaction.

The bookkeeper will close the books at a set time. This may be at the end of the business day, where they’ll tally up the day’s ins and outs. They may also close the books once a month, to create monthly profit and loss statements.

From this information, you can also generate quarterly reports and more.

Bookkeeping Methods

There are two primary methods of bookkeeping, called single-entry and double-entry. Single-entry bookkeeping is just that. You enter the amount in one journal ledger and call it a day.

Most bookkeeping uses the double-entry system. For every transaction recorded in one journal ledger, an equal and opposite transaction is recorded in another.

An example makes this easier to see. If you move $500 from your revenue account to your expenses account, you’d record this as a debit, or withdrawal, from the revenue account in one journal.

In the other journal, you’d record it as a $500 credit to the expenses account.

Next, you’ll need to decide on when transactions are recorded. With the cash method, you record transactions when the cash arrives. With the accrual method, transactions are recorded when they occur, regardless of whether the money has actually moved.

An invoice is a good example. With the cash method, you’d only record the invoice amount once you’ve received payment. With the accrual method, you’d record the invoice when it was raised.

The accrual method requires more tracking, but it can also help you keep a better eye on what’s due to come in and out of the business.

Paying Bills

There are two primary types of transactions bookkeepers look after: debits and credits. As we established, debits represent any withdrawal from an account. Credits represent inputs, such as payments.

Keep in mind that debits and credits can move between your own business accounts. A debit isn’t necessarily money leaving the business. By the same reasoning, a credit isn’t always a payment.

Nonetheless, bookkeepers will look to the payment of bills to keep the business running. This includes the basics, such as paying rent for your office space or paying your electricity bill. If you buy new computer equipment, that would also count as a payment.

Some typical types of business payments include:

  • Vendor payments, for services or product
  • Technology tools, such as apps or smartphones
  • Business insurance
  • Business and payroll taxes
  • Payroll

We’ll talk more about payroll in a bit since it can be complex. It’s good to note that some payments are one-time withdrawals. Others will be expenses you pay on a regular basis.

Invoicing

The other side of the coin is getting paid. You likely offer something for sale, such as a service or a product. If you sell a customer a new pair of running shoes, you expect to receive payment for it.

Some businesses, like retail stores, expect payment at time of purchase. For other businesses, payment may be made after so many days. This is usually associated with invoicing.

The bookkeeper also tracks all invoices. They’re usually involved in preparing and sending the invoices as well. They may even be responsible for tracking down late payments.

By recording this information, the bookkeeper keeps track of your business cash flow. If you have more money coming into the business than going out, you have a positive cash flow. If more money is going out than coming in, cash flow is negative.

Cash flow is important to keep an eye on. Negative cash flow could mean your bank account is overdrawn and you’re charged fees. Negative cash flow over a longer period could highlight an issue in the business, such as high overheads or fiscal mismanagement.

Cash flow is implicated in more than 80 percent of business failures. Ongoing negative cash flow can lead to spirals of debt and eventual bankruptcy. Catching cash flow issues early and acting to correct them are just one reason you need to keep your books in order.

Reconciling the Books

One of the trickiest tasks of bookkeeping is reconciling the books. This is when your bookkeeper takes financial statements and checks them against the ledger.

An example is taking bank statements and checking them against withdrawals in the ledger.

Another example is checking deposits moved from your safe to the bank account. You may also want to ensure the amount of cash on hand matches what the ledger indicates should be there.

Reconciling the books is important because it can help you find errors in your accounting. It may point to mistakes, such as a vendor payment that was processed twice. It could also help you reduce shrinkage.

Reconciling the books at the end of a longer period, such as a month, can be more complex. That’s because there are more transactions to go through. Again, going through this exercise can help pinpoint errors or problems, which can help your business in the long run.

Payroll: A Complex Part of Bookkeeping

Perhaps the biggest expense for most businesses is payroll. Between paying your employees and making sure you remit the right payroll taxes, it’s a big job.

It’s also a complicated one. There are some very specific rules for how to handle payroll, such as remitting FICA taxes to the federal government. You’ll also want to be sure you’re monitoring minimum wage regulations and overtime rules.

Most importantly, you want to be sure you’re paying your people on time and correctly. Employees begin searching for a new job after just two payroll errors. Losing talented people over payroll errors is not a good situation for any business.

Although payroll can be complicated, small businesses usually have only a handful of employees. Payroll can usually be handled as part of bookkeeping, although some business owners will separate the tasks.

In larger businesses, payroll may be left to a separate team or department.

How to Conduct Payroll

Payroll includes collecting information about hours worked, the rate of pay, and deductions. It also includes ensuring the amounts are correct, and that the employees are paid on the right date, for the right period.

If employees are entitled to pay for overtime, sick days, or vacation time, you’ll also need to factor that in.

It’s a good idea for bookkeepers to keep records of payroll. One easy way to do that is to issue pay stubs for each employee. Some states don’t require pay stubs, but it can help you meet requirements for record-keeping.

Cash flow becomes important here as well. If you run payroll but don’t have enough in your account to fund it, your employees won’t get paid on time. If your cash flow is negative, you may need to consider loans to make sure your people are paid on time.

Paying Taxes

Payroll isn’t the only complex task bookkeepers look after for small businesses. Bookkeepers will also assist with tax preparation.

This makes sense, especially if you’ve worked with a bookkeeper throughout the year. They may have access to your payroll records, as well as your cash flow statements. They also have information about how much you spent, on what, and how much the business brought in.

With all that information in hand, they’re in the perfect position to prepare your taxes. Even if you don’t work with a bookkeeper for anything else, you may consider taking your taxes to them.

The bookkeeper can help you assess which expenses can be claimed as write-offs for the business. In turn, they can also help you find more tax credits and ensure you’ve applied the right rates.

If the bookkeeper handles your payroll, they may be responsible for filing reports. In addition to filing the payroll taxes, there may be quarterly and annual reports your business needs to turn in.

Again, the bookkeeper’s work to keep track of cash flow will help you ensure you can take care of your tax obligations. Their help will help you avoid penalties for late filing or missed payments.

A bookkeeper can also help you generate tax forms, such as W2s and 1099s for contractors. They have the information already, so preparing these documents is much easier.

Tools of the Trade

The bookkeeper’s role is primarily to collect and record data. To do that, they must draw information from several different sources.

Most bookkeepers use bookkeeping software, such as QuickBooks. These tools help them maintain the ledger. They may also be able to use this program to generate invoices and track payments.

Some tools will also help them record payments the business makes. Bookkeepers may use other tools to help them organize receipts, statements of account, or vendor bills.

If you run a retail store, then the bookkeeper will likely pull transaction information from your sales software. This could include pulling transaction data from point-of-sale terminals, as well as from an online store.

Some bookkeepers will run payroll through specialized software designed for this task. Specific payroll software may include features that allow employees to record their hours. The program may also integrate with your time-tracking programs or a benefits program.

Another tool bookkeepers might want to consider is a pay stub maker. With an online generator tool, they can easily pick a pay stub template and make stubs for all your employees.

If you’re an independent bookkeeper with several small business clients, a pay stub maker is a great investment.

Give Your Business a Helping Hand

That concludes bookkeeping 101. With these tips and a better understanding of how bookkeeping works, you can keep your business’s finances in good order. You may also decide to start offering your services to others.

With bookkeeping taken care of, you can get back to the things that matter. If you have a great idea, then it might be time to get a patent. Discover the process and more informative articles right here on our blog.