Bookkeeping 101

/Bookkeeping – a word that inspires dread in many business owners. Keeping track of your company’s finances can seem overwhelming. But the good news is that it doesn’t have to be this way. Anyone can learn what is bookkeeping and how to be an effective bookkeeper, and you don’t need the skills of an accountant to do it .

It’s worth your time learning to keep accurate books because it’s the only way to be in complete control of your ship. You’ll know when to pay the bills, what you can and can’t purchase, and exactly where your operations need to improve. On the other hand, neglecting your books is a sure path to failure. If you can’t keep track of your cash flow, how can you make informed decisions about your business?

Bookkeeping 101: А Beginner’s Guide to Bookkeeping

Bookkeeping is simply another word for record-keeping – specifically, keeping records of all the financial transactions of a company or individual. This means things like sales, purchases, wages, bills, rent – basically all movements of money, in and out.

There are many advantages to keeping accurate books. You’ll be able to catch any mistakes you’re making, such as paying too much tax, for example. Another advantage is that banks are more likely to give you a business a loan if you can show accurate financial records.

There are two keys to good bookkeeping – being organized, and knowing the right vocabulary.

Single vs. Double Entry Bookkeeping

There are two types of bookkeeping system. Single-entry is an incomplete system in which the bookkeeper only records one side of a transaction. This system amounts to a list of all transactions and is only suitable for very small businesses. 

Double-entry is a complete bookkeeping system which records both sides of all transactions – that is, the effect on both accounts. Because all the transactions have to be balanced, mistakes are extremely easy to spot, making the double-entry system  virtually error-proof. This system is suitable for all types of business.

Balance Sheet Basics

A balance sheet is a statement showing the exact financial status of a business. That means its assets, its liabilities, and its sources of income. 

Balance sheets have three main components: 

• Assets – resources used by the company to operate
• Liabilities – debts held by the company
• Owner’s equity – share of company assets owned by the owners/shareholders.

These three components have to balance – hence the name balance sheet. The statement is based on a simple business equation: Assets = Equity + Liabilities.

Income Statement Basics

An Income Statement, sometimes called a profit and loss statement, is a report that shows how much money your company spent, and how much revenue it made, during a given period, usually a month or a year. Basically, it tracks the following items:

• Total revenue – all income for services rendered and products sold;
• Total cost of goods sold (COGS)- expenses directly related to generating sales revenue, such as raw materials;
• Total expenses – things you have to pay for in order to keep your business going (administrative costs, wages, taxes, equipment costs, etc.).Together, these three data points allow you to calculate your net income, or how much money you have left to reinvest in your business and/or take home.

This is why it is important to keep track of every revenue stream and every expense. Only then will you get a complete picture of what your net income is.

Cash Flow Statement Basics

If you’ve ever asked yourself “why doesn’t the balance in my bank account match the amount of money I made?”, Cash Flow Statement is where you’ll find the answer. You don’t need to know how to prepare them, but you should know how to read them. They indicate your sources of revenue, what that cash was used for, and the resulting change in balance over time.

Cash vs. Accrual Basis Accounting

The difference between Cash vs. Accrual Basis Accounting is in the timing – in other words, when transactions are recorded.

Cash-based accounting is a very intuitive system with which you only record revenue and expenses when money changes hands. It is similar to the single-entry data system described earlier. This system is simple to operate yourself, but it only focuses on cash.

Accrual accounting records all transactions at the time they are made, which is often before money has actually been exchanged. Because it covers every aspect of business operations – accounting for cash, credit and advances – it is a far more complex and accurate system, and closer to the double-entry system. Accrual accounting is the accounting system required by the GAAP.

Bookkeeping Software or DIY system?

You can make your own free spreadsheet to keep track of all your company’s transactions, but that will be a big job. It will require a lot of data entry and substantial bookkeeping knowledge. Accounting and/or bookkeeping software will do the job a lot more efficiently, so it could be a worthwhile investment. 

Prices vary, but many of the better systems have features like for generating invoices, paying bills, and automatically generating financial statements. Do be sure to research before you buy – you need to check if your accounting software is compatible with your business (for example, importing data from an Etsy store).

Bookkeeping Best Practices

• Open a new bank account

Set up a separate bank account, and credit card, specifically for your business. It can even be a personal account – just make sure you use it solely for your company. Keeping your business and personal finances separate makes it easy to balance your books, but more importantly, reduces stress during tax season. 

• Collect payments ASAP

Make sure that your customers pay their bills on time. You should be creating clear invoices to send to customers and reminder notices if they are late with payment. Make sure that your payment methods are convenient for your clients.

• Keep cash in the bank

You should pay your bills on time, but there’s no need to rush! Even if you have spare cash, wait until the last few days before bills are due before paying them – more money in your account means a wider safety net in case of emergencies such as early wage payments or vital repairs. 

• Track employee paychecks

Keep a detailed record of all payments made to employees. These details should show the date of payment, to whom the payment was made, and of course the correct amount. Tax deductions should also be displayed on the check. Hiring a payroll services company will simplify the process, but you will still need to keep track for bookkeeping purposes. 

• Review financial statements 

Your financial statements show the action going on behind the scenes of your business. Business owners need to keep on top of their statements if they don’t want to miss out or get taken advantage of. Services are available to help business owners create and understand their reports, such as professional bookkeepers and the CFA. 

• Outsource your bookkeeping

Owning a business isn’t like working a job – you have to know where your weaknesses are, and hire other people to take up that slack. Bookkeeping is no different. The good thing is that you don’t need to hire a full-time bookkeeper – there are many services that can do the work remotely, for a fraction of the cost of a full-time bookkeeper.