Bookkeeping is an essential part of small business operations. It plays a significant role in keeping your small business finances organized and is especially helpful come tax time.
Bookkeeping has benefits for beginners, but learning the basics of bookkeeping may help you save time and money. Here are the basics of bookkeeping for beginners, which you can’t ignore.
Why Is Bookkeeping so Important for Small Businesses?
Bookkeeping is vital for small businesses because it keeps accounts, invoices, and expenses organized. Poor bookkeeping can lead to missed payments, late invoices, and a headache when it’s time to file your taxes.
You can use bookkeeping to help:
- Access important documents and records for business operations.
- Facilitate tax information by having business finances readily available.
- Identify transaction mistakes with time for reconciliation and transaction management.
- Keep your business and personal finances separate from each other.
- Monitor your small business’ financial health for any changes or improvements.
5 Bookkeeping Basics You Can’t Ignore
There are four bookkeeping basics that you can use to grow your small business.
1. Organized Record Management Is Key
You can use two record management systems for your bookkeeping needs: bookkeeping software and spreadsheets. Whatever you decide to use, you need to ensure that you’re consistently updating your records.
Spreadsheets vs. Bookkeeping Software
Bookkeeping software allows small businesses to have accurate records. You can use bookkeeping software to improve the accuracy of your entries. Because of the improved accuracy, you’ll save time with how quickly you can complete your bookkeeping.
You can configure bookkeeping software to create reports for certain financial aspects of your small business. Similarly, bookkeeping software allows you to have all of your records in one place.
Spreadsheets offer small businesses a convenient way to save, store, and view large quantities of information. You can use spreadsheets to view data, such as customer data, financial data, and product data.
For small businesses, spreadsheets might work well for tracking their budgeting and spending habits. You can also use spreadsheets to create financial charts and financial reports too. Finally, you can use spreadsheets to create invoices and receipts.
2. Know the Difference Between Bookkeeping and Accounting
The second bookkeeping tip for beginners is knowing the differences between bookkeeping and accounting. You may see the two terms used together often, but there are notable differences.
- Answering day-to-day financial questions
- Balancing and maintaining a ledger
- Entering debits and credits
- Maintaining expenditures and income
- Promoting financial statements, like the balance sheet
- Recording daily transactions
Accounting has different responsibilities, which involve:
- Adjusting entries in the ledger
- Analyzing business costs
- Completing in-depth budgeting and forecasting
- Conducting strategic planning
- Preparing taxes
- Providing macro-financial advice
3. Be Aware of the Different Types of Bookkeeping Methods
There are two types of bookkeeping methods: cash method and accrual method.
The cash method is convenient for many small businesses because of its simplicity. With the cash method:
- You’ll record expenses when you pay a bill.
- You’ll record sales when you receive payments.
- You’ll record transactions when you receive cash or spend it.
The cash method differs from the accrual method in how you’ll track expenses and revenue. With cash accounting, you track revenue when you receive it. You’ll track expenses when you pay it.
The accrual method is the second bookkeeping method. This accounting method is based on the matching principle, matching revenue with expenses.
It differs from the cash method in how you track expenses and revenue. With the accrual method:
- You’ll record expenses even though payment has yet to occur.
- You’ll record sales even though you have yet to receive funds.
- You’ll record transactions when they are incurred.
The accrual method also differs from the cash method for small businesses. Businesses must use the accrual method if it generates more than $25 million in annual gross receipts for three preceding years.
4. There Are Several Different Accounts to Track
The final bookkeeping for beginners tip is to learn the basic bookkeeping account types. These accounts serve various purposes that will help you form your balance sheet.
The first bookkeeping account is cash. Cash includes:
- Bank accounts
- Undeposited checks
On a balance sheet, cash is a current asset.
Accounts receivable is an account in the general ledger. It describes a credit that businesses are owed. On a balance sheet, accounts receivable are current assets.
Accounts payable is an account within the general ledger. It describes a debt that a business must pay. On a balance sheet, accounts payable are current liabilities.
Assets describe what a business owns. On a balance sheet, assets are the total of liabilities and equity. A balance sheet also lists assets as current assets and other assets.
Current assets include:
- Accounts receivable
- Cash equivalents (marketable securities, money market funds, treasuries)
A small business may have other assets, including:
- Financial assets
- Fixed assets
- Intangible assets
Liabilities are what a business owes. You can find liabilities divided into two subsections: current liabilities and other liabilities. Together, these combine to determine your total liabilities.
Revenue is the income a business makes from its operations. There are two types of revenue: operating revenue and non-operating revenue. Operating revenue is revenue from sales or services. Non-operating revenue is revenue from investments or passive income.
5. Outsourcing your bookkeeping can save time and money
Bookkeeping is a vital part of any small business. It’s also one of the most impactful things that can aid in your small business development. However, busy business owners don’t always have the time or know-how needed to effectively manage the books. That’s where 1-800Accountant comes in. Our team of expert bookkeepers can support you and your small business by taking care of your bookkeeping.
When your small business needs help with its bookkeeping needs, contact experienced professionals who can help you. Work with the professionals at 1-800Accountant when it’s time to find your small business bookkeeping needs.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.