10 Tips and Best Practices for Small Business Bookkeeping

When you’re starting a business, bookkeeping might be far from the top of your priority list. You want to begin operations quickly without letting tedious administrative tasks get in the way. 

While you might want to avoid it, accurate and timely recordkeeping is critical to your business. Setting up your bookkeeping systems as early as possible will help you avoid headaches later. 

Follow our list of small business bookkeeping best practices as you implement your bookkeeping solution. You’ll learn crucial components and how to avoid errors – so you can get back to growing your business.

What Is Bookkeeping? 

Bookkeeping supports your company’s financial reporting and recordkeeping functions. Bookkeepers maintain accurate and timely financial data for tax returns and business decisions. 

Bookkeeping activities include:

• Categorizing transactions
  
• Reconciling accounts
  
• Tracking invoices
  
• Recording revenue
  
• Monitoring cash flow
  
• Preparing financial reports
  
• Compiling records for tax returns

What Is Bookkeeping vs Accounting? 

Bookkeepers and accountants can have overlapping responsibilities, but each function serves a different purpose.

Bookkeeping responsibilities support accurate financial accounting records. Accountants require correct account balances and transaction data to perform their jobs. Accounting activities include: 

• Analyzing financial trends
  
• Calculating and reviewing budget-to-actual discrepancies
  
• Assisting with business planning and forecasting

Bookkeepers can identify trends and monitor business expenses, but accountants generally perform detailed account analyses rather than day-to-day account reconciliations. Many accountants hold a certified public accountant (CPA) license.

You can maintain your business’s financial health without hiring a full-time bookkeeper or accountant. Outsource your accounting and bookkeeping services to 1-800Accountant and find budget-friendly pricing to support your business needs.

Bookkeeping Best Practices for Small Business Owners

Follow our guide to small business bookkeeping best practices so you can maintain accurate and timely financial data for your business. 

Best Practice #1: Separate Your Business and Personal Finances

Keep separate bank accounts for your personal and business finances. Avoid using your personal account for business transactions – instead, use a business credit card.

Maintaining separate accounts supports accurate account balances and prepares your business for a smooth tax season.

Best Practice #2: Establish a Chart of Accounts

A chart of accounts is a list of all accounts in your recordkeeping system. The chart of accounts typically includes an account number and description to facilitate consistent and accurate financial reporting. 

Consider the following basic example:

• Account 1000 – Cash
  
• Account 1100 – Accounts Receivable
  
• Account 2000 – Accounts Payable
  
• Account 3000 – Equity
  
• Account 4000 – Revenue
  
• Account 5000 – Expense

Establish as many accounts as your business needs to track detailed account balances. Your chart of accounts will help your business monitor your financial health and prepare financial reports.

Best Practice #3: Automate Processes

Bookkeepers perform similar responsibilities on a monthly, weekly, or daily basis. Your business can save valuable time by automating repetitive tasks.

For example, instead of manually entering business receipts into a spreadsheet, you can implement a bookkeeping or accounting solution that automatically tracks and records invoice payments.

Choosing Small Business Accounting Software

Implement accounting or bookkeeping software to automate financial reporting and eliminate the risk of manual error. Common accounting systems include QuickBooks, FreshBooks, and Xero. 

Alternatively, consider outsourcing to bookkeeping and accounting professionals. Outsourced bookkeeping services help you keep accurate financial records without wasting valuable time on recordkeeping activities. 

Best Practice #4: Follow Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) represent the financial recognition rules most U.S. businesses follow when preparing financial statements. For example, GAAP instructs the timing for recording revenue and expenses.

GAAP requirements depend on your business’s accounting method.

Understanding Your Accounting Method

Your method of accounting determines when your business must record revenues and expenses. Most companies use one of the primary accounting methods:

• Cash basis accounting: Recognition happens when the business receives or spends cash.

• Accrual basis accounting: Recognition depends on when the business earns revenue or incurs expenses (not necessarily upon exchanging cash).

Your business must follow the GAAP rules for your accounting method. Professional CPAs can help you understand and apply GAAP to your financial statements.

Best Practice #5: Track Your Business Expenses

Most of your operational expenses represent business tax return deductions. Lower your tax bill by tracking and accurately recording your day-to-day expenses.

The following business expense categories represent common business tax deductions:

• Employee wages
  
• Inventory purchases
  
• Supplies
  
• Transportation costs
  
• Utilities
  
• Vehicle mileage

Best Practice #6: Perform Account Reconciliations

Account reconciliations support accurate financial data. Your business should reconcile your credit card and bank account balances to your general ledger. Establish a routine for reconciling your accounts throughout the year to maintain the correct balances.

For example, compare your checking account bank statement to your cash account balance every month. Ensure your general ledger reflects the correct cash balance.

Best Practice #7: Generate Financial Statements

Bookkeepers prepare financial statements for forecasting, revenue analysis, or bank funding. 

Many small businesses compile financial reports annually to support their tax filings. We recommend preparing monthly or quarterly financials so you can review trends and analyze budget-to-actual discrepancies. 

Standard financial reports include:

• Balance sheet. The balance sheet reflects the company’s assets, liabilities, and equity on the date of the financial statements.
  
• Income statement. The income statement reports the company’s income and expenses for the period.
  
• Statement of cash flows. The cash flow statement reports the sources of cash receipts and expenditures during the period.

When you partner with 1-800Accountant for your bookkeeping services, you’ll have access to real-time financials whenever you need them.

Best Practice #8: Conduct Quarterly Reviews

Small business owners can monitor revenue and spending trends by reviewing bookkeeping data quarterly and annually. Businesses can use their financial reports to identify trends and establish budgets.

Best Practice #9: Plan for Taxes

Your bookkeeping activities support your business tax return preparation. Your tax advisors will use your financial reports and account reconciliations to calculate your taxable income and tax deductions. 

Your business can prepare for tax season (and potential IRS audits) by maintaining timely and accurate recordkeeping.

Best Practice #10: Consider Outsourcing Your Bookkeeping Services

When you hire a bookkeeper or add the responsibilities to your own list, you risk losing valuable time and increasing your administrative burden.

We recommend partnering with professional bookkeepers specializing in recordkeeping practices for your industry. Outsourcing your bookkeeping services helps you save bandwidth and resources. Instead of organizing receipts and tracking expenses, you can focus on growing your business. 

Essential Bookkeeping Terms for Startups

Refer to the following glossary for terms you should know before implementing your small business bookkeeping.

General Ledger

A general ledger combines the chart of accounts with the company’s financial transactions. 

The chart of accounts lists each account name and number, and the general ledger reports the transactions posted to each account. Your general ledger should reflect transactions and account balances for the reporting period.

Asset

Business assets include items supporting your business operations. Assets generally hold value and help your business earn money. Types of assets include cash, accounts receivable, intangibles, and equipment.

Accounts Receivable

Accounts receivable represent outstanding payments from customers. 

For example, consider an auto repair shop that sends a customer an invoice after a transmission replacement. The auto shop can record a receivable after performing the repair services. After the customer pays the invoice, the shop must remove the receivable and record the cash receipt.

Liability

Liabilities include amounts your business owes to third parties. Common liabilities include accounts payable and bank loans. A liability represents a future cash outflow. 

Accounts Payable

Accounts payable include outstanding short-term payments your business owes to vendors. 

For example, your business should record an account payable for a utility bill you receive. After you pay the bill, remove the payable and record the cash outflow.

Revenue

Revenue represents income your business earns from day-to-day operations and other sources. 

A bookstore earns revenue by selling books, and a veterinarian earns revenue by treating animals. Your business can also earn unrelated income, such as interest on investments. 

Your bookkeeping function should track each activity as a separate revenue category.

Expenses

Business expenses include business inventory, supplies purchases, and all other costs of running your business.

Accurate bookkeeping must separately categorize each type of expense. Utility expenses, employee wages, and office supplies represent distinct expense categories.

Small Business Bookkeeping FAQ

What should a small business owner know about bookkeeping?

Small business owners should know that bookkeeping can generate important insights to help them make crucial data-backed business decisions. They should also know that accurate bookkeeping data helps accountants produce their work.

What is the most common bookkeeping mistake that small business owners make?

Small business owners' most common bookkeeping mistake is taking on these responsibilities themselves. Bookkeeping is a detail-oriented, time-consuming job; making mistakes or falling behind can harm a business. 

What is the most commonly used accounting software?

Several do-it-yourself (DIY) bookkeeping platforms are available for small businesses to take advantage of. When you use 1-800Accountant's bookkeeping service, your books are done for you with easy-to-understand reporting. And you don't have to start from scratch; our bookkeeping platform is highly compatible with many DIY platforms. 

How often should a small business reconcile its accounts for effective bookkeeping?

Small businesses should reconcile their accounts monthly for effective bookkeeping. Business owners can opt to increase the frequency of reconciling their accounts if necessary. 

What are some essential bookkeeping tips for small business owners to stay financially organized?
Some essential bookkeeping tips for small business owners include separating business and personal finances, following generally accepted accounting principles, and identifying processes that can be automated. 

Hire Proven Experts to Handle Your Bookkeeping

Don’t let a long to-do list feel overwhelming. You can save time and professional fees by outsourcing your bookkeeping to 1-800Accountant. 

Consider the benefits of hiring bookkeeping professionals to maintain accurate records for your business: 

• On-demand access to your records so you can quickly monitor your business’s financial health
  
• Cloud-based bookkeeping solutions that automatically connect to your revenue system
  
• Up-to-date reports on your schedule so you don’t have to make time to enter updates
  
• Access to professionals who specialize in your line of business
  
• Budget-friendly pricing so you don’t get stuck with a large professional services bill

1-800Accountant can manage a system you’ve already implemented or set up your bookkeeping system from scratch. Schedule a free call to learn how your business can benefit from outsourced bookkeeping services.