10 Tips and Best Practices for Small Business Bookkeeping

Bookkeeping probably wasn't a priority when you started your business, which is understandable. No one wants tedious, time-consuming administrative tasks dulling the excitement of a successful launch.

While you might want to avoid it, accurate and timely recordkeeping is critical to the success of your business. Setting up your bookkeeping systems as early as possible will help you avoid headaches later, but where do you start?

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 or focusing on that next milestone.

What is bookkeeping?

Bookkeeping supports your business’s financial reporting and recordkeeping functions, with bookkeepers maintaining accurate and timely financial data for tax returns and business decisions.

Common 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 supports accurate financial accounting records. Accountants require correct account balances and transaction data from bookkeepers 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.

Why is Bookkeeping Integral for Small Businesses?

Bookkeeping is integral for small businesses, ensuring that all financial data is properly recorded by creating a general ledger. The general ledger records debit, credits, and other pertinent data. Maintaining the ledger is detail-heavy work, with its thorough information providing the best tools for financial data interpretation, decision-making, and forecasting.

Bookkeepers maintain the records for a small business, as well as handling payroll and creating invoices. They also handle the important task of financial reconciliation– ensuring your bank statement matches the records in the general ledger.

Integral bookkeeper benefits include:

• Being able to better plan and budget for the fiscal year

• Making tax season easier to manage

• Records and data provide the insight to make critical business decisions

Bookkeeping Best Practices for Small Business Owners

Follow our guide to small business bookkeeping best practices to maintain accurate and timely financial data for your business. Once you've implemented these best practices, review additional resources, including How to Create a Simple Bookkeeping Spreadsheet 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.

For more detailed information, read our blog, Chart of Accounts: A Comprehensive Guide with Real-World Examples. 

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. GAAP rules aim to make financial reporting accurate and consistent while promoting transparency. 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.

Cash Basis Accounting Example #1: A customer buys something from you for $500 on November 15th. On the date of the sale, you give the customer an invoice for $500 but don’t get paid until December 15th. You’ll record revenue when you receive the $500 in cash on December 15th.

Cash Basis Accounting Example #2: You hire a technician for $750 to repair several of your business’s computers. The technician makes the repairs on December 20th and gives you an invoice. You pay the $750 invoice on January 20th. You’ll record the expense when you pay the $750 on January 15th.

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

Accrual Basis Accounting Example #1: A customer buys something from you for $500 on November 15th. On the date of the sale, you give the customer an invoice for $500 but don’t get paid until December 15th. You’ll record the $500 of revenue on November 15th, the date of the sale.

Accrual Basis Accounting Example #2: You hire a technician for $750 to repair several of your business’s computers. The technician makes the repairs on December 20th and gives you an invoice. You pay the $750 invoice on January 20th. You’ll record the expense of $750 when the technician performs the repairs on December 20th.

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 monthly cash account balance. 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

Review bookkeeping data quarterly and annually to monitor incoming revenue and spending trends throughout the fiscal year. Identify trends and establish budgets with the financial reporting that's reviewed each quarter. 

Best Practice #9: Plan for Taxes

Your bookkeeping activities support your business tax return preparation. If you outsource business accounting, your tax advisors will use your financial reports and account reconciliations to calculate your taxable income and tax deductions. If you handle tax preparation and filing for your small business, you will handle these responsibilities. 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. You might also open yourself up to other issues, such as incorrect data or falling behind on your books due to your lack of specialized knowledge and training.

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.

For more detailed information, read our blog, What Is a General Ledger and How Does It Work?

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. They should also remember that doing it themselves will only take them so far before they need to work with a professional outsourced bookkeeper.

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. Other common mistakes are falling behind on their books and using old data to make decisions that impact the future of their businesses. 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?

1-800Accountant's proprietary bookkeeping platform, ClientBooks, is compatible with leading do-it-yourself bookkeeping software, including QuickBooks Online (QBO), Sage, and Wave. When you use 1-800Accountant's bookkeeping service, your books are done for you with easy-to-understand reporting.

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. 

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.