Bookkeeping for Beginners: 6 Basic Concepts to Get You Started

Alternatively, in-house or outsourced bookkeepers can update your books for you, typically for a monthly fee. But whether you plan to do bookkeeping yourself or outsource it to an accountant, it pays to understand the basics of bookkeeping. Under double-entry bookkeeping, all transactions are entered into a journal, and then each item is entered into the general ledger twice, as both a debit and a credit. Keeping an accurate, up-to-date set of books is the best way to keep track of tax deductions (expenses that you can deduct from your taxable income). Accrual basis accounting records those invoices and bills even if the funds haven’t been exchanged. Generally, accrual basis is the recommended accounting method and more aligned with generally accepted accounting principles.

Balance the books

Getting your books together and producing financial statements is the only way to gauge the financial health of your small business. You need to know your net profit in order https://www.kelleysbookkeeping.com/ to do your taxes, and to figure that out, you need to know your total income and expenses. And the only way to know that for sure is to have accurate, up-to-date books.

Small Business Bookkeeping (2024 Guide)

Bookkeepers have to understand the firm’s chart of accounts and how to use debits and credits to balance the books. Bookkeeping is the regular practice of updating a company’s financial records to reflect all financial transactions, credits, and debits. Since the information gathered in bookkeeping is used by accountants and business owners, it is the basis of all the financial statements generated. Most accounting software allows you to automatically run common financial statements such as an income and expense statement, balance sheet and cash flow statement. Business owners or accountants can then use these statements to gain insight into the business’s financial health. Every financial transaction should have a line item in the general ledger, which tracks everything in one place.

Record every financial transaction

You no longer need to worry about entering the double-entry data into two accounts. This means that you don’t record an invoice until it is actually paid. Similarly, you don’t notate outstanding bills until you actually pay them. This method offers a true snapshot of your assets and debts at any given time. If not done at the time of the transaction, the bookkeeper will create and send invoices for funds that need to be collected by the company. The bookkeeper enters relevant data such as date, price, quantity and sales tax (if applicable).

Choose your bookkeeping method

But even if an expense is ordinary and necessary, you may still not be able to deduct all of it on your taxes. Just because you do most of your work from your dining room table doesn’t mean that you can deduct your entire monthly rent. Luckily, the IRS has put together a comprehensive guide on business deductions that you can consult if you’re ever unsure about a deduction. Diamonds may be forever, but the ink on your expense receipts is not. Since the IRS accepts digital records, it’s smart to use a cloud-based system like Dropbox, Evernote, or Google Drive so you never have to deal with smudged receipts. You can also use apps like Shoeboxed, which are specifically made for receipt tracking.

If your business is a side project with a limited budget, you can probably get by going the DIY route. You might still consider consulting with a CPA or bookkeeper at the beginning, just to make sure you’re doing everything right. But most businesses in the hobbyist stage can get by using either a simple spreadsheet (like our free Income Statement Template) or one of the many accounting or bookkeeping software solutions on the market. At tax time, the burden is on you to show the validity of all of your expenses, so keeping supporting documents for your financial data like receipts and records is crucial.

You’ll benefit from bookmarking this glossary which is full of bookkeeping terms (no confusing jargon though) that we’ll regularly update. There’s a little bit of learning involved that will make getting to grips with bookkeeping much easier in the long run. To help, we’ve listed the most basic types of bookkeeping you should know below.

1. A financial expert can give advice specific to your unique business and give you a more in-depth look at basic bookkeeping principles.
2. Firms also have intangible assets such as customer goodwill that may be listed on the balance sheet.
3. When you keep detailed, organized records of your business transactions, tax season suddenly won’t feel like such a daunting chore.
4. An example of an expense account is Salaries and Wages or Selling and Administrative expenses.
5. If you’re using spreadsheet software as your GL, you’ll need to enter each transaction by hand.
6. Instead, an account is a record of all financial transactions of a certain type.

You never want to waste time chasing down last month’s missing invoice, and you certainly don’t want to find yourself in trouble with legal requirements. Visit SBA.gov to find out more about how small businesses can stay legally compliant. If you choose to use double-entry bookkeeping—and we strongly suggest you do! We’ll show you examples of how to record a transaction as both a credit and debit later on. Mixing together personal and business expenses in the same account can also result in unnecessary stress when you need to file taxes or do your bookkeeping.

Most small businesses will either do their books themselves or outsource the work to a professional. If you’re going to be doing your own bookkeeping, it’s worth talking to a pro when you set up your system to make sure the accounts you create align with your industry standards and CPA expectations. Every transaction you make needs to be categorized when it’s entered in your books.

From there, the total pay is determined with the applicable taxes and withholdings. In the accounting software, the primary journal entry for total payroll is a debit to the compensation account and credits cash. Since good record keeping relies on accurate expense tracking, it’s important to monitor all transactions, keep receipts, and watch business credit card activity. Many bookkeeping software options automate the tracking process to eliminate errors. Maintaining bookkeeping tasks is essential for the stability and success of small businesses.

Business owners who don’t want the burden of data entry can hire an online bookkeeping service. These services are a cost-effective way to tackle the day-to-day bookkeeping so that what is a general journal business owners can focus on what they do best, operating the business. For business owners who don’t mind doing the data entry, accounting software helps to simplify the process.

For instance, ever looked at your bank statements and thought, Where is all the money we made this month? Bookkeeping is essential to the vitality and long-term success of any small business. Primarily, you need to have an accurate picture of all the financial ins and outs of your business.

At its core, bookkeeping is about recording financial data, while accounting is about interpreting financial data. For every new small business, it might not make sense to hire a bookkeeper straight away. But as soon as you see growth in your company, it will soon be https://www.kelleysbookkeeping.com/what-to-do-if-you-missed-the-tax-deadline/ essential to have a highly detailed, consistent bookkeeping approach. While you might be able to do this yourself to start as a small business owner, it’s best to make the investment in a qualified, professional bookkeeper to ensure your success in the long term.