Small Business bookkeeping basics

Proper bookkeeping ensures that you are always on top of your business's finances, allowing you to make sound financial decisions that will help you develop your organisation.

Bookkeeping is the process of recording your company's financial transactions so you can see exactly how much money you're making and where it's going. It's essential for running a lucrative business—after all, if you don't know how much you're making or where your money is going, you'll struggle to find ways to increase your profits.

Best Small-business bookkeeping can be intimidating if you've never worked in finance before. Fortunately, most small-business bookkeeping software was designed primarily for non-accountants. (If you're just starting out, free bookkeeping software can help you save money.) Alternatively, for a monthly charge, in-house or outsourced bookkeepers can update your books for you. However, whether you plan to handle your own bookkeeping or outsource it to an accountant, it is beneficial to understand the fundamentals of bookkeeping.

We'll break down bookkeeping into its most fundamental principles in the sections that follow. Along with reading this page for a fast bookkeeping overview, we always recommend consulting with a CPA (certified public accountant) or bookkeeper long before you open your doors—or as soon as possible if you've already launched your business. A financial professional can provide specialised bookkeeping assistance tailored to your specific business while also providing a more in-depth look at the fundamental principles discussed here.

1. Decide on a bookkeeping approach.

Before you can begin keeping your financial records, you must first select a method because the method you select defines how and where you record each financial transaction.

Single-entry bookkeeping is the most basic type of bookkeeping. Each financial transaction must be recorded just once in your total bookkeeping record. This strategy is appropriate for freelancers or sole proprietors who have only one or two business transactions per month.

However, single-entry accounting is less precise than double-entry bookkeeping, which requires you to record each transaction twice: once as a debit and once as a credit. Because you make two entries per transaction, you're better positioned to spot minor errors in your record before they become large financial issues.

We normally recommend double-entry bookkeeping as a superior solution for most small-business owners, regardless of how much money they bring in per month. Furthermore, practically all bookkeeping and accounting software employs double-entry accounting. (One noteworthy exception is FreshBooks' cheapest plan, which only allows for single-entry—which, to be honest, we don't like.)

If you utilise double-entry accounting, which we strongly recommend, you will record each transaction as a credit and a debit. Later on, we'll teach you how to record a transaction as both a credit and a debit.

2. Create your general ledger.

Businesses used to keep track of their financial activities in a tangible book called the general ledger for centuries (GL). Instead of scribbling down transactions on a piece of parchment with a quill and ink, business owners can enter and organise transactions using a spreadsheet or bookkeeping and accounting software.

When you complete a financial transaction, such as a sale, accept a client's invoice, or pay a bill, you should record it in your general ledger. Making a journal entry is the process of recording a financial transaction in your general ledger.

There are several methods for creating a general ledger. Using a spreadsheet is the most cost-effective choice, especially if you use Google Sheets instead of Microsoft Excel, which has a monthly charge. General ledgers, on the other hand, can get problematic if you try to manage several accounts.

Bookkeeping software (which can range in price from free to several hundred dollars per month, depending on the size and demands of your firm) generates and populates a general ledger for you.

You can also hire an accountant, bookkeeper, or outsourced accounting firm to manage your accounts and ledger for you.

3. Establish your business accounts

Your general ledger is divided into accounts in which you record various types of transactions. Keep in mind that in the realm of bookkeeping, an account does not necessarily correspond to a personal bank account. An account, on the other hand, is a record of all financial transactions of a specific sort.

There are five different sorts of accounts:

• Asset accounts are used to keep track of all the resources that your company has (like inventory and property)

• Liability accounts are used to keep track of all the commitments and debts that you owe (like monthly rent payments)

• Revenue or income accounts are used to record the money your company earns (like inventory sales)

• Expense or expenditure accounts, which track all of the money that leaves your company (like employee salaries or monthly utility payments)

• Equity accounts are used to document a business owner's ownership interest in the company (like stock shares)

What exactly is a chart of accounts?

If a general ledger is a book, a chart of accounts is the table of contents—a it's list of all the accounts your company employs to record transactions. Each account is like a chapter of a book in this metaphor, and individual journal entries are like the pages of each chapter.

Setting up each relevant account so you can record transactions in the appropriate categories is the first step in bookkeeping. You won't have the same exact accounts as the firm next door, which is why we recommend consulting with a CPA to create a personalised chart of accounts for your company. However, regardless of the type or size of your organisation, the accounts listed below are the most popular. You're likely to employ at least a few of them.