What is Bookkeeping?

“So what is bookkeeping?”

Believe it or not that’s actually one of the most frequently asked questions we get. Small business owners seem to understand that it has to do with basic business finances, but what is bookkeeping really?!

Bookkeeping Basics

“Bookkeeping” is the act of recording financial transactions. Seems simple, right?

Well, wait a second, while we’re here… let’s break down the word “transactions” too, so we have the most basic building blocks of bookkeeping!

What is a Financial Transaction?

There are two general types of transactions you need to record for your bookkeeping, your expenses and your income. At the most basic level, you are recording the money that goes out of your business (an expense) and the money that comes into your business (your income).

Expense Basics

We need to record the money that goes out of our businesses so we can know what our working budget is. As a small business owner, you not only need to know how much money you’re spending, you need to know if you have money to spend!

Here are some very common transactions you will want to record:

• Expenses: Your rent, electric bill, utilities you pay to the city or county, alarm, copier bill, telephone and internet!

• Vendors: The people you buy from! Just like you provide something for your customers, you’re someone else’s customer too. You will want to keep records of who you pay and for what!

• Wages: You may have employees to pay. If so, you’ll have to calculate payroll taxes, withholdings, and keep really good records. 

Keeping track of your expenses up front will mean that when tax season comes, you already have the information you need to enter on your forms (or give to your accountant!). Less work means less stress, less taxes, and more savings!

Income Basics

We also need to record the money coming into our business so we can understand what is profitable. So we can in turn know how much money we can spend on our business expenses. Some examples of income transactions you might record depending on what your small business does:

• Service Income Do you provide a fee-based service? You’ll want to record each service payment you receive.

• Billable Income: Hourly rates, daily rates, consulting fees, and income that is based on time spent working with a client or on a project.

• Bank Deposits and Direct Payments: Your clients may pay you through a bank connection or you might receive a one time or recurring regular payment from a client or customer. You need to record anything that goes directly through your bank in your books so you don’t miss any income. These payments may be entirely automated, which means you won’t have direct customer activity associated with the payment.  But even though it’s automatic, don’t forget that it still needs to be part of your books!

Keeping track of your income not only prepares you for tax time, but it also allows you to make informed management decisions on how best to run your business.  Not to mention keep a budget and inform all of your expense-related decisions that we mentioned above!

Bookkeeping Basics: Accounts

An account is simply a record of the financial transactions that we just discussed. Accounts can be assets, liabilities, equity, income, or expenses.  We just need to know the foundation to keep solid records. Some examples of accounts that may apply to small business bookkeeping are:

• Auto Expenses
• Advertising
• Contract Labor
• Legal & Professional Fees
• Utilities
• Wages

These are are just a few common accounts that small businesses may use to categorize different transactions for a full list of our sample chart of accounts.... Go HERE!

Bookkeeping Basics: Double-Entry

What is Double-Entry Bookkeeping?

To state it simply: double-entry bookkeeping keeps track of the money source and the account the money goes to. For each credit to one account, there will be an equal and opposite debit to another account.

courtesy of www.allenandallen.com

To compare, single-entry bookkeeping simply records a list of transactions, without using different assets or liabilities (these would be different accounts, or sources for income and expenses)

Why small businesses should use double-entry bookkeeping

Why should you switch, or start with double-entry bookkeeping instead of the easier single-entry bookkeeping? Does it really matter that much?

I say, very dramatically, YES! It will make you a smarter business owner. Making better decisions about your business will make you a happier business owner too, and that’s something that we really want for you!

Double-entry bookkeeping helps you catch errors that you would never notice if you were recording all of your transactions in one big account; and the more transactions you have to record, the more opportunities you have to make mistakes. Double-entry accounting will save you from worrying about this, because even if you do make a mistake (which for the record, happens to all of us!), you’ll catch your mistake when the number you wrote as a debit in the first account doesn’t match the credit that you wrote in the second account.

Double-entry bookkeeping makes your records accountable, or in other words, explainable. Using these records, you can build a deeper understanding of how your business works. You can form reports to compare profitability of different income sources. When you, the business owner, can clearly see where you make your money and where you spend it, you can make informed decisions about all sorts of things. A few small but important examples include: how much you can afford to pay yourself (and your employees), unnecessary or inflated expenses, and even how to budget your time better!

Is Double-entry bookkeeping really basic bookkeeping?

You bet it is! While it may seem daunting at first, there are tons of available free tools, software programs, and resources to help you learn the best practices for small business bookkeeping. Many software programs provide the ability to facilitate double-entry bookkeeping without you having to enter twice the number of records. In fact, a lot of the double-entry in bookkeeping software is “behind the scenes” and is part of how the program works!  Keeping it user-friendly and intuitive so you can get back to doing what you do best sooner!

We hope to see you soon!

If you’re ready to learn more about bookkeeping and  accounting, keep an eye out for our next blog in this series where we will breakdown Bookkeeping versus Accounting.  And give you our top bookkeeping software recommendations on the market!

Disclaimer This article presents general information and is not intended to be tax or legal advice.  Refer to IRS publications and discuss possible tax deductions with your tax preparer.