How to Do Bookkeeping: Basics Every Small Business Owner Needs to Know

Whether it’s Shopify, BigCommerce, WooCommerce, or Adobe Commerce, you must keep track of income, outgoings, and any relevant taxes. A digital app lets you keep your incomings, outgoings and everything in between properly organised which makes it simpler to manage your financial records. Late-paying customers is never a good thing and it can have a negative impact on your cash flow. Make sure you pay attention to when your receivables are due and don’t waste time when they’re overdue – act right away. See if you can work out a plan so you can get the money you’re owed as soon as possible but the longer you leave it, the longer it can damage your cash flow.

• Otherwise, your account balances won’t match—which means you don’t have an accurate understanding of where your business actually stands financially.
• Receipt Cat – Receipt Cat is a receipt scanner app and expense tracker that helps you keep track of your business receipts and manage your small business expenses.
• Many beginners often mix up bookkeeping with accounting, but these two fields couldn’t be more different.
• A debit entry can increase the balance of some accounts, while a credit entry can increase the balance of other accounts.

4) Have accurate cash flow management – Managing and reacting to whatever your cash situation is will be easier when your business finances are separated from personal ones. Getting loans or credit will be easier when you have clear financial records. Look at the item in question and determine what account it belongs to. For example, when money comes from a sale, it will credit the sales revenue account. Making sure transactions are properly assigned to accounts gives you the best view of your business and helps you extract the most helpful reports from your bookkeeping software.

Top 3 Bookkeeping Best Practices

Analyzing them can reveal your startup’s strengths, weaknesses, and growth opportunities. Before you do anything else, take the time to establish separate accounts for your business. Most startups opt for one dedicated bank account and one business credit card to start. Now that you know the bookkeeping basics to run your business properly, you can enjoy having fewer headaches when tax season rolls around.

All these accounts may sound too much to handle in the beginning. However, once you get the hang of the bookkeeping basics, you’ll be able to effectively use the data from these accounts to make informed business decisions. Has your business borrowed money to purchase assets like property, furniture, vehicles, and equipment?

Equity is the investment that a business owner or any other investor has in the firm. Further, the equity accounts include all the claims the owner has against the company. The loans payable account is an important aspect of bookkeeping, especially if your small business has taken out loans to finance equipment, vehicles, furniture, or any other expenses. This account tracks the amount you owe and the payments that are due. In summary, AP represents the money your business owes to vendors, while AR represents the money that is due to your business from customers.

How Your Business Can Grow Through Word-of-Mouth Referrals

Costs, also known as the cost of goods sold, is all the money a business spends to buy or manufacture the goods or services it sells to its customers. The Purchases account on the chart of accounts tracks goods purchased. Companies also have to set up their computerized accounting systems when they set up bookkeeping for their businesses.

A debit entry can increase the balance of some accounts, while a credit entry can increase the balance of other accounts. It will be helpful for you to understand this principle before posting any transactions. At the same time, businesses need to make sure they pay their own bills on time to avoid late fees and maintain a solid reputation. These expenses that haven’t been paid yet are categorized as accounts payable.

At the end of the appropriate time period, the accountant takes over and analyzes, reviews, interprets and reports financial information for the business firm. The accountant also prepares year-end financial statements and the proper accounts for the firm. The year-end reports prepared by the accountant have to adhere to the standards established by the Financial Accounting Standards Board (FASB). These rules are called Generally Accepted Accounting Principles (GAAP). Typically, it only makes sense to hire an in-house accountant after your startup has expanded significantly.

How do I reconcile payments in ecommerce bookkeeping?

As the name suggests, this account tracks all the revenue your business makes from sales. Recording and maintaining an accurate sales account will help you understand where your business is currently standing. This account tracks the Bookkeeping 101 purchase of any raw materials and finished products for the business. This account is a crucial component when it comes to calculating the cost of goods sold (COGS) — indispensable if you run an online or brick-and-mortar store.

You didn’t start your ecommerce business so you could juggle accounts and balance books. You started it to sell products, serve customers, and make money while you’re at it. But ecommerce bookkeeping is a necessary and important part of keeping your accounts in good shape.

Stay up-to-date on winery accounting.

Meanwhile, the accrual method recognizes revenues when you earn them and expenses when you incur them. It requires that you track accounts receivable and accounts payable, which often means you have to do more bookkeeping work by hand. In addition, you don’t have to pay to get access to the software you need. Lendio offers free accounting software for small businesses that can automatically track your transactions. That said, the above-mentioned bookkeeping basics will be enough to get you started, helping you record your business’s transactions with peace of mind.

Then a loan payable account will track payment details and monthly due dates for your business loans. Think of this as money saved in the form of assets or products; hence you must keep a careful record to track them. It will help you physically run a periodic stock check to confirm that the inventory products match the record on the books. This happens when you sell products and services, but don’t collect money straight away.

Liabilities

Depending on the type of accounting system used by the business, each financial transaction is recorded based on supporting documentation. That documentation may be a receipt, an invoice, a purchase order, or some similar type of financial record showing that the transaction took place. Bookkeeping records financial transactions, whereas accounting analyzes the financial health of a business based on those records. Think of bookkeeping as an accountability buddy — it tracks your daily income and expenses and holds you accountable at managing your money. That way, you’ll always know what’s happening in your business and make the best financial decisions.

• For example, you may find yourself in a dispute with a vendor or under audit by the government.
• Generally speaking, bookkeepers help collect and organize data and may have certain certifications to do so for your business.
• Your chart of accounts is the backbone of your business and is a necessity in order to properly record transactions.

It’s the easiest to follow, and your bookkeeping software should be able to handle it. Many startup founders and small business owners do their own bookkeeping. It’s relatively simple, and software like the Lendio Bookkeeping Solution can automate a significant portion of the work. While it’s not fun to hold onto every little receipt and track all transactions, you will be making things easier for your business. Set solid bookkeeping habits so that you will make the whole bookkeeping process much less painful. 2) Accounting Software – There are many options available today when it comes to accounting software.

Fast forward just six months, we had restructured the agency across the world. We’d broken into new markets and were concentrating on only larger clients. My stress levels were at about 10% of what they had been, and money was flooding the bank account. Instead, I sat down and examined the income statement in detail and discovered I could fire most of our clients, downsize the staff, and make a lot more money. When I put out a request on HARO what the most important financial statement for freelancers and agencies was, the income statement (a.k.a. profit and loss statement) came out on top.

Her work has appeared on Business.com, Business News Daily, FitSmallBusiness.com, CentsibleMoney.com, and Kin Insurance. Even if you aren’t planning on growing any time soon, you need to have a sense of how much money is coming in versus what is going out. On top of that, you need the data used in bookkeeping to file your taxes accurately. Consider using one of the best bookkeeping services to make managing your books a breeze. When manually doing the bookkeeping, debits are found on the left side of the ledger, and credits are found on the right side.