Bookkeeping is the foundation of every successful small business. It helps you track income, manage expenses, and stay compliant with tax laws. With services like Remitly, cross-border financial management becomes easier, so you can focus more on growing your business. This beginner-friendly guide breaks down the basics of bookkeeping, best practices, and tools to help you stay organized with your finances.
Understanding bookkeeping for businesses
Let’s take a look at the fundamental concepts of bookkeeping and why it’s vital for your business’s success.
What is bookkeeping and why does it matter?
Bookkeeping involves recording and organizing your business’s financial transactions, such as sales, purchases, and payroll. It provides a clear picture of your financial health, helps you prepare for tax season, and supports better decision-making. Accurate records can also protect your business from legal issues and make audits much easier.
Key bookkeeping terms every business owner should know
- Assets: Resources owned by your business, such as equipment, inventory, and cash
- Liabilities: Debts or obligations like loans and unpaid invoices
- Equity: The owner’s stake after subtracting liabilities from assets
- Income statement: A summary of revenue and expenses over time that shows profit or loss
- Balance sheet: A snapshot of assets, liabilities, and equity at a specific time
- Accounts payable: Money your business owes to suppliers
- Accounts receivable: Money owed to your business by customers
- Cash flow: How money moves in and out of your business
- General ledger: A master document tracking all your business’s financial transactions
Bookkeeping methods for small businesses
Choosing the right bookkeeping method depends on your business’s size, complexity, and future goals. These are the two most common approaches.
Single-entry vs. double-entry bookkeeping
Single-entry systems record each transaction once, like a checkbook. This method suits microbusinesses with straightforward finances, such as freelance consultants. However, it lacks error-checking mechanisms and detailed financial insights.
Double-entry systems log every transaction twice (as a debit and credit) to ensure accuracy. For example, a $500 sale increases revenue (credit) and cash (debit). While more complex, this method is ideal for businesses with inventory, loans, employees, or multiple revenue streams.
Below is a quick comparison:
| Aspect | Single-entry | Double-entry |
| Complexity | Low | Moderate to high |
| Error detection | Limited | Robust |
| Best for | Sole proprietors | Businesses with employees/inventory |
How to choose the right method for your business
Think about your business size, complexity, and growth goals. For example, a freelance graphic designer might prefer single-entry for simplicity, while a small retail store with inventory and staff would benefit from the accuracy and detail of a double-entry system.
How bookkeeping supports your business finances
Keeping accurate records helps you:
- Identify trends: Track seasonal changes in sales or rising supply costs
- Secure funding: Lenders require organized financial statements
- Prepare for taxes: Deduct eligible expenses and reduce audit risk
Essential bookkeeping practices
To maintain accurate and reliable financial records, it’s essential to establish and follow sound bookkeeping practices.
Setting up a bookkeeping framework
A solid framework helps you manage your records efficiently from day one.
- Choose an accounting method: Decide whether you’ll use the cash method (recording income and expenses when money changes hands) or the accrual method (recording income earned and expenses when incurred, regardless of payment timing)
- Set up a chart of accounts: Create a list of the accounts you’ll use to record transactions, then organize these accounts into categories like assets, liabilities, equity, revenue, and expenses
- Open business bank accounts: Keep your business and personal finances separate by opening a dedicated business account to simplify tracking and reduce tax complications
- Implement a transaction recording system: Options include a manual spreadsheet or bookkeeping software like QuickBooks, Xero, or Wave
- Establish a filing system: Organize both physical and digital records, such as invoices, receipts, and bank statements, for quick access and audit readiness
- Set a bookkeeping schedule: Decide how often you’ll record transactions, reconcile accounts, and prepare financial reports
Tracking business transactions accurately
Proper transaction tracking prevents costly errors and ensures your financial data is reliable.
- Record everything: Log every financial transaction, even small ones, promptly and accurately
- Use original documents: Retain invoices, receipts, bank statements, and contracts to support your records
- Categorize correctly: Match each transaction with the appropriate account in your chart
- Double-check entries: Review regularly to identify and correct any errors
- Reconcile bank statements: Compare your bank statements with your internal records to ensure accuracy and identify any discrepancies
Organizing and managing financial records
Well-managed records make tax time and audits much easier.
- Create a filing system: Organize your financial documents by type and date, both physically and digitally
- Label consistently: Use clear and consistent naming to simplify searches
- Store documents securely: Protect sensitive financial documents from damage, loss, or unauthorized access
- Back up digital files: Regularly back up your digital financial records to the cloud or external drives to prevent data loss
- Know retention rules: Keep financial records for the period required by law—usually 5 to 7 years in the US
Preparing financial reports and statements
Preparing financial reports and statements provides insights into your business’s performance and financial position. Here are the key reports:
- Balance sheet: This shows your business’s assets, liabilities, and equity at a specific point in time. It provides a snapshot of your financial health.
- Income statement: Also known as a profit and loss (P&L) statement, this report shows your business’s revenue, expenses, and profit or loss over a specific period
- Cash flow statement: This statement tracks the movement of cash into and out of your business, categorized into operating, investing, and financing activities
Tools and resources for efficient bookkeeping
To make bookkeeping smoother and more efficient, it’s helpful to leverage the right tools and resources that match your business’s needs.
Overview of bookkeeping software options
- Spreadsheets: Programs like Microsoft Excel or Google Sheets can be used for basic bookkeeping, especially for very small businesses. However, they can be prone to human error and may not be suitable for complex accounting.
- Desktop software: Software like QuickBooks Desktop or Sage 50 can be installed on your computer and offer more advanced features than spreadsheets
- Cloud-based software: Cloud-based software like QuickBooks Online, Xero, or FreshBooks is accessible from anywhere with an internet connection and offers features like automatic bank feeds and collaboration tools
Free vs. paid accounting solutions
When choosing the right bookkeeping software for you, you’ll find both free and paid options. Free tools, such as Google Sheets budgeting templates or basic versions of cloud-based platforms, may be suitable for sole traders or businesses just getting started. However, they often have limited features and may not scale as your business grows.
Paid solutions offer a more comprehensive set of features, from automated transaction imports to advanced reporting and customer support. Although they involve a cost, they can save you time and reduce errors in the long run.
Streamlining finances with cloud-based tools
Cloud-based bookkeeping tools offer the following advantages:
- Accessibility: View and access your financial data from anywhere with an internet connection
- Automation: Automate tasks like bank reconciliation, invoicing, and reporting
- Collaboration: Allow multiple users to access and work on the same data simultaneously
- Real-time data: Get up-to-date insights to guide better financial decisions
- Integration: Integrate with other business tools like payroll or CRM software
- Security: Benefit from strong encryption and backup protocols to protect your financial data
Common bookkeeping challenges and solutions
Even with solid systems and the right tools in place, bookkeeping can still present some hurdles. Below are some common issues and practical ways to address them.
Balancing time-consuming tasks with business growth
Bookkeeping can be time-consuming, especially as your business grows. Here’s how to efficiently maintain bookkeeping tasks with other business priorities:
- Automate tasks: Use bookkeeping software to automate repetitive tasks like invoicing
- Outsource bookkeeping: Consider hiring a bookkeeper or using a bookkeeping service to handle your financial records
- Prioritize tasks: Focus on essential bookkeeping tasks, such as tracking cash flow and keeping accounts up to date
- Set a schedule: Allocate specific times each week or month for bookkeeping tasks
- Use technology: Leverage mobile apps and cloud tools to streamline processes and reduce errors
Understanding tax requirements and preparation
- Know your tax obligations: Familiarize yourself with the tax rules that apply to your business type and location
- Maintain accurate records: Keep detailed and organized records of all income and expenses
- File taxes on time: Missing deadlines can lead to penalties, so set reminders and plan ahead
- Seek professional advice: A tax advisor can offer personalized guidance and help you stay compliant
- Use tax software: Tax software can help with tax preparation and filing
What are some common bookkeeping mistakes to avoid?
- Mixing personal and business finances
- Not recording all transactions
- Failing to reconcile bank statements
- Not backing up financial data
- Misclassifying transactions
- Ignoring accounts receivable and payable
- Not seeking professional help when needed
When to hire a bookkeeper or use bookkeeping services
To know when to hire a bookkeeper or use bookkeeping services, consider these factors:
- Business size and complexity: As your business grows or your transactions become more complex, professional help can ensure accuracy
- Time constraints: If bookkeeping tasks are taking up too much of your time, outsourcing may be a practical solution
- Lack of expertise: If you’re not confident in your bookkeeping knowledge and accounting principles, a professional can provide valuable assistance
- Cost-benefit analysis: Weigh up the cost of hiring a bookkeeper or using a service against the time and potential errors saved
FAQs
What are the basic bookkeeping practices for a small business?
Basic bookkeeping for small businesses includes setting up a chart of accounts, recording all transactions accurately and promptly, reconciling bank statements, and preparing financial statements like balance sheets and income statements. Keeping your financial records organized is also essential to stay on top of your finances.
How often should I reconcile my bank statements?
Bank statements should be reconciled at least once a month. This process involves comparing your internal records with your bank statements to ensure accuracy and identify any discrepancies. Reconciling more frequently, such as weekly, can help you catch errors or suspicious activity sooner.
What is the difference between bookkeeping and accounting?
Bookkeeping is focused on recording financial transactions, while accounting is the broader process of analyzing, interpreting, and reporting financial information. Bookkeepers handle tasks like invoicing and expense tracking, while accountants use that data to generate financial reports and offer strategic advice.
What are the key financial statements for a small business?
The main financial statements for small businesses are the balance sheet, income statement (or profit and loss statement), and cash flow statement. The balance sheet shows your business’s assets, liabilities, and equity at a specific point in time. The income statement shows your revenue, expenses, and profit or loss over a certain period. The cash flow statement tracks how money flows in and out of your business.
What are some bookkeeping software options for small businesses?
Small businesses can choose from a range of bookkeeping tools, from simple spreadsheets to more advanced accounting software. Popular options include QuickBooks Online, Xero, FreshBooks, and Sage. The best choice depends on your business’s size, complexity, and budget.