Having a small business may sound like it’s less work, but often, you have to accomplish the same amount with fewer resources. Bookkeeping for a small business can be a large responsibility with a lot of moving parts.
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Bookkeeping is the process of recording an accurate record of your business’ financial activity. This can involve all of a business’ income and expense data as well as their petty cash records, and even managing the employee payroll where relevant.
When it comes to bookkeeping, your job is to make sure you properly record all of the money flowing in and out of your business. There are a few decisions you’ll need to make upfront: single or double-entry system, and cash-based or accrual-based accounting?
Single-Entry vs. Double-Entry System
A single-entry system means only recording transactions once. Although this method may seem simple, it’s also more prone to errors. It can be ok with simple small businesses. However, if growth is in your business plan, it’s best to start out with double-entry accounting.
Double-entry accounting records both debits and credits to maintain a total balance between both the money in and out of a company. This method strives to maintain the accounting equation: Assets = Liabilities + Equity. This system also makes it easier for your accountant to spot errors.
Cash-Based vs. Accrual-Based Accounting
Cash-based methods record only the money as it’s paid out or in. This means just receipts rather than invoices, as invoices are money that will be paid in the future rather than money that has just exchanged hands.
Accrual-based accounting records everything, including invoices and bills where money has not yet been exchanged. This is a better system as it means having clear records tracking your business performance monthly. You’re also better able to see what accounts payables and receivables are due and when, if they’re recorded.
Tracking the Money
Bookkeeping can be simplified down to income, or accounts receivable, and expenses, or accounts payable. Put more simply, this is all the money you pay out and all the money you earn. It’s vital you keep records in a spreadsheet, ledger or digital software form, keep proof of payments, and reconcile your records monthly against your banking records.
Income aka Accounts Receivable
Your income streams are a record of the money the company has earned. The first thing you’ll need is an invoice template. This should include your contact info and a logo if possible, the payment terms (due date, who to make payments out to, suitable methods of payment), details about the services provided, hours worked, and the invoice number.
You need clear records for all accounts receivables. The ledger, spreadsheet, or software should record the customer or vendor name, the invoice date and number, the amount owed, the due date of payment, the date of payment received, and the amount paid. In this way, you can see if there’s an outstanding amount owed to follow up with vendors or customers.
Always keep proof of payment. This can include invoices, receipts, cancelled checks, and other forms of proof of payment.
Expenses aka Accounts Payable
When it comes to expenses, the information you need to record is slightly different from that of your income. Expense reporting requires the supplier’s name, what the bill is for, your account number, when the invoice was received, when it’s due, how much is owed, and the date you paid on.
As with income, you must keep proof of payment and any other documentation that could be important to your bookkeeping records. This could include the actual bill or invoice, receipt or proof of payment, bank statements, and credit card statements.
Other Bookkeeping Responsibilities
Bookkeeping is the recording of a company’s financial activity. This will involve petty cash or a float depending on your business type. When it comes to petty cash, you need to keep a clear record of any money used, what the money was used to buy, and how it was paid back into petty cash. It’s not enough to just replace the money with cash from your wallet and not record it. Keep receipts and a clear record.
Reconcile your records with your bank statements and credit card statements monthly. Check your accounts receivable and accounts payable reports against your monthly bank statements to ensure that everything matches up. The longer you leave this, the more confusing it becomes. There’s also a higher likelihood that you’ll find errors.
The more organized your bookkeeping methods, the more easily your accountant will be able to manage your end of year accounting. If you’re finding your bookkeeping to be too much, or you need help streamlining your process, get in touch today.