A Beginner's Guide to Bookkeeping Basics
Are you a business owner struggling with bookkeeping basics? Maybe, you are a budding entrepreneur looking for tips to set up a booking system for your business?
If you find yourself nodding in 'yes' to either of the above statements, you are in the right place. This article will help you sail through the bookkeeping basics. The best part is that you will not require any prior knowledge or an accounting degree to get started.
Let us dive right in and find out what bookkeeping is and how it can help your business.
Bookkeeping basics for fusiness
In order to run a small to medium-sized business, you must learn bookkeeping basics to create a system suitable for your needs. Do not panic, though, as you do not need to take a crash course in accounting and finance to master this technique.
Bookkeeping is a simple process that involves recording and organizing the financial transactions of your business. Learning bookkeeping basics and applying them will revolutionize your business.
Types of bookkeeping accounts for small businesses
Here are ten types of bookkeeping accounts for a small-to-medium sized business.
Receivable is the money owed to you by the customer. This happens when you sell products and services but do not collect money straight away. In order to stay up to date on who owes you what, you must track "Accounts Receivable" so you can send accurate invoices or bills to customers on time.
This account deals with the money that your business owes to other parties, vendors, etc. Accounts payable account gives you a clear and simplified view of when your payments are due and helps you avoid duplicate payments.
As the name suggests, all the financial transactions of your business go through a cash account. You can further maintain two separate bookkeeping records for cash that are
- Cash receipts
- Cash disbursements
Any record of unsold products goes into your inventory account. Think of it 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.
Loans payable account
Has your business borrowed money to purchase assets such as property, furniture, vehicles, and equipment? In that case, a loan payable account will track payment detail and monthly due dates for loans.
Owners equity account
This account tracks the amount you will put in as a business owner. This is also known as net assets and reflects the amount of the business owner's money after subtracting any liabilities from the assets. Liabilities are essentially claims in which you owe lenders and other vendors.
Payroll expenses account
Bookkeeping can help maintain your payroll expenses in an organized fashion. This will allow you to stay up to date on your taxation compliances, ensuring you do not miss a due date. It will also ensure that you meet all taxation standards.
This account tracks the 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). You just subtract the amount you paid to buy the raw material from the sales, and the remainder is your profit.
Retained earnings account
This account tracks all your company's profits and investments not yet paid back to the business owner. Retained earnings are the amount of money that appears as the running total of money retained since your business started.
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.
All these accounts may sound too much to handle in the beginning. However, once you get the hang of the bookkeeping basics, you will be able to effectively use the data from these accounts for informed business decisions.
7 must-know bookkeeping skills for small businesses
Whether you are an established business or a new small business owner considering to set up a bookkeeping system, here are seven bookkeeping basics you must follow.
1. Setting up all business accounts
Now that you know about the ten types of basic bookkeeping accounts, they will help you track all financial aspects of your organization. You can still go old school and do this on physical books, but most businesses use computer booking software to record their accounts. This is the virtual record and is also known as "General Ledger."
You can use the following software solutions to set up all your business accounts.
- Desktop bookkeeping software
- Cloud-based bookkeeping software
- Spreadsheet software such as MS Excel
You can even pay a bookkeeper, accountant, or third-party Company to manage bookkeeping accounts on your behalf.
2. Adopting a bookkeeping method
So you are about to set up your in-house bookkeeping system. For this reason, you will need to decide whether you will use a single-entry or double-entry bookkeeping system. What is the difference? Well, let us try to explain in the simplest way possible.
- Single-entry bookkeeping system: In this system, you enter each financial transaction once only. For example, you sold a product, received a payment, and entered that payment details into the asset column. This method is ideal if you have a simple business, such as working from home without any stocks and equipment.
- Double-entry bookkeeping system: This is the more comprehensive record maintaining method that records every transaction. Moreover, you may have to enter a single transaction into several accounts. For example, selling a product will deduct the transaction from the inventory section, but you will have to enter the incoming payment into accounts receivable and assets accounts.
3. How to record financial transactions
By this stage, you have set up all financial accounts and chosen a bookkeeping system. You are all set to start recording the financial transactions of your business. However, it is critical to know that you must record each and every debit and credit financial transaction, no matter how small it might be. A lot of small business owners opt to operate on a cash-basis because records are easier to maintain.
If you miss out on any payments, it will create discrepancies when you try to balance your accounts. Moreover, you will have to determine which accounts will record debit and credit.
For example, you bought new software for $1,000 in cash. This transaction will affect two bookkeeping accounts, which are
- Cash account: Debit from cash because the cash value decreased due to payment
- Asset account: Dedit because you just bought a new asset or equipment.
You have to ensure that all your financial transactions go into the books. Do not miss or leave out any transaction, even if it is worth a single cent. Bookkeeping is all about the process of recording and showing a balance between your incoming as well as outgoing money. Missing out on any payments, business transactions or financial information will cause issues when you try to reconcile your books.
4. Reconciling your accounts
Balancing your accounts is the most crucial and final step of bookkeeping basics. In this process, you tally up all accounts to ensure that no money or assets are missing. This means that the total amount must match, i.e., the outgoing amount must equal the incoming assets or profits.
When this happens, you call it "books are balanced." Typically, you can do it on a quarterly or annual basis.
Suppose you have been recording entries to each account as credit and debits. At the time of balancing your books, you will send these entries to each account in the general ledger and adjust your account balances accordingly.
For example, in the last quarter, your cash account had $10,000 in credit and $5,000 in debit. You will adjust the balance in your cash account with a difference of $5,000.
Once you have balanced the books, your equity should match the liabilities. If it does not match, you will have to go through your bookkeeping record to find the error or missing entries. Once you have balanced the books, you will be ready to prepare your business's financial report.
5. Preparing your financial reports
Now that you have reconciled all your accounts and transactions, you are ready to close the month and print out your financial reports. Using a manual ledger can be a time-consuming exercise; therefore, you must use bookkeeping software to automate the completion of financial reporting.
Financial reporting is a critical part of any business's bookkeeping process. These reports provide you with a transparent and accurate view of your business' current standing. Moreover, you get to gauge the financial health of the Company and share it with the stakeholders and accountant.
Your financial reports mainly consist of three essential elements.
- Balance sheet: This sheet shows your Company's equity, assets, and liabilities at the end of the closing date.
- Income statement: This statement shows the net income of your Company over a certain period of time.
- Cash-flow statement: Your cash-flow Statement will show all incoming and outgoing transactions over a certain period of time.
Bookkeeping software will do the accounting process for you. They allow you to automatically prepare these financial reports in real-time with a click of a button. Moreover, having access to these financial reports will help you as a business owner. You will be able to make an informed decision based on the current financial health of your small business.
6. Doing it with consistency
Bookkeeping is not something you can pick and do when it suits you. One of the most important bookkeeping basics is to stay consistent and stick to the schedule you have established for your business. You must record all financial transactions, ideally once a week. These include all incoming invoices, outgoing bill payments, purchases, and sales.
Moreover, you must make it your top priority to balance your books/accounts on a regular basis. You can either do it every month or at the end of every quarter. Having a dedicated person to do this for you can help if you believe you might procrastinate and then forget to do it completely.
7. Storing your records
You must always ensure secure storage of your bookkeeping records. Following the bookkeeping basics make the process easier and allows you to stay compliant with the industry standards and regulatory laws.
Moreover, it will also save all this sensitive data from falling into the wrong hands. Apart from that, securely stored and well-maintained bookkeeping files will help you track previous invoices without burying yourself in a plethora of unorganized mess.
If you are a business that is struggling with the idea of where to begin, do not do it alone. Although you do not have to be an accountant to master bookkeeping basics, it can still be challenging, depending on the complexity of your business.
Therefore, you can always seek assistance from experts offering bookkeeping services or a virtual accounting system to help you record transactions. For that, you can hire an accountant or CPA, a virtual bookkeeper, or install accounting software to keep financial records. If you are a simple business, you can do this on the go via several smartphone apps too like Keeper Tax for easy tax returns.
These apps allow you to record income statement transactions, scan your credit card or bank statements, outgoing expenses, and anything in between for record-keeping. You will be surprised to learn how easy it is to use some of these apps and software. That said, the above-mentioned bookkeeping basics will be enough to master the bookkeeping methods, helping you record your financial transactions with peace of mind.
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