Just getting started as a freelancer or small business owner? Your daydreams of striking out on your own might turn nightmarish when the realities of managing your own finances sink in.
The process of recording the financial activities of a business is called “bookkeeping.” Doing it right can help you keep tabs on your business's financial health — not to mention saving you a lot of money come tax time. But depending on your situation, proper bookkeeping can also come with a steep learning curve.
Luckily, there are professionals who can handle it for you.
This article covers what exactly a bookkeeper does, how bookkeepers are different from accountants, and why you might want to consider hiring one.
What is a bookkeeper?
A bookkeeper is someone who tracks and records the money going in and out of a business on a daily basis. In other words, they record a business’s daily transactions.
In general, transactions flow into five “accounts.” These include:
- Assets: Anything the business owns, like inventory or equipment
- Liabilities: Anything the business owes, like loan payments
- Revenue: Income the business generates, whether from sales or investments
- Expenses: Purchases or costs required to run the business
- Equity: Money put in or taken out of the business by an owner
Here are some examples to put these accounts into perspective. Let’s say you’re a small business owner who runs a local yoga studio. These are the kinds of transactions your bookkeeper might keep tabs on:
- Assets: The yoga mats you provide
- Liabilities: The loan you took out to help cover the costs of renting a studio
- Revenue: The money you make from people buying memberships to your studio
- Expenses: The bookkeeper you hire to help with your finances
- Equity: The savings you initially invested into your company to get it off the ground
The accounts are recorded in a ledger or “book.” Hence the name “bookkeeping”!
Why are ledgers important for a business?
Ledgers are important because they can be used to create documents for your business, like income and cash flow statements.
You can also turn to your ledger if the IRS ever comes knocking.
Finally, updated ledgers can help you save money on your taxes by thoroughly tracking all the business expenses you can write off.
The history of bookkeeping
If you’re new to self-employment, you might be asking yourself, “Is bookkeeping really all that important?” We’re here to tell you: Yes, it is. And it’s been that way for a while.
Financial recordkeeping goes way back as an integral part of running a business. (And as a self-employed person, whether you’re taking on shifts with DoorDash or opening a small bakery, you are a business owner!)
The Venetians of the 15th century are considered the fathers of accounting. In 1494, mathematician Luca Pacioli published the world’s first bookkeeping treatise detailing the use of bookkeeping by Venetian merchants.
This became a point of reference for bookkeepers over the next several hundred years. We’re still following its basic blueprint today.
What is the difference between a bookkeeper and an accountant?
Bookkeepers and accountants are like peanut butter and jam. They’re both condiments, and they work well together, but they’re not the same.
In a nutshell: Your bookkeeper prepares the groundwork for your accountant to analyze and prepare your business’s financial information.
Here’s more on how the two roles differ:
The basics of bookkeeping:
- Noting down and maintains records of your small business's daily financial transactions
- Offering a clear, objective look at your financial standing
- Doesn’t require specialized training (though they might have an associate’s, a bachelor's degree, or even a certification)
The basics of accounting:
- Providing insight into your financial standings based on information recorded by the bookkeeper
- Helping you see the bigger picture and potential long-term outlook of your finances.
- Goes through training and takes standardized exams to qualify as a certified public accountant (CPA) or enrolled agent (EA)
That said, depending on the type of bookkeeper or accountant you hire, and the situation you’re using them for, they may offer overlapping services.
On that note, let’s take a closer look at the day-to-day responsibilities of a bookkeeper.
What does a bookkeeper do?
The daily responsibilities of a bookkeeper vary based on the type of professional you hire. (More on that shortly!) They also depend on what level of services you’re looking for.
Let’s start with the core tasks a bookkeeper might spend their day on.
Basic bookkeeping responsibilities
These tasks are a bookkeeper’s bread and butter. They’re the kinds of things that a sole proprietor or small- to medium-sized business might hire a bookkeeper for.
Balancing the books
This involves recording all transactions to find the “balance,” or the difference between a business’s total debits and total credits.
Financial report preparation
A bookkeeper prepares weekly, monthly, and quarterly financial reports.
These help you track all your incoming and outgoing transactions in chronological order, giving you a good a picture of your business’s financial health.
The process of verifying a business’s financial report with its bank account activity is called “reconciliation.” It’s an important step in making sure all your records are correct and up-to-date.
If there’s a discrepancy between the books and your bank, your bookkeeper will help you get to the bottom of it.
Cash flow assistance
A cash flow statement provides an overview of all your cash transactions. This can help forecast future cash flow conditions so you can plan for, say, a dry month.
Managing accounts receivable and payable
This involves creating outgoing invoices you might need to send a client you’ve done work for. In may also mean paying incoming invoices from anyone you’ve hired.
Payroll includes processing the paychecks for employees. It might also include managing employee benefits, insurance, and tax withholding.
Advanced bookkeeping responsibilities
A business owner with more complex financial systems might enlist a bookkeeper for more advanced items, such as:
Tax return assistance
Unless they’re also a tax preparer, a bookkeeper can’t file your taxes for you. They can, however, help prepare your self-employed tax return. (They just won’t put their name on it when you submit it.)
A bookkeeper can also consult with an accountant on your behalf to ensure you’re not missing any tax deadlines. That’s especially helpful if you’re responsible for quarterly taxes.
Dealing with the IRS
If your business is ever audited by the IRS — or if it just has a question for you — your bookkeeper can act as your liaison.
Producing management accounts
Management accounts are meant to help owners or managers of a business make decisions using financial data.
They’re similar to regular financial reports, except that they zero in on a particular aspect of your business. For example, if you run an online store, you can ask a bookkeeper to produce management accounts on your bestselling products.
Types of bookkeeping
Not only do the daily responsibilities of bookkeepers vary, but there are also different types of bookkeeping services you can seek out.
The right one for you depends on your needs and budget. You can learn more about how much it costs to hire a bookkeeper here, with a rundown of how much you can expect to pay for the different types.
In the meantime, though, here’s a quick summary to help you figure out which kind of bookkeeping is right for you, from the lowest maintenance to the most resource-intensive.
Each option has been rated out of four books. One book means it’s best suited to businesses with simple finances. Four books, on the other hand, means it’s recommended for someone dealing with more financial complexity.
Are you a numbers-savvy freelancer with a knack for organization and relatively simple finances? Then you might decide to handle your bookkeeping yourself.
If you go this route, make sure you’re keeping good track of what it costs you to do business, using something like a spreadsheet for your expenses. That way, you can take advantage of all your write-offs come tax time.
A bookkeeping app
Sometimes, your situation might not require a dedicated bookkeeper — but you could still use a hand with recordkeeping and expense tracking. In that case, you might want to consider a bookkeeping app like Keeper.
The Keeper app uses software to automatically scan your bank records for business expenses. This will make sure your financial records are up-to-date — and you don’t have to worry about storing paper receipts!
Even better: The app will compile a list of all the tax write-offs you can claim when you file, which can help you save hundreds to thousands of dollars.
While the Keeper app allows you to handle your finances on your own, we also have a team of real-life tax assistants working on bookkeeping behind the app. They’re here to answer your questions and make sure you feel guided the whole way.
An outsourced bookkeeper is a third-party professional who’s been hired to handle your finances. They might be part of an agency or an independent freelancer.
This option is often used by small to medium-sized businesses that only need a couple of hours’ worth of bookkeeping every month.
If you hire a dedicated bookkeeper as an employee of your business, they’re considered “in-house.”
In-house bookkeepers are typically employed by larger companies, with more complex financial systems that require a robust suite of full-time services.
Why should you hire a bookkeeper?
As a business owner, you probably like to spend your time growing your business or connecting with customers — not compiling financial statements.
Hiring a professional bookkeeper can help save you valuable time and money. That’s a huge boon for people just venturing into self-employment. (If wrangling financial data really isn’t your jam, you might even call hiring one a business owner’s form of self-care.)
At the end of the day, a bookkeeper will ensure your company's financial records are in good hands. You’ll also get peace of mind when it comes to compliance — and a whole bunch of records you can show the IRS.
Have any lingering questions about what a bookkeeper does or whether you need one? Don’t hesitate to reach out to our email team. You can also download the Keeper app and start chatting with a bookkeeper right away.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email email@example.com with your questions.