How to Start Bookkeeping for Small Business
Even if you own a small business, basic booking skills will be a plus to running the business effectively. This is because the practice of keeping your business’s day-to-day financial activities can go a long way to boost your performance when you know areas where to double your effort. By keeping a trail of expenditures business vendors gain the self-confidence to make the right decisions on the business. In a nutshell, bookkeeping gives a direction on what needs to be done next.
Bookkeeping is the process by which financial transactions are managed by keeping records and daily tracks of activities of a business. A bookkeeper is responsible for this role which is a significant aspect of an accounting system.
Small Businesses: How to start bookkeeping
There are basic steps to take if you own a small business and want to start your bookkeeping.
Step 1: Have a clear Knowledge of the different accounts involved
Bookkeeping is about accounts and figures. Bookkeeping has major account types that every small business owner should have good knowledge about. Accounts here are financial records and include the following:
- Liabilities: these are the debts the company owes. They include loans from banks, taxes owed, and other payable accounts.
- Assets: they are the monies and resources the business owns such as company vehicles, cash, machinery, and accounts receivable. They can be tangible or intangible assets.
- Equity: simply, it is asset minus liabilities. It is the result obtained when the companies assets are liquidated and debts owed are paid off
- Expenditure: these are the monies that are available in the business to pay for services and products. It takes care of the companies spending records.
- Revenue: this is the money the business earns or generates, most of the time via sales.
- General ledger: the general ledger account is used for storing, sorting, and for summarizing all transactions.
- Payroll: for small businesses with employees, besides making payment processes easy to manage, payroll gives information on issues of taxes of employees that needs to be paid to the government.
- Balance sheet: A balance sheet is a comprehensive report that gives a detailed breakdown of the business’s financial position. You’ll find elements such as assets, and liabilities, and your company’s resources in this document. The balance sheet gives you a glimpse of the company’s credit/debit records.
- Income statement: This is the financial statement that describes the economic performance of the business in terms of profit and loss.
- Depreciation: Depreciation is when an item losses its value over a given period.
Getting to know what goes into these accounts is important. This will help you to document your business transactions appropriately.
Step 2: Setup the accounts
With a good knowledge of the various accounts, setting them up comes next in line. Keep in mind that today’s bookkeeping accounts are computer-based, unlike the physical general ledger that existed back in those days.
But now, computer software is used by most organizations to monitor accounts. Rather than a hard copy, it is a virtual record that is still called the general ledger.
Here are the three common options to set up today’s general ledger:
- Spreadsheet software
- Desktop accounting bookkeeping software
- Cloud-managed bookkeeping software
The spreadsheet option is the most accessible. For example, most computers have Excel software installed. Google sheet is an online free source.
For desktop setup, the software is usually a premium once-off purchase that can be installed to be used offline. Cloud-run bookkeeping software requires a paid subscription per time. QuickBooks has a solution for both cloud and desktop use.
Step 3: Choose a bookkeeping technique
There are two types of bookkeeping techniques to choose from.
This bookkeeping method is the ideal option for small businesses that manage their bookkeeping themselves. In this type of technique, a transaction is entered once. For instance, when you receive money, it is paid into the account receivable records. You can adopt single-entry bookkeeping if you operate from home, have no equipment or inventory to sell, and don’t venture too regularly into cash transactions.
This is the most used account bookkeeping method to enter records in the ledger. Based on this method, an entry of record into a particular account will require an equivalent opposing entry in another section of the ledger. This means if an account has been credited, there should be an opposite action of debit in the other account. Take for example; when you buy equipment for $5000, you’re expected to credit the assets account by $5000 and debit the expenditure account by $5000.
Step 4: Take a record of daily transactions
Since you now have a good grasp of the various accounts and understand the two major entry methods, taking daily records is next with building your bookkeeping arm. Remember that many organizations go with the double-entry method. Generally, it is the most acceptable for proper auditing of records in big organizations.
Any debit and credit transaction needs to be reported correctly and in the actual account.
Identify each account to get entries and enter accordingly. You can work with the pairs of profit and loss accounts, assets and liability accounts, expenditure and revenue accounts, among others.
Step 5: Balance the records
In simple bookkeeping, the last move is to balance the books and close them. The totals should match when you compare debits and credits, at the time specified. The balance should be something of this nature:
Asset = liability + equity
You can use the calculation to make changes to the general ledger. This results in a trial balance adjustment account.
Step 6: Generate a financial report
You need to take a closer look at what those books mean now that you’ve balanced your books. Financial report generation helps you to attain this. With this summary, you can know the financial health of your business and take the necessary steps to grow it further.
Step 7: Secure your records
Data security is very important in any business. Make sure to secure your records safely. Have copies in different locations in the event that there is a security breach. Besides your computer being the primary location, use an external storage device and also have a copy on the cloud.