Bookkeeping 101: Bookkeeping Basics for Small Businesses

Bookkeeping 101: Bookkeeping Basics for Small Businesses

bookkeeping 101

Bookkeepers track the materials and goods purchased for the business in the purchases account. You use this to calculate the COGS, and you subtract it from sales to determine the company’s gross profit. This refers to the money spent to purchase or manufacture the products or services the business sells. Aside from the Balance Sheet, bookkeepers also create the Income Statement. This covers the revenue, costs, and expenses of the business. Managing the general ledger is part of your daily responsibilities as a bookkeeper.

bookkeeping 101

From there, the total pay is determined with the applicable taxes and withholdings. In the accounting software, the primary journal entry for total payroll is a debit to the compensation account and credits cash. If not done at the time of the transaction, the bookkeeper will create and send invoices for funds that need to be collected by the company.

Who should manage small-business bookkeeping tasks?

You may determine if any payments are due, submit them, and record them in the financial ledger. As a bookkeeper, you may also receive client payments and deposit them at your company’s financial institution. If you opt to not link your software with your bank, you will need to reconcile you accounts manually. Whichever way you do it, it’s important to complete the process on a regular basis. Reconciling provides you with an accurate cash balance, which can be particularly important to smaller businesses with limited cash flow.

For example, a company that hired an external consultant would recognize the cost of that consultation in an accrual. That cost would be recognized regardless of whether or not the consultant had invoiced the company for their services. Generally speaking, bookkeepers help collect and organize data and may have certain certifications to do so for your business. On the other hand, accountants are generally equipped with an accounting degree and may even be state-certified CPAs. You can expect most bookkeepers to maintain the general ledger and accounts while the accountant is there to create and interpret more complex financial statements. Bookkeeping is the process of tracking income and expenses in your business.

Adjust Entries at the End of Each Accounting Period

Bookkeeping software makes bookkeeping for beginners much easier. This software is a must for anyone running their own business. While standalone platforms exist for invoices and taxes, bookkeeping software tends to be more comprehensive. Balance sheets make it easier to spot and utilize trends, particularly trends with payables and receivables.

  • This allows easy daily or weekly reconciliation, making the month-end process that much simpler.
  • It’s also a good idea to set your fiscal year when you start your business.
  • A bookkeeper is responsible for identifying the accounts in which transactions should be recorded.
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  • And in any decision you make, there are considerations, mostly related to finances.
  • You also need to ensure that all transactions concerning these three are correctly recorded in the right journal or document.

The accountant provides an accurate financial picture of the company. By law, accountants representing all publicly traded companies must comply with GAAP. Your revenue is the total amount of money you collect in exchange for your goods or services before any expenses are taken out. Expenses include any purchases you make or money you spend in an effort to generate revenue. Expenses are also referred to as “the cost of doing business”.

Why Bookkeeping Is Important for Small Businesses

This part can be tricky and is usually where the expertise of an accountant or CPA is needed. And the only way to improve profits is through useful information. Bookkeeping is important for filing your personal tax return too. Budgeting creates a financial roadmap Nonprofit Accounting Explanation for your business so there aren’t any surprises. And even worse, you won’t be able to run your business because you won’t know what’s going on financially. The insights you get from your bookkeeping will help you reap the rewards of your business for years to come.

  • There is very little point in doing all of these steps if you aren’t using this information to make better business decisions.
  • This influences which products we write about and where and how the product appears on a page.
  • It’s also a good idea to become familiar with the accounts included in your chart of accounts, which will make it much easier when you begin to enter financial transactions.
  • Most accounting software allows you to automatically run common financial statements such as an income and expense statement, balance sheet and cash flow statement.

Knowledge of how the business works is also essential to contextualize financial data. Accountants oversee the financial records for a business and make sure the data is correct. Then, they use this data to create budgets, financial documents, and reports. Knowing these nine bookkeeping basics is essential for any bookkeeper to perform their job well. They apply to almost any business type and size, which makes having these basic bookkeeping skills valuable.

How to do bookkeeping for a small business

Though often confused for each other, there are key differences between bookkeeping and accounting. At its core, bookkeeping is about recording financial data, while accounting is about interpreting financial data. As important as it is to understand how business accounting works, you don’t have to do it alone.

  • In Alabama, on the other hand, businesses are not required to purchase workers’ compensation insurance if they have fewer than five employees.
  • Are you currently studying this subject or business, finance or accounting?
  • Your business’s books are balanced when all of the debits equal (or cancel out) all of the credits.
  • On top of that, you need the data used in bookkeeping to file your taxes accurately.
  • If you’re using the wrong credit or debit card, it could be costing you serious money.

According to 81 percent of CBs who interviewed for a new job after becoming certified, having a certification contributed to getting the interview [4]. You can earn certification from the National Association of Certified Public Bookkeepers (NACPB) and the American Institute of Professional Bookkeepers (AIPB). The NACPB offers a certified public bookkeeper (CPB) certification, while the CPB offers a certified bookkeeper (CB) certification. Both the CPB and CB certifications require similar eligibility requirements.