Bookkeeping Basics for Start-ups & Small Businesses
Bookkeeping is a crucial aspect of running a small business, as it helps you track your income and expenses, make informed financial decisions, and ensure compliance with tax regulations. Here's a basic guide to get you started:
STEP 1: Choose an Accounting Method
An accounting method refers to the set of rules and procedures a company uses to record, measure, and report its financial transactions. The choice of accounting method influences how a company recognizes revenues and expenses, which in turn affects the financial statements and ultimately, the tax liability.
There are two main accounting methods:
Cash Basis Accounting:
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid.
Simpler and easier to understand, often used by small businesses or individuals.
Accrual Basis Accounting:
Revenues are recognized when earned, regardless of when payment is received.
Expenses are recognized when incurred, regardless of when payment is made.
Provides a more accurate picture of a company's financial performance, often used by larger businesses.
The choice between cash and accrual accounting depends on several factors, including the size and nature of the business, industry regulations, and tax requirements. Generally Accepted Accounting Principles (GAAP) require accrual accounting for most businesses, while the Internal Revenue Service (IRS) allows smaller businesses to use cash accounting.
STEP 2: Set Up a Chart of Accounts
A Chart of Accounts (COA) is a comprehensive list of all the financial accounts used by a business to categorize and track its financial transactions. It serves as an organized index of these accounts, allowing for efficient recording and reporting of financial data.
The COA is typically organized into five main categories, mirroring the structure of financial statements:
Assets: Resources owned by the business, such as cash, inventory, equipment, and accounts receivable.
Liabilities: Debts or obligations owed by the business, such as accounts payable, loans, and accrued expenses.
Equity: The owner's investment in the business, including retained earnings and owner's capital.
Revenues: Income generated from the business's activities, such as sales, service fees, and interest earned.
Expenses: Costs incurred in operating the business, such as rent, salaries, utilities, and advertising.
Each account within these categories is assigned a unique number or code for easy identification and reference. This systematic structure enables businesses to track every financial transaction accurately, ensuring that debits and credits are properly balanced.
The COA is essential for generating financial reports like the balance sheet, income statement, and cash flow statement. These reports provide valuable insights into the business's financial performance and position, aiding in decision-making and financial planning.
STEP 3: Track Income and Expenses:
Tracking income and expenses is critical to running a successful small business. And to do this accurately, open a separate business checking account! If you are serious about your business, this is not optional. Mixing personal and business funds makes it nearly impossible to get a true picture of your business’s financial health. Additionally, it makes for a lot of extra work at tax time. So don’t mix your money. Open that business checking account right now!
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So back to tracking income and expenses. There are several ways to handle recordkeeping including pen and paper, spreadsheets or utilizing any of the accounting software in the market Quickbooks, Freshbooks, Xero are but a few of the options and their starter plans are normally in the $20 to $35 per month range.
Income
When recording your business’s income, capture all sales, payments received, and any other source of revenue. Some businesses have distinct sources of revenue that they wish to track separately. An example would be a landscape company that performs work for residential customers as well as commercial customers. Since these are two distinct groups of customers, it can be very helpful to keep your revenue segmented (as well as your expenses) so that you can track profitability on each. Refer back to the Chart of Accounts to accomplish this and simply create a Residential Sales Revenue Account and a Commercial Sales Revenue Account, and don’t forget to do the same for expenses if and where possible.
Expenses
Record all purchases, payments made, and other business-related costs. Since you will likely have more expense transactions than income transactions, you have to be diligent here. Keep all receipts and invoices and utilize software tools whenever possible. Accounting software such as Quickbooks (and others) enables you to quickly scan receipts back to the software. If you don’t use these tools, then make sure you get those expenses on paper or in a spreadsheet at least once per week so you don’t risk forgetting what it is that you purchased.
STEP 4: Reconcile Bank Accounts
We should all know this one but many of us today prefer to simply check our banking app each day to make sure we have money. Although this may work for your personal account, your business account is too important to risk any mishaps. When you get your monthly statement, sit down and take a few minutes to review your deposits and make sure they line up with your expected sales revenue categories. If you accept credit and debit card payments, you will also need to pull your processing statement monthly.
From an expense standpoint, go through each transaction on your checking statement and make sure you have captured every expense into whatever financial system you are using (pen/paper, spreadsheet, software). And don’t forget any credit cards that you may use for business expenses. Grab those credit card statements and check each transaction as well against your accounting system.
STEP 5. Generate Financial Reports
Business financial reports are formal documents that summarize a company's financial performance and position over a specific period. These reports provide essential information for both internal and external stakeholders, including managers, investors, creditors, and regulatory authorities.
There are three main types of financial reports:
Income Statement (Profit and Loss Statement):
Summarizes a company's revenues and expenses over a specific period (e.g., monthly, quarterly or annually).
Shows the net income or loss, which indicates the profitability of the business.
Helps assess the company's ability to generate profits and its operating efficiency.
Balance Sheet:
Provides a snapshot of a company's financial position at a specific point in time.
Lists assets (what the company owns), liabilities (what the company owes), and equity (the owner's investment).
Helps assess the company's financial health, solvency, and liquidity.
Cash Flow Statement:
Tracks the flow of cash in and out of a company during a specific period.
Classifies cash flows into operating, investing, and financing activities.
Helps assess the company's ability to generate cash, meet its financial obligations, and invest in growth.
STEP 6: Consider Professional Help
If bookkeeping becomes overwhelming, consider hiring a bookkeeper or accountant.
They can ensure accuracy, provide insights, and handle complex tax requirements.
And you can always Book a Call with SalesHEAD Services for more helpful information, advice on bookkeeping, payroll, business and personal tax as well as merchant services.
For further information and detailed guidance, you can consult resources like:
NerdWallet: https://www.nerdwallet.com/article/small-business/small-business-bookkeeping
Forbes Advisor: https://www.forbes.com/advisor/business/small-business-bookkeeping/
By following these steps and utilizing available resources, you can establish a solid bookkeeping foundation for your small business.