According to Bernadette L. Harris, Atlanta-based author, speaker, forensic accountant, and founder of accounting services firm By The Book Accounting, establishing a good bookkeeping system should actually be a top priority from the start. “Many new business owners underestimate the importance of having good recordkeeping systems in place from the beginning,” she told The Balance via email. “It’s not something you put in place when you start making money, it’s something you should have in place before you open your doors.” To gain a better understanding of bookkeeping, it’s important to learn the basics and best practices to help you better track your business’s income and expenses.
Bookkeeping Basics and Initial Steps
Bookkeeping is an accounting process of recording and maintaining accurate records of your company’s financial transactions. This information can help you make informed decisions about your business operations, investment opportunities, and other financial decisions. In addition to helping the business owner, bookkeeping gives banks, investors, and the government the ability to ascertain the financial health and potential of the business. Typically in the U.S., there are two types of accounting businesses use: “cash” or “accrual” accounting. Cash accounting records income when the money is actually received while accrual accounting records income when a transaction happens, even if the cash that comes with it has not yet been received. You will need to determine which method of accounting works best for your business. Once you’ve figured out your ideal accounting method, start by creating a balance sheet, which you will use to record and track equity, liabilities, and assets. This step will allow you to do a cost-benefit analysis of your product or service to determine if the way you’re conducting business is resulting in profit or loss. In addition, consider the tax implications and other business-related expenses to be deducted from earnings. Once you’ve completed your analysis, it is a good practice to pay all of your expenses first (by check or card, not cash) before determining profit. Harris said that if you’re feeling overwhelmed, take some time to research related books that are available or look into digital accounting tools. “There are lots of accounting software programs available to small business owners, and the one I recommend most is QuickBooks,” she said. If you still feel like you need outside help to manage your finances and can afford the investment, hiring a bookkeeper can be an ideal solution.
What Does a Bookkeeper Do?
Bookkeepers are financial professionals who document the financial accounting and records of a business. Tasks they routinely complete include reviewing accounts receivable (money owed to the company) and accounts payable (money the company owes), determining available cash, reconciling bank statements, and tracking payroll data They also often create detailed reports and notify business owners of any accounting errors they may find. Bookkeepers often customize the books based on the needs of the business. Some basic types of small business bookkeeping accounts are:
Cash (receipts and disbursements)Inventory (unsold products to be sold)Accounts receivable and payable (money owed to and by the business)Sales (revenue produced from selling products or services)Purchases (money spent on goods needed to operate)Retained earnings (profits reinvested back into the business)
“Tracking income and expenses is necessary to file an accurate tax return and it is also essential to the success and growth of the business,” said Harris. “Having an accountant system helps you make management decisions based on numbers and facts.”
When Do You Need a Bookkeeper?
Most small business owners can begin managing their company’s finances by doing their own basic bookkeeping. However, as a business grows and the transactions multiply or become more complex and have greater tax implications, it may be necessary to seek professional help. “Owners should consider hiring a bookkeeper if they do not have the skills needed to keep their own books, if bookkeeping takes up a lot of their time, or it keeps them away from income-producing activities,” she said. Finding the right person to suit your business’s needs may also take some time and effort.
Bookkeeping Best Practices
Whether you do your own bookkeeping or hire a professional, it is important to maintain a high level of accuracy in your financial management tasks. There are several common accounting errors that you should watch for when reviewing your company’s books. To avoid these errors and optimize your financial reporting, here are some best practices when it comes to bookkeeping:
Keep your personal and business bank accounts separate.Determine your accounting method.Establish guidelines for the processing of accounts payable and accounts receivable.Optimize and continually update your chart of accounts.Embrace accounting software to track expenses, streamline your process, and increase efficiency.Ask your vendors to provide electronic documents so that they can be integrated into your accounting software.Continually review your work including analysis and invoices before paying them.Plan for taxes in advance.
The American Institute of Professional Bookkeepers, for example, grants the Certified Bookkeeper Designation. To earn this certification, you must submit evidence of at least two years of full-time bookkeeping experience, sign a code of ethics, and pass a four-part certification exam. The National Association of Certified Public Bookkeepers (NACPB), meanwhile, offers its bookkeeper license program for certification. To obtain a license, an applicant must hold an associate or bachelor’s degree in accounting, have one year (2,000 hours) of bookkeeping experience, agree to abide by a code of professional conduct, submit an application for licensure, and pass a Uniform License exam.
