Bookkeeping Fundamentals for Small Business Owner

Undoubtedly, bookkeeping is one hugely important aspect of business ownership. Without it, business owners can’t generate the reports they need to make strategic decisions or properly organize the documentation they need to build a solid audit trail. 

While often used interchangeably, it’s important to understand the difference between bookkeeping and accounting here since they’re two related but very different functions. Very generally: 

  • Bookkeeping involves day-to-day record-keeping, proper categorization of transactions and the reconciliation of accounts. Bookkeepers also typically handle all accounts payable and receivable activities. 
  • The accounting process involves taking the data recorded accurately by the bookkeeper and building financial reports to facilitate good business decisions. 

A good bookkeeping system is invaluable since it allows business owners to keep an accurate historical record of every transaction that makes up the financial reports. 

So what are the basics of bookkeeping for small businesses? 

Choosing the Right Software

Some businesses start off with the “shoebox” method, meaning all receipts and documents are kept in one place and (sometimes) tracked in a spreadsheet application. 

Obviously, as the business grows and becomes more complex, this system becomes problematic and requires the use of a more formal accounting system.

There are many desktop or cloud-based software packages available to small businesses, and the nature and size of a business have a lot to do with choosing the right one. 

If you aren’t sure which option is the best fit for your business, ask your accountant or CPA for a recommendation. 

Understanding Accounts

In the language of bookkeeping, the term “account” doesn’t always refer to bank accounts. Rather, an account is a “bucket” of sorts, which captures all transactions of a certain type. 

There are five basic types of accounts:

  • Assets: These can be short- or long-term and can include things like furniture and fixtures as well as equipment and vehicles.
     
  • Liabilities: These also can be short- or long-term and reflect the business’ obligations and debts owed, such as loans or accounts payable.

  • Revenue: These accounts capture all business income from sales to interest dividends.

  • Expenses: These capture all business cash outflows for everything from salaries to office supplies.

  • Equity: These represent the owner’s held interest in the business. 

Understanding each of these types of accounts and how they relate to the financial statements is an important bookkeeping fundamental. 

Setting Up Bank and Credit Card Accounts

Many small business owners make the mistake of co-mingling their personal and business bank and credit card accounts. 

Not only does this make record keeping much harder, but it also makes it more difficult to prove to the IRS that business income and expenses are separate and distinct from personal ones.

When setting up a bookkeeping system, business owners should not use existing personal accounts but should create separate accounts under the business name for checking, savings and credit card accounts. 

Tracking Expenses

A foundational principle of bookkeeping is the retention of accurate records for all business transactions. 

So it’s important not only to track expense transactions but also to record what kind of expenses are incurred. This helps tax accountants understand which expenses are deductible and which aren’t. 

Expense accounts should be set up in a Chart of Accounts (a master list of all accounts, including expenses, income, assets and liabilities) and tracked by type. 

Examples of some common expense accounts include:

  • Meals and Entertainment
    • Pro Tip: Receipts should be kept indicating who attended and the purpose of the meal or event.

  • Business Travel
    • Pro Tip: Keep a good paper trail since the IRS has strict rules around what’s considered business travel and personal travel.

  • Vehicle-related
    • Pro Tip: Keep detailed mileage records and the purpose for which the vehicle was used.

Paper expense receipts may be kept in hanging files or folders but in an increasingly paperless world, many businesses use software packages that capture and store digital images of receipts in the cloud. 

Tracking Income

Business income should be tracked in revenue accounts. There are as many different kinds of revenue accounts as there are business types.

Manufacturers may have income from the sale of widgets, while consultants may have income from the fees they charge their clients.

A business can have more than one revenue account to track different types of income. 

For example, a business might sell tangible products and also charge consulting fees when they train a customer on how to use the product. Each type of income would then be tracked in separate revenue accounts. 

Asking for Help

Most business owners don’t go into business with an in-depth knowledge of generally accepted accounting and bookkeeping principles, and so keeping the books can be a challenging task. 

And even if an owner has some background in bookkeeping, it’s very often a much better use of their time to pay a professional to keep the books for them.

When a DIY solution no longer makes sense, it’s time to ask for help.

Steiner Business Solutions helps small business owners save time and avoid costly mistakes by offering convenient and affordable bookkeeping services.

Our certified bookkeeping experts keep accurate records so business owners have the right information to make the best, most strategic business decisions. We’d love to talk!