How to Do Bookkeeping for Small Business
A previous post on this blog suggested that business owners do the bookkeeping themselves instead of hiring a bookkeeper. Or if you decide to hire a bookkeeper, the post suggested to make their service supplemental to your own instead of replacing you as the bookkeeper. While a good piece of business advice is to work on your business and not in your business, bookkeeping is one of the few activities where business owners can save time and money by doing it on their own. Read that post for more details.
How to Find a Good Bookkeeper – If you plan to hire a bookkeeper to supplement your bookkeeping, then I’d start looking for one with references from local business associations, like the local chamber of commerce, or from your local SCORE mentor. Again, even if you are working with a bookkeeper, as the business owner you still need to know how to do bookkeeping so you can keep the keeper on the right track.
Double Entry Accounting Before Accounting Software:
Recall from 40 Basic Accounting Principles that the standard formula for accounting is Assets = Liabilities + Equity, and that every transaction of the business affects two different accounts – one on each side of the equal sign (=). Before there was accounting software, this had to be entered manually into the general ledger. The business owner and staff would make entries into journals of original entry and then those entries would be transferred to the general ledger. Then the accountant would have to manually create the business financials. Here is an example of a transaction taken from AccountingCoach.com: The business owner puts $20,000 of cash into her own business. This is how it would appear in the general ledger:
Remember that “cash” is a sub-account of “assets”, so both sides of the equation are represented. Notice how the “debit” and “credit” side of the entry and the associated lines form a “T”. Debit is always on the left and credit is always on the right. Debit is often abbreviated “dr” and credit is often abbreviated “cr”. The account that was debited was always on top and the name of the account that was credited on the second line was indented. The date of the transaction alwo would’ve been recorded, probably to the left of the account name. Accountants followed this system for accurate record keeping when entering the data manually. Now the accounting software does it all automatically. If you were to take an accounting class, they would give you these tips for the test:
- When a company receives cash, the cash account is debited, the other account is credited.
- When a company pays cash, the cash account is credited, the other account is debited.
- Accounts that are increased with a debit are DEALS:
- Dividends (owner’s draws)
- Accounts that are increased with a credit are GIRLS:
- Stockholder’s (Owner’s) Equity
Stockholders Equity and Dividends in a corporation are respectively the same as owner’s equity and owner’s draws in an LLC. There is much more you could memorize, but this post is not meant to replace a class on accounting. It’s meant to give you what you need to know to get started doing bookkeeping for your business. More resources are listed below if you would like to study this more in depth.
Bookkeeping with Accounting Software.
Here are some steps you need to take in order to start doing bookkeeping for your business:
Hire an accountant. (Read How to Find a Good Accountant)
Select your accounting software and start familiarizing yourself with it. Add your accountant and/or bookeeper(s) as administrators/collaborators on the software. Have a training session with your accountant.
Link your accounting software to your business bank account, business credit card, and other accounts that your business uses (such as PayPal). If you don’t have a business bank account for your business, you need one. Keep personal and business transactions separate.
Create your chart of accounts (i.e. all the accounts that will appear in your general ledger). Many of the accounts will already be created by default with your accounting software. You’ll add a few that are specific to your business and industry. This will probably be part of what you’ll do when you have a training session with your accountant.
Since your accounting software is linked to all your business accounts, there is not nearly as much manual entry of transactions as there would be without the accounting software. However, your accounting software can only record what is being recording in the accounts that it is linked to. If you write a check, that takes money out of your business bank account, and that will appear automatically in the software. However, the software may not know what the transaction was for, or which accounts should be debited and credited. So you’ll have to make adjusting entries from time to time. It also doesn’t know when you pay cash for something, or when you use your vehicle, or a handful of other transactions that may occur. So to keep your records accurate and to keep your business prepared for an IRS tax audit, you also need additional records and systems in place for keeping those records. Often these records are directly associated with the expenses you claim as tax deductions.
There will be future posts on tax deductions which might help in creating your additional record keeping. Here is an example of what you’re looking forward to:
You have a vehicle that you use for your business and some personal use. You also have a home office. The home office is a deduction in and of itself. It also allows you to deduct any trips that you take from your home to your commercial office (which is possibly a more important deduction than the home office itself). Since you use the vehicle for some personal use, you must only deduct the amount that you use for the business. You cannot claim 100% as a tax deduction. In order to do this, you must keep a record of your car mileage and all maintenance expenses. If 95% of your vehicle usage is for the business, then you can claim 95% as a tax deduction. Also, if you’re going to have a home office, you must have documentation that proves to the IRS that the immediate space you use in your home for your “home office” is only used for your business and that you actually use it for your business.
The most important steps you can take to get started in your business bookkeeping are listed above – hire an accountant, select your software, have a training session with your accountant to set up your software. Additional record keeping will come as you learn about tax deductions.
Here are some additional sources to learn bookkeeping for your business:
- Financial Accounting: A Mercifully Brief Introduction by Michael Sack Elmaleh
This article was not written by an accountant. Consult a CPA or other accounting professional before performing accounting for your business.
For an explanation of why a marketing blog has posts on accounting, read September is Accounting Month.
If you have any questions on this article (or answers to questions), leave a comment below. What’s the best system you’ve come up with for record keeping and bookkeeping?