Bookkeeping Basics That Every New Small Business Owners Must Know

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Starting a business is not a piece of cake. What makes starting a new business daunting for most small business owners is the finance and taxation part of the business; if you have created a business despite all the obstacles, congratulations! You have crossed the threshold which many are unable to cross. Now, you need to start focusing on core business activity and taking care of other vital business processes like accounting, bookkeeping, marketing, human resources, etc. 

You can easily outsource all the non-core tasks so that you can focus on your core business activity. Out of all non-core activities, bookkeeping and accounting is an activity that requires experts’ supervision. This is why it  accounting and bookkeeping services are one of the most outsourced business activities. 

 Bookkeeping is the process of recording and organizing financial transactions. It has to be done meticulously while ensuring it is in line with respective accounting standards for uniformity. Conducting your bookkeeping process efficiently allows you to have an accurate picture of your business health. While it is best to leave your bookkeeping process in experts’ hands, it is never disadvantageous to learn the basics to monitor the process. So, let us learn about some bookkeeping basics – 

  • Setting up your bookkeeping system 

As a new business owner, you must first and foremost determine which bookkeeping method to use – cash method or accrual method. In the cash basis method, revenues and expenses are recognized only when they are actually received or paid. In the accrual basis method, revenues and expenses are recognized when the transaction occurs, even if the money has not been paid or received. 

 Once you choose one of the above methods, you also need to choose between single-entry and double-entry bookkeeping systems. In the single-entry bookkeeping system, each transaction is entered only once, while in the double-entry bookkeeping system, every transaction is entered in a minimum of two accounts. If you have a small business that is simple and has a bare minimum business process, a single-entry bookkeeping system might be a good option for you. 

 A double-entry bookkeeping system is used by most businesses worldwide. Here every transaction has two entries – a debit (Dr) and a credit (Cr). These are then recorded as journal entries in the ledger. We will be guiding you with a double-entry bookkeeping system. 

  • Learn about 5 Bookkeeping accounts 

Now that you have selected your bookkeeping process, you can learn about bookkeeping accounts. In bookkeeping, every transaction is recorded under different heads, also known as accounts. There are five basic types of accounts: 

  • Assets: Assets are simply the cash and resources your business owns to help you successfully run the business. Example:  cash, land, accounts receivable, equipment, tools, vehicle, furniture, etc. 
  • Liabilities: Liabilities are basically all the obligations and debts you owe. Example: accounts payable, loans, etc. 
  • Revenues: Revenue is all of the money you earn from your business by selling services and goods. 
  • Expenses: Expenses are all of the money that flows out from the business to operate your business.  
  • Equity: Equity is all of the money you invest plus the accumulated profits of your business. 

These five accounts have to define credit and debit rules. Remember, a debit doesn’t necessarily mean cash is flowing out. Memorize this chart for future use. 

 

Account type  Debit if  Credit if 
Asset  Increase  Decrease 
Liability  Decrease  Increase 
Revenue  Decrease  Increase 
Expense  Increase  Decrease 
Equity  Decrease  Increase 
  • Set up your business accounts 

Once you memorize the treatment of these five accounts, you can now easily set up your business accounts. You need to set up each necessary account that will be recorded under the above five account categories.  

For example, a cash purchase of machinery will be reflected in two business accounts–cash and machinery accounts. Both these business accounts are part of asset. Since the purchase has led to a decrease in cash, the cash account will be recorded in credit, and since you have an addition in machinery, the machinery account will be recorded in debit.  

Remember that you will witness the need for new business accounts once in a while as the business’s nature is unpredictable, but many accounts are common. 

  • Record every financial transaction 

This step goes without saying! To have an accurate picture of your business finance, you have to record all your financial transactions without fail. Every business transaction must be properly segregated and recorded in its respective heads. 

Separate your personal bank account and business bank account. This will enable you to understand which expenses and income are business-specific and further helps in the tax filing and deductions. Another important thing is to keep invoices, receipts, and other records in a safe and organized manner. Keeping ahold of your transactions in a safe and organized manner will aid you when it comes to filing taxes. Another thing which might make the process of filing your taxes easier is the services of an expert in tax preparation Bend Oregon (or elsewhere more relevant for you). Having an expert on hand to help you can ensure you don’t miss anything important that will need factoring in, they may also be able to help you reduce your overall tax bill through their knowledge and industry experience.

  • Balance the books 

Another basic of bookkeeping is to balance the books and closing them. You must tally all your accounts periodically and match the debits and credits. In simple words, this is called accounts reconciliation. This step will enable you to understand any shortcomings in your bookkeeping process and help you detect errors or any discrepancies. 

  • Preparation of financial reports 

Your bookkeeper’s final task for any financial year is the preparation of financial reports. This step will enable you to understand what the numbers in your books mean. Financial reports will help you understand your business financials and whether your efforts have positive or negative results and make further business decisions based on these results. Here are some common financial reports that you have to create when conducting the bookkeeping process: Balance sheetProfit and loss (P&L) statement, and Cash flow statement. These reports can be easily prepared with the help of accounting software and what is even more beneficial is that you can get these reports in real-time any time of the year. This can be extremely beneficial when you have to make quick business decisions based on your current business health.  

The Take Away 

If you want to conduct your bookkeeping process independently, you must be fluent in accounting standards and existing laws & legislation concerned with the accounting process. While we have explained the basics of bookkeeping and multiple online resources that can help you with every step of the process, we highly recommend hiring expert bookkeeping services. There are even specialized bookkeeping services for small businesses. This will enable you to focus on your overall business and increase your business productivity. You will save time and save yourself from incurring high costs due to errors in the bookkeeping process. Hire outsourced bookkeeping services today and let them take care of your non-core activity while you focus on enhancing your overall business.