Should I do my own bookkeeping for my small business?

Bookkeeping is about more than numbers and spreadsheets. In fact, maintaining accurate, up-to-date books can provide a more holistic view of your business’s health. It’s a bit like a health checkup for your business, allowing you to more easily track performance metrics and make informed decisions. This, in turn, gives you the power to steer your business in the right direction.

This article will walk you through the basics, from bookkeeping definitions and misconceptions to the next steps you can take to ensure your small business financials are in good shape.

Recording and Logging Your Business’ Monetary Transactions

Bookkeeping is the detailed day-to-day process of recording and logging your business’ monetary transactions. Every entry is made according to a set of agreed company rules (accounting principles) and backed by supporting paperwork.

Bookkeeping records should be accurate, detailed, organized, and backed by supporting documents. Examples include:

• Bills: records of a debt owed by your business to a vendor.
• Receipts: official records that prove items or services have been purchased.
• Invoices: records of money owed, either by the business or a customer.

A purchase order is another type of bookkeeping document.

You can keep track of your business financials by using a paper journal, a simple spreadsheet or by using bookkeeping software. Many businesses today use accounting software to manage the bookkeeping process. It’s no secret that software can reduce tedious, repetitive tasks like data entry and calculations.

Accurate bookkeeping can help you spot patterns and trends. This, in turn, allows you to make financial decisions that can help your business grow.

There are two major approaches to bookkeeping: single-entry and double-entry. Each one of these is suited to a different type of business. Often, the choice comes down to a combination of the type of business and a specific financial situation.

Small businesses and sole proprietors commonly use single-entry bookkeeping. The single-entry system works well for small business types with low transaction volumes. A single-entry system tracks only cash inflow and outflow over a set period.

Every single-entry system should include the following three essential records to maintain financial health:

• Cash sales journal: a listing of all income for the business for a given period.
• Cash disbursements journal: A record of cash paid out by your business.
• Bank statements: every cash deposit and withdrawal should be matched against the journals above.

As the name implies, single-entry bookkeeping involves recording each transaction once, either as income or as an expense.

Double-entry bookkeeping is a more complex, but more robust, type of bookkeeping system. Every transaction is recorded in at least two accounts. Each credit should be posted with a corresponding debit entry of equal value. It suits businesses that have accrued expenses.

A thorough double-entry bookkeeping system will consist of the following records:

• Journal entries: each single transaction is entered on a journal sheet.
• General ledger: a complete record of all the company’s accounts.
• Inventory record: the inventory record keeps track of sales and purchases.
• Cashbook: a cash account records all cash transactions that move in and out of a business.
• Accounts payable: A record of all the money the business owes to creditors.
• Accounts receivable: A record of all the money owed to your business by customers.
• Loans: A record of loans received and paid by the business.
• Payroll: a record of your employees’ pay.

QuickBooks uses double-entry bookkeeping, so every entry includes two balancing elements.

Though many use the two terms interchangeably, bookkeeping and accounting are different. Accounting is more of an umbrella term. Bookkeeping is an integral part of accounting.

The following tasks are typical in most bookkeeping positions:

• Recording transactions: The bookkeeper keeps track of all business inflows and outflows.
• Journals: Use journal entries to record debits and credits in each account.
• Preparing financial reports.
• Managing payroll.

Bookkeeping is a recording process, whereas accounting deals with the interpretation of those records. Bookkeeping involves inputting transactions into a system (or spreadsheet), whereas accounting entails analyzing that data and providing insight.

Typical accounting tasks include:

• Analysis of financial statements.
• Making adjusting entries.
• Auditing: An audit is an official check of financial records to ensure they’re in compliance with all regulations.
• Taxes: Accountants prepare and file tax returns for businesses.

Bookkeepers record and organize your business’s financial data. This makes it easy for accountants to analyze your business’ finances and build reports. Accountants use the reports they make to offer advice and to help you make decisions that promote business growth.

A Bookkeeper is essentially responsible for the internal financial functioning of your business. Bookkeepers perform several essential tasks as part of their day-to-day duties.

Bookkeepers are responsible for recording your financial transactions on a daily or weekly basis. They enter them into an accounting program (like QuickBooks) and ensure expenses are categorized correctly.

Organizing receipts, expenses, bank statements, etc. in a way that makes it easy to extract relevant information.

Creating financial reports, like Profit and Loss reports, balance sheet reports, and cash flow reports, that give you a snapshot of your business’ financial health.

Reconciliation: Bookkeepers reconcile bank statements. This is the process of ensuring that all transactions are accurate and match your records.

Bill payments: A bookkeeper will take care of all the administrative work of handling your business’s bills. Creating and sending client invoices.

The role of bookkeeper can vary depending on the needs of a company. Managing payroll, which means calculating and submitting payments and distributing payslips on time.

Good Bookkeeping Practices

Solid bookkeeping practices can help streamline your business processes, save you money, and prevent big mistakes, whether you keep the books yourself or hire someone.

Bookkeeping done right ensures that all your records are up-to-date, organized, and readily available. Bookkeepers usually assign a category to every transaction. This makes it easier to classify, sort, and analyze business data.

Common categories include:

• Cost of Goods Sold.
• Contractors and professional services.
• Compensation: This category is used to record wages, bonuses, and other payments made to your employees.
• Taxes.

Maintaining accurate books helps to ensure that you can answer any audit questions quickly and with the correct information. A well-kept set of books can help you compile accurate financial statements, chiefly the income statement and the balance sheet. Accurate, informative statements will make it easier for anyone to understand the health of your business.

Accurate financial statements aren’t just for the taxman. You can gain a clearer insight into the health of your business and where it’s headed. Detailed records help you better track your progress toward your business goals.

Statements that help here include:

• Balance sheet: a record of business assets, liabilities, and equity.
• Income statement: A record of your business expenses, along with a breakdown of how much money you take in from sales.
• Cash flow statement: this is a record of cash flowing in and out of the business.

Accurate statements mean you can identify opportunities to grow your business, and also spot problems sooner so they can be resolved in a timely manner. Losses from unrecorded transactions add up, and faulty data could easily lead to mistakes, giving a skewed view of your business financial situation.

The simple fact is that accurate books are a foundation for compliance with tax regulations. Any business filing taxes has to comply with Internal Revenue Service (IRS) regulations, and the paperwork commonly includes records of:

• Financial transactions.
• Financial statements.
• Tax compliance.
• Cash flow reports.

Tax season can be stressful, but it’s much easier to deal with when you keep your books in good shape year-round.

However, it’s important to know some of the drawbacks of bookkeeping, too.

Self-managed bookkeeping can be time-consuming. While paper records can be simple to use, they require a significant commitment of time and energy.

A sole proprietor can find managing bookkeeping alongside running a business overwhelming. After all, your primary task is growing your business, not wrestling with expenses and financial records.

Hiring a professional bookkeeper can be expensive, and an in-house bookkeeper costs more than the salary. If you’re considering an in-house bookkeeper, be sure to factor in compensation, training, sick and vacation leave.

Many businesses hire freelance bookkeepers to work on a part-time basis for a few hours a week. This arrangement can save you money on salaries and training costs. One downside of a freelance bookkeeper is they may not work as closely with you as an in-house employee. After all, they’ll have less direct experience with your day-to-day operations.

Data entry is a chore, and it’s prone to errors like typing errors and forgetting something. Not only can small mistakes pile up into big ones, but you might also fail to see the big mistakes altogether. Bookkeeping mistakes can lead to errors in financial statements and tax returns. Even the most diligent and careful bookkeeper can make an honest mistake.

While it may seem tedious at times, good bookkeeping practices are invaluable. These best practices apply whether you use bookkeeping software, an Excel sheet, or paper records. The following general tips can help you navigate bookkeeping with more confidence and give you ideas to start improving your books.

Don’t make a wholesale change to your bookkeeping setup all in one go. Make changes gradually to ensure the flow of your business remains smooth. If you change your bookkeeping system or move to a different software application, switch in stages. Taking on the entire system at once might be overwhelming.

When you switch, introduce your team to the new procedures in stages. In the long term, this will make the switch smoother and less chaotic.

A general ledger is the master record of all your company’s financial transactions. It should list every transaction, with each assigned to a proper account category. These categories include balance sheet accounts for assets, liabilities and equity, plus income statement accounts for revenue, gains, losses and expenses.

In a double-entry system, every transaction touches at least two of these ledger accounts. Typical examples:

• Asset accounts: Cash, Accounts Receivable, Inventory, Investments, Equipment, and Land.
• Liability accounts: Accounts Payable, Customer Deposits, Accrued Expenses Payable, and Notes Payable.
• Equity accounts: Common Stock, Retained Earnings, and Treasury Stock.

Keep your ledger up-to-date. Out-of-date records can lead to expensive errors. The more accurate and current your financial records are, the easier it is to build reports.

Work with an accountant or tax professional to make a tax strategy that fits your business. This will give you a clear idea of your business financial health, and you’ll be ready when it’s time to prepare and file your tax returns.

Mixing your business finances with your personal finances can cause you no end of trouble. Firstly, the separation of business and personal accounts helps you get an accurate view of your business’s financial health. Keeping your books separate also reduces the odds of an IRS audit.

A few practical ways to do it:

• Use a separate credit card or debit card for your business expenses.
• Set up separate bank accounts for your personal and business finances.
• Keep all financial paperwork like statements and receipts in separate filing systems. A file cabinet or virtual file structure will work.

Maintaining different sets of records for business and personal can help you avoid mistakes.

Business disruptions can happen at any time, whether it’s a hard drive failure, a storm, or a flood. It can be devastating to lose all your data to a hard drive failure or malware attack. If you use digital records, you can upload copies of the data to the cloud.

Reconciling bank statements is an important bookkeeping task, one that helps prevent errors and fraud. Comparing bank and credit card records with your bookkeeping records lets you catch any errors that might creep in. Monthly reconciliation can identify errors before they create big problems.

Doing Your Own Bookkeeping

There’s no hard and fast rule about doing your own bookkeeping. Ultimately, the right choice comes down to your skills, how much time you can dedicate to your business, and whether you can afford to pay someone else.

To effectively manage your business’s bookkeeping, you need a set of skills. This requires more than a vague knowledge of accounting and bookkeeping. A few college courses may not be enough on their own.

If you have an accounting background, or solid experience with accounting applications, you might find managing your own bookkeeping smooth and efficient. However, if you have no accounting background or aren’t confident in your bookkeeping skills, you might want to consider hiring a professional, especially if local and federal tax codes are unfamiliar territory.

Just remember, doing your own books can be tedious and time-consuming. Running a business often means switching between roles, and juggling those responsibilities alongside bookkeeping can be difficult. If you can devote the time necessary to keep your books up-to-date and accurate, then bookkeeping could be a reasonable DIY task for you.

You may see bookkeeping as a chore, and wish to spend less time on paperwork, and more time running your business. The time you commit to do-it-yourself bookkeeping is time you can’t dedicate to growing your business. After all, using a bookkeeper can free you up to focus on your core business tasks.

Another big consideration is your business’s cash flow. How much money can your business spare to pay for a bookkeeper’s services? Outsourcing bookkeeping means less time and stress for you. However, outsourcing means you’ll pay for someone’s time and expertise on an ongoing basis, so consider outsourcing if you have a budget.

If you can afford the investment, a bookkeeper is a valuable addition to your business. After all, making mistakes in your books might be costly. A bookkeeper is well worth the investment to ensure you can get more done, while saving time and stress.