How to do your Own Bookkeeping for Your Small Business

Bookkeeping is an important part running a business. Bookkeeping allows you to track the financial health of their businesses so you can make educated and confident business decisions. Generally speaking, bookkeeping involves recording, organizing, and managing daily financial transactions of a business. 

Despite bookkeeping being a fundamental task to successfully managing a business, many business owners put off bookkeeping because they lack sufficient accounting experience. This often results runaway expenses and loss of profits. 

How to Get Started with your Own Bookkeeping

Having a defined framework is essential to starting and maintaining effective bookkeeping practices. In this article, we are going to outline 6 important steps that will help business owners set up and maintain bookkeeping for their small business and get visible results immediately.

1. Choose an Appropriate Bookkeeping Method

The first step to doing your own bookkeeping is to choose a bookkeeping method. This will determine where and how your financial transactions will be recorded. There are two bookkeeping methods to choose from: single-entry and double-entry. 

Single-entry bookkeeping is simple. It is recommended for freelancers and sole proprietors who have a few transactions per month. In this method, each financial transaction is recorded just once in the general ledger. However, this method is less accurate than the double-entry method. 

In the double-entry method, each financial transaction is recorded twice, once as a debit and once as a credit. Since there are two entries for every transaction, it is easier to catch minor errors before they end up becoming major financial problems. The double-entry method is thus recommended, and most bookkeeping software uses it.

2. Set up a Chart of Accounts

A Chart of Accounts is a record-keeping structure for a business's financial data. Every financial transaction that is carried out, for example, a sale, must be recorded in the general ledger. This is known as making a journal entry. Chart of accounts should be can be set up to be specific to your business and workflow. A good bookkeeping software will often have a general chart of accounts to get you started and a dedicated bookkeeper can help you fill in the gaps.

3. Separate you Business and Personal Finances

Next, you will need to separate your personal and business financials. Keeping your business financials separate from your personal finances will help protect your assets in the case of any legal actions. Separating your personal business finances will also save you time at the end of the year when you need to file your personal and business taxes.

4. Create Different Business Accounts

In the world of bookkeeping services for small business, an account is a record of financial transactions of a specific revenue, expense, asset, liability, or equity. The general ledger is organized into 5 different accounts.

There are five types of accounts:

• Revenue account: This account records all the income the business generates for example income from the sale of inventory.

• Expense account: This account records the cash outflows from the business for example due to payment of salaries to employees.

• Asset account: This account records all the resources owned by the business for example property and inventory.

• Liability account: This account records all the debts and financial obligations the business owes.

• Equity account: These provide a financial representation of the ownership of the business for example in form of stock shares.

Once you have set up all the accounts, then you will be able to record all your income and expenses in the appropriate categories.

5. Balance the Books

The next step involves balancing and closing your books. When you add up all the months’ debits and credits, they should match up. This will mean that your books are balanced and the bookkeeping process is complete. You may choose to balance your books at the end of every day, week, month, quarter, or year.

Once you combine the different account types, it should meet the accounting equation:

Assets = Liabilities + Equity

6. Generate Financial Reports

Once books are balanced, it is important to generate financial reports you can get a clear picture of the financial health of your business. The three crucial financial reports are the balance sheet, profit, and loss (P&L) statement, and cash flow statement. 

The balance sheet summarizes the total assets, liabilities, and equity of the business. It indicates whether the business can expand or needs to reserve cash. The (P&L) statement or the income statement breaks down the revenues, expenses, and costs of a business over a period. It can enable you to compare sales and expenses and make accurate forecasts. The cash flow statement enables businesses to know their ability to fulfill short-term financial obligations. 

Every business should embrace bookkeeping no matter how small they are. At Lightning Bookkeeping, our bookkeeping services for small business protect business owners from making costly mistakes and provide valuable insights on how they can grow. Contrary to popular belief, you don't have to be a math genius to start implementing bookkeeping for your business. With a simple framework, you can start implementing bookkeeping today!