Mastering the Basics of Bookkeeping
As a new business owner, you will certainly have some responsibilities you won’t be able to avoid. One of those non-negotiable part of your business is producing financial statements. It can be overwhelming trying to master a topic such as bookkeeping but don’t worry this bookkeeping 101 guide will help you to get more familiar to this -painful for some- activity.
First, let’s clear something up, bookkeeping doesn’t mean accounting, these two, are separate fields. A simpler way to see it would be thinking of bookkeeping as an accountability partner, it gives you a hand to track your daily income and expenses, that way you will have the entire picture of your business’s financial situation in order to make the best financial decisions. Accounting starts to take place once the bookkeeping is done. In other words, bookkeeping is the process of recording financial transactions, and accounting analyzes the financial health of a business, based on those records.
Bookkeeping consists of recording financial data relating to business operations in an accurate and orderly manner. One of the objectives of bookkeeping are recording 100% of the transactions related to your business, in a systematic and logical manner to show its financial effect on the business. Therefore, it is important to keep in mind that you should keep personal expenditures separate from business expenses. This is one of the most common mistakes new business owners make.
What are the basics of bookkeeping 101?
If you don’t have an accounting or finances background, a topic as bookkeeping can be tedious. However, there are a few concepts that you must know:
Assets:
Assets are the things that the business owns. There are two types of assets, tangible and intangible assets. Intangible assets include royalty and goodwill. The most common tangible assets are the following:
- Cash (or bank) – Cash on hand and money on banks.
- Accounts Receivable – Money to be collected from customers for the products they purchase and service they receive from the business.
- Inventory – Products not yet sold.
- Fixed assets – Good example of these assets are equipment and properties, such as buildings, and cars.
Liabilities:
This is basically what the business owes. Including short-term debt (accounts payable) and long-term debt (loans payable).
Equity:
Refers to the ownership of the business owners and/or investors. Equity accounts cover all the claims they have over the company.
Should I use Cash or Accrual basis for my accounting?
Cash Basis of Accounting: Every business transaction passes through the cash account. By cash I mean both, physical and electronic money. Some business starts with cash basis, however, as they grow it’s common to shift to accrual basis of accounting.
Accrual Basis of Accounting: The main reason why a business needs to change from cash to accrual basis, is because the entity grows and starts offering credit to customers or requesting credit from vendors. This way sales and purchases are recorded immediately, even if there is no cash involve in the moment (credit transactions). This is also common with businesses who use an inventory system.
You need to carefully monitor the first three concepts from above that you’ll find in the balance sheet. Make sure these three are correctly recorded in order to balance the books. The method to corroborate your books are always balance is a formula called the accounting equation:
Assets = Liabilities + Equity
This formula means that what the business owns (assets) balance exactly the business claims (liabilities and equity). The reason of this is because, liabilities cover all the payables or debts to creditors and suppliers (this is the money owed to them in exchange for assets, inventory, expenses, supplies, etc.). Equity covers the investment or capitalization that business owners put into the business (can be financial or physical contribution such as preexisting individual assets).
How do I teach myself bookkeeping?
You can find online a lot of bookkeeping tutorials for free that will wide you and will you perfect examples for specific situations that your business might face in some point. If you are using QuickBooks online, they have lots of great tutorials. Other than that, there are a few best practices:
Separating Personal and Business Finances
These two must always be separated, this way you will be able to file your taxes more easily. My personal advice is always kept two separate bank accounts, one personal and one specific for your business. The business account(s) should be used for the income you receive from sales or services and for all the business expenses.
File Taxes on Time
As we have said before, you always must keep in mind that even if you have lost money and do not owe any taxes, at least you must file a return. If you end up earning a profit and owe taxes, that’s great, but you must report that income to Uncle Sam.
If you are a contractor (or freelancer), keep track of your expenses as these can be great at reducing your taxes. These can be office supplies, computer, desk, etc. Check out our resources tab for a few common industries we serve and find the tax deduction checklists.
Track Monthly, Don’t Get Behind!
Have you heard about the term “Month End Reconciliation”? If you have, probably the face of the person who said that it was annoyed or worried to finish on time. However if you are keeping the books for your business, this is a perfect way to have control of all of your finances, and in case of a discrepancy either with a vendor or costumer, you can solve it on time, instead of trying to track everything once the year ended and you have to fill your taxes, and believe me, by that point, it would be more complicated to fix any inconsistency in your financials.
What are 10 things bookkeepers do?
Bookkeeping duties can vary from company to company. Some of the typical responsibilities of a bookkeeper, according to QuickBooks Blog, include the following:
- Complete data entry and collect transaction details for incoming and outgoing bank accounts.
- Use bookkeeping software, spreadsheets, and other databases to post up to date financial transactions.
- Track debits (incoming dollars) and credits (outgoing dollars) for each account.
- Generate financial reports, such as balance sheets and income statements.
- Maintain and monitor financial records for accuracy.
- Reconcile or report any discrepancies in financial reports.
- Produce or pay invoices for credit card bills or inventory orders.
- Complete payroll.
- File tax returns.
- Handle accounts receivable and payable.
What does a bookkeeper do on a daily basis?
Bookkeepers manage general accounting ledgers, record journal entries (transactions), and generate financial statements. In an extended sense, bookkeepers help businesses keep their finances intact by overseeing different reports, recording all the transactions, and at the same time making sure of the accuracy of these reports. It is their responsibility to organize, collect and store the business’s financial information, such as cash flow statement, bank reconciliation, profit & loss statements, etc. If all these activities are done accurately, bookkeepers make possible for owners and accountants to build budgets, identify trends, and plan for future years.
If your company has inventory, one of the most important responsibilities can be keeping track of restocking when needed. Once you order inventory, your bookkeeper collects the receipt, enters the transaction into the general ledgers, and files the record into your financial database.
Bookkeeping also help businesses keeping track of their accounts receivable. The first step in this process, is generating the invoice, collecting a payment (sometimes this may require multiple outreaches, sending their account statement, and hopefully they will pay within their payment terms). The next step is entering the transaction into the general ledger and documenting the paid invoice.
It is important to mention that every company is different and has specific needs due to their operation. Be sure that the type of bookkeeping you are doing fits your business needs and you hire according to the entity’s needs. An experienced bookkeeper, or at least one who is desiring to learn more, is a financial tool you can use to make business management easier.
What are the two types of bookkeeping?
Yes, there is more than one method of bookkeeping, and no, I’m not trying to make it more confusing to you.
There is the single entry and double entry. Each of them has its own advantages and disadvantages. You, as the owner, must decide the one which is most suitable for your business.
Single Entry Bookkeeping System:
- Single Entry System of bookkeeping requires recording one entry for each financial activity or transaction.
- Single Entry System of bookkeeping is a basic system that a company might use to record daily receipts or generate a daily or weekly report of cash flow. Basically, single entry is an incomplete system in which the bookkeeper only records one side of a transaction in a single ledger.
Double Entry Bookkeeping System:
- This bookkeeping system requires a double entry for each financial transaction (the old “credit and debit”).
- Double entry system is not cash-based. This means that transactions are entered when debt is incurred, or revenue is earned.
- Due to all the transactions must be balanced, mistakes are extremely easy to spot, which makes this system virtually error-proof. Double entry is a suitable system for all types of business, most used by larger businesses with complex accounting, employees, and inventory.
If you have the time, the proper background (or at least the willingness to learn new skills), you can keep the books for your company. Hopefully this post on Bookkeeping 101 was helpful! If you need some help or just don’t want to deal with the headache, we are willing to keep your books or help you with any specific questions you may have. Most business owners didn’t go into business to do bookkeeping. Spend time doing what you love and makes you the most money. Leave the rest to us! Don’t hesitate, call us today.
Edgar Castillo
Tax & Accounting
