Bookkeeping 101

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:

  1. Complete data entry and collect transaction details for incoming and outgoing bank accounts.
  2. Use bookkeeping software, spreadsheets, and other databases to post up to date financial transactions.
  3. Track debits (incoming dollars) and credits (outgoing dollars) for each account.
  4. Generate financial reports, such as balance sheets and income statements.
  5. Maintain and monitor financial records for accuracy.
  6. Reconcile or report any discrepancies in financial reports.
  7. Produce or pay invoices for credit card bills or inventory orders.
  8. Complete payroll.
  9. File tax returns.
  10. 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

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Should I Open an HSA?

Should I Open An HSA Account? Are you considering a Health Savings Account (HSA)? If so, it is vital to understand what exactly an HSA entails. With this guide, you'll learn all about it: the advantages of an HSA and how it can help you manage your medical expenses....

Personal Finance Tips for Young Adults

As someone who has been working for most of their life, I wish there was someone out there who had shown me the correct way to save money for my future. Now that I am in my 30s, I have been getting better at saving money, but there are some personal finance tips that...

How to Track Expenses

There are many different methodologies, tools, tips, and tricks for tracking expenses, and it ultimately depends on your lifestyle and how actively and accurately you want to track them. This is information I’ve pulled from other sources and compiled into a few...

How To Accurately Record Commuting Mileage and Increase Tax Deductions

Increase Tax Deductions With the Business-Mileage Rule Using the Business Mileage tax deduction can be tricky. There are lots of situations that count while others do not. We don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible....

Bankruptcy – Everything You Need to Know

Everything you need to know Filing for bankruptcy protection is considered a statement on your ability to repay your debt to your creditors. Filing for bankruptcy will also put a halt to foreclosure or legal actions against you, and it stops creditors from calling and...

Top Tax Tips for 2023

Tax Refunds May Be Smaller This Year Plan now to learn these 2023 tax tips avoid surprises in the future! If you’re expecting a tax refund in 2023, it may be smaller than last year, according to the IRS. Your annual balance is based on taxable income, calculated by...

What is an EA?

Have you ever seen the title EA next to a tax professional’s name and wonder what it means? Or maybe you’re familiar with the title and you’re curious about the differences between an EA and CPA? Either way, in this blog I will be answering these frequently asked...

Familiarize Yourself With Tax Terminology

Yes, I know, tax terminology feels like a whole new language. For most people all of tax forms can be even more confusing than a foreign language. What’s the difference between itemized deduction and standard deduction? What’s Income tax?  These words and more tax...

History of Federal Income Tax Rates: 1913 – 2021

The United States federal government levies taxes on the income of its citizens and legal residents. The Internal Revenue Service (IRS) is the agency responsible for collecting these taxes.  Federal income tax rates have changed several times since 1913, when the...

Never Too Young To Learn About Taxes

Taxes is a topic that affects us young and old – whether we are worrying about how much taxes to pay if you win the lottery or buying your first item as a kid for $10.00 and realizing sales tax is a thing and it truly costs more than $10.00. While taxes do serve a...

Request an Appointment Today

4 + 3 =

Call us at

Pin It on Pinterest

Share This