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Small Business Bookkeeping 101: Everything You Need to Know


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Building your business is exciting and challenging, requiring you to wear multiple hats, including bookkeeper. However, it can be easy to put bookkeeping on the back burner, especially when you are dealing with all the other aspects necessary to keep your business running from day to day. With that in mind, let’s talk about why small business bookkeeping is an essential part of assisting your business to thrive.


What is small business bookkeeping?


To build a strong foundation for your business, bookkeeping is the critical framework, encompassing multiple tasks. Here are just a few of the aspects involved in your bookkeeping:


  • Basic data entry – To know the financial health of your business, you need the data.
  • Accounting software – The right software will help you to generate reports to understand how profitable your business is.
  • Certified public accountant – Having an accountant can assist you in understanding the tax implications of your capital investments and growth opportunities.


However, before your small business bookkeeping can help you understand the financial health of your business, you have to decide how you want to enter the information. The two methods available are:


  • Single entry accounting – All transactions are recorded at once, either as an expense or income. Suitable if your business doesn’t have significant equipment or inventory.
  • Double entry accounting – Every transaction is entered twice, both as a debit and credit, thus balancing the books between accounts. Can be complicated, but also can prevent recording errors.


With an entry system in place, then determine what accounting method you want to use.


  • Cash-based accounting – Records transactions only when money changes hands. No invoices or outstanding bills recorded until they are paid.
  • Accrual-based accounting – Record bills and invoices even if funds have not been exchanged.



Once you have decided on these two points, your bookkeeping will be easier for you to manage. Additionally, your financial reports will be more complete, thus giving you the information necessary for you to make critical decisions about the future of your business.


Why is bookkeeping important?


Fundamentally, small business bookkeeping is essential for a number of reasons.

  • Budgeting – With income and expenses organized, it is easier to review financial resources and plan for future expenses.
  • Tax Preparation – Make tax filing more efficient because you aren’t scrambling for paperwork.
  • Organization – Regardless of whether you need the information for the IRS, investors, or lenders, small business bookkeeping allows you to quickly provide what is necessary.
  • Analysis – To analyze your business performance, financial statements should be regularly generated. Track your inflow and outflow lets you know what is working and what isn’t.
  • Decision-making/Planning – With the right information available, you can make profitable decisions and strategic planning for its long-term growth.


The best way to make your business thrive is understanding its financial position. Without proper bookkeeping processes in place, you will constantly be scrambling to determine the best course forward. Opportunities could be missed, and avenues of expansion could disappear.

Even if you are regularly inputting information into your accounting software, you still might be struggling to understand the financial position of your small business because you lack the ability to read your financial reports. Here are some tips to make your small business bookkeeping more effective, particularly for your strategic financial planning.


7 Tips for Small Business Bookkeeping and Accounting


Putting the right entry system and accounting method in place can give you a leg up when it comes to understanding the financial position of your business, but there are multiple reports assisting you in analyzing where your business is financially at the moment and the potential for future growth with capital investments.

These tips will help you to better analyze your financial statements by outlining what information you can gather from each of them.


Tip #1: Understand the Profit and Loss (P&L) Statement

small business bookkeeping


A profit and loss statement (P&L), also known as an income statement, is a regularly produced financial statement. It shows your company’s revenue minus expenses for running the business, such as rent, inventory costs, freight, and payroll. Your P&L statement entries give you insight into cash flow, helping you to see where money is being used and where it is coming from.


The top line gives you the revenue. Once expenses are deducted, you will have your net operating income. A P&L statement takes into account outstanding debts, one-time deductions, and interest payments. Together this information shows you the net profit of your business. By knowing what these entries mean, you have specific insight into your business’s cash flow, giving you a comprehensive picture of its financial fitness.


Tip #2: Learn to Read a Balance Sheet


Reading a balance sheet provides a picture of your business assets, liabilities, and the owner’s net worth or equity. Your balance sheet is divided into two parts that must equal each other out. That means your assets are balanced by your company’s financial obligations, along with the equity investment and retained earnings.


  1. Assets are what you use to operate your business. They are classified from most liquid to least liquid.
  2. Liabilities are what your business owes. These are organized from short- to long-term borrowings and other obligations.
  3. Owner’s equity is the amount initially invested into your business, representing another source of funding.


Understanding whether you have the assets and equity to cover your liabilities is key to determining whether your business is healthy enough to take on additional debt to purchase equipment or expand your team.


Tip #3: Know What a Cash Flow Statement Is


Your cash flow statement summarizes the movement of cash and cash equivalents in and out of your business. The main components are cash from three areas, operating activities, financing activities, and investing activities. Calculating cash flow are done using direct or indirect methods. The direct method adds up all cash payments and receipts. The indirect method adjusts net income by adding or subtracting differences from non-cash transactions.


The cash flow statement helps creditors determine the amount of cash available to fund operating expenses and pay down debt. It clearly shows whether your business is on solid financial ground.


The typical structure of a cash flow statement is:

  1. Cash flow from operating activities – includes any sources of cash generated by your products or services.
  2. Cash flow from investing activities – includes purchasing assets, changes in equipment, or loans made to vendors
  3. Cash flow from financing activities – includes when capital is raised and cash-out when dividends are paid
  4. Disclosure of non-cash activities, which can be included when the statement is prepared under generally accepted accounting principles (GAAP)


While analyzing the cash flow statement, red flags shouldn’t be raised when you see poor cash flow. Further analysis can show that you made a decision to expand your business, resulting in a low cash flow temporarily. If you analyze changes in cash flow over time, you can see how your business is performing. Be sure that your analysis includes the income and balance sheets.


Tip #4: Separate Business and Personal Expenses

small business bookkeeping


To make sure that your financial statements are as accurate as possible, keep your personal and business expenses separate. Don’t mix purchases, and be sure that you keep records of all receipts related to your business expenses.


Tip #5: Save Important Bookkeeping Records


Once your financial year is complete, don’t assume that you no longer need those records. Keeping accurate records and saving them assists you in seeing how your business is growing, speeds up preparing financial statements, and helps you to separate your types of income and expenses.

Plus, by putting processes in place to save your small business bookkeeping records, you avoid missing out on crucial deductible expenses that could help to lower your tax liability. It also assists in managing payments, payroll, and profit distributions. Finally, keeping your bookkeeping records means you have all the evidence you need if your business ever gets audited by the tax authorities.

It doesn’t have to be a struggle. Simply put a process in place for saving bookkeeping records, archiving them at regular intervals. Your auditors can assist you in creating a plan that works for your business and meets accounting best practices.


Tip #6: Choose the Right Accounting Method


Choosing whether to use cash vs accrual comes down to timing and when you record your expenses and income. If you do it when you receive a bill, for instance, then you are using the accrual accounting method. On the other hand, cash accounting means recording cash only when it changes hands. Here is what you need to know:


Benefits of Cash Accounting

  1. Simple and shows the money on hand
  2. Only pay taxes on money received


Downsides of Cash Accounting

  1. Not accurate because you could be showing profits when you haven’t paid your monthly overhead.
  2. Doesn’t help when making management decisions because you don’t have a long-term view of cash flow.


Keep in mind, some businesses cannot use cash accounting methods, so check with the IRS to see if your business is one of these.


Benefits of Accrual Accounting

  1. Accurate picture of performance and finances
  2. Make financial decisions with more confidence
  3. Easier to pitch for long-term financing


Downsides of Accrual Accounting

  1. More work watching invoices.
  2. Pay taxes on income before your customers pay.


Finally, there is the hybrid accounting method which combines aspects of accrual accounting for loan applications but uses cash accounting to simplify elements relating to tax liabilities. To determine which is the right method for you, consider speaking with a professional accountant.


Tip #7: Update Your Books Monthly

It can be easy to push updating your bookkeeping down the road, but eventually, it will catch up with you. Avoid the hassle of scrambling to get your books updated by making a regular schedule every month to keep them up to date. Doing so will mean less work for you down the line.


Bonus Tip: Hire a Bookkeeping Service to Take It Off Your Plate


If you are struggling to find time to manage the tasks related to your bookkeeping, consider using a monthly small business bookkeeping service, such as Accounts Balance and EcomBalance. Both provide monthly accounting service options for businesses, regardless of size. Additionally, we offer services geared toward online businesses, making sure that you have the proper financial reporting tools in place.


small business bookkeeping


Staying up to date on your bookkeeping is key to the success of your business. Our team can help by providing catchup bookkeeping services and so much more.


In Summary


Bookkeeping is an essential part of successfully running your business. By incorporating these tips, you can easily read your business’s financial statements and understand its financial health before you make crucial decisions about financing or capital investments. However, it doesn’t mean that you have to be tied to your computer and accounting software. Utilizing an accounting service can give you the tools to successfully grow your business, helping it to thrive, regardless of the challenges and opportunities. Learn more about how to manage your bookkeeping with our team today.


Want help with your bookkeeping? We make it easy. Get startedSpeak w/ a Founder, or Schedule a Callback

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Tracy Knepple

Tracy Knepple

As a writer and editor with 20+ years experience, Tracy Knepple offers practical tips and analysis on accounting, bookkeeping, small business, and many other topics. She has authored over 100 books as a professional writer for the Raymond Aaron Group. She received her Bachelor's degree in Communications from Indiana University.

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