How Small Business Bookkeeping Works

Bookkeeping might seem like a dry and boring topic, but it's critical for the success of your small business. In this post, we'll look at how bookkeeping works and some tips for staying on top of your books.

We'll also discuss some of the most common mistakes small businesses make regarding bookkeeping. By understanding how bookkeeping works and avoiding these common mistakes, you can set yourself up for success!

Are you a small business owner who is overwhelmed by bookkeeping? Do you feel like you're spending more time wrestling with numbers than running your business? Relax! Bookkeeping doesn't have to be hard, and it's something that can be learned.

This post will break down the basics of small business bookkeeping and explain how it works. We'll also give you some tips on making bookkeeping less daunting and more manageable. So read on for everything you need to know about keeping your books in check!

Bookkeeping is one of the most important aspects of any small business. It's essential to keep track of your expenses and income to stay on top of your finances and make sound business decisions. But bookkeeping can be confusing, especially if you're not familiar with the terms and procedures.

We will explain how small business bookkeeping works and offer some tips to help you get started. We'll also provide a few resources to help you learn more about bookkeeping. So if you're looking for a crash course in small business bookkeeping, read on!

Let's get started!

Bookkeeping

Bookkeeping refers to the process of maintaining records of everyday financial transactions for an organisation. When managing the books for a company, a professional is required to record all of the company's expenditures, sales, cash transactions, and bank transactions in a general ledger.

When you first launch a company, you'll need to get in the habit of maintaining records in the form of diaries and ledgers. The financial health of any organisation is dependent on the accuracy and upkeep of its ledger.

In addition to maintaining a record of the transactions, the bookkeeper is responsible for drafting invoices and completing payroll. The bookkeeping process, and the degree to which it is complicated, is directly proportional to the size of the company as well as the number of transactions that are processed on a daily, weekly, or monthly basis.

Bookkeeping Techniques

Single entry and double entry are the two approaches of bookkeeping that are available. Many organisations utilise bookkeeping methods called double-entry, in which an accountant is obliged to make an entry to a different account that is equivalent and opposite to the original entry.

The maintaining of financial records can be performed on a spreadsheet or on any piece of lined paper. In today's world, there are a great deal of automated procedures for carrying out the aforementioned tasks, and one may make use of software that ties together a number of the steps involved in the accounting process.

Sticking to completeness and correctness at all times should be the primary priority of a skilled bookkeeper. However, because it is possible for the bookkeeper to make an error, they are required to work under the supervision of an accountant.

The Price Paid For Poor Bookkeeping

1. What is the point of your concern?

Your company will benefit from the support that a qualified bookkeeper can provide. Inaccurate bookkeeping might make it appear as though a company is doing better than it actually is. There are two expenses associated with paying for poor bookkeeping services: the price of the poor bookkeeping itself, and the cost of hiring a CPA firm to remedy the inaccuracies. In addition, there is the cost that is not immediately visible of making poor choices due to a lack of adequate financial information.

2. Just what does "poor bookkeeping" entail?

As an accountant, we have experienced all aspects of bookkeeping, including the good, the bad, and the ugly. At its most extreme, sloppy bookkeeping can produce information that is even less useful than no information at all. As a result, you ought to call into question the quality of your bookkeeping if it isn't compatible with your knowledge of the operational results of the company.

When I was dealing with one customer, I found that the information provided by the bookkeeping was so untrustworthy since it was so inconsistent with the operations of the business. Because to this, the majority of the job had to be redone even though we had access to bookkeeping.

During the course of the year, the company relied on information that was unreliable, which led to an excessive utilisation of its line of credit and extra interest expense. After everything was said and done, we submitted the tax return and offered a suggestion to change the bookkeeper.

3. Four indicators of poor bookkeeping

• Interest & penalties. The bookkeeper either does not understand how to execute the bookkeeping or is attempting to clean up bookkeeping that has been done incorrectly, which leads to the filing of late reports and the accrual of interest and penalties. It is important to keep an eye out for large interest and penalties when monitoring the evaluations.

• Reports that include outdated or otherwise peculiar information. These are more technical errors that occur when a bookkeeper records a transaction to a sub-ledger and then does not correctly close out the transaction, resulting in numbers that should have been removed from reports. These errors occur when a bookkeeper records a transaction to a sub-ledger and then does not correctly close out the transaction. Because of this, the reliability of the reports for use in making business choices is reduced.

• Unable to provide responses to questions regarding their employment. Either the bookkeeper is unable to address inquiries regarding their bookkeeping, or the answers they provide are incompatible with the way the firm is run. A company's bookkeeper is the person on whom it should be able to rely for information regarding the company's finances.

• The management of similar transactions was handled inconsistently, and a lack of understanding of trend analysis was demonstrated. The inconsistent classification of similar transactions is an indication of a lack of grasp of basic accounting concepts, and it reduces the usefulness of accounting data for analysing trends and monitoring for errors.

One illustration of this would be the situation in which the bookkeeper records the removal of waste to the account for utilities one month, and then to the account for repairs and maintenance the following month. Therefore, there should be twelve things included in the annual expense category of utilities (one per month).

The examination of trends can be used to monitor for errors in accounting as well as operations. For instance, skipping a month can suggest that a payment has been overlooked.

4. Costs unforeseen by poor bookkeeping (or the fraud discussion)

There are situations when sloppy bookkeeping is not necessarily an indication of ineptitude on the part of the bookkeeper. Instead, sloppy bookkeeping conceals indications of fraudulent activity. The majority of cases of fraudulent activity are almost always accompanied by inadequate record-keeping. When someone decides to commit fraud, they need to devise a plan to cover their tracks, and it is far simpler to do so in a sloppy accounting system than in one that is accurate.

5. Your bottom line can get better with good bookkeeping!

Your business management should benefit from good bookkeeping because it should deliver relevant information. It is possible to demonstrate to your clients that you are well organised through effective management of your accounts receivable. A listing of work that is still in progress can make billing go more quickly.

An accurate listing of accounts receivable will reveal whether or not it is necessary to call customers whose balances are more than thirty days old. A listing of accounts receivable will help highlight trends about the customers. For instance, if a particular customer ordinarily places an order for $10,000 worth of product every week but has not done so this week, a member of staff can call the customer to enquire as to what may have caused the discrepancy.

The management of stock can be accomplished through the use of an aged inventory listing. For instance, a wine shop may keep tabs on older and less popular vintages in their stock, and if they find any that are more than a year old, they may put them on sale in order to make room for newer, more in-demand vintages. Alternately, the listing might keep track of the most popular vintages, and greater orders could be placed for any new product that would sell out in less than a week.

A competent management of one's cash flow can result in lower interest rates on loans. For instance, a company's accounts receivable are typically its largest current asset, and proper management of those receivables can help your company reduce its reliance on a line of credit that requires interest payments.

For instance, if the typical collection period for an invoice can be lowered from 45 days to 25 days, then the earlier payment might be put towards decreasing the amount of money drawn from a line of credit.

If you borrow $1,000 from your bank for 20 days at a borrowing rate of 6% per year, the interest you will be charged will be $3.29 ($1,000 multiplied by 6% multiplied by 20/365). If this happens 12 times in a year, the annual fee is $39.45 ($3.29 multiplied by the total number of times), and it is applied to every $1,000. As a result, the amount that can be saved on accounts receivable totalling $100,000 is $3,945. In addition, the quicker accounts receivable are recovered, the lower the likelihood that the amount would be questioned in the future.

A knowledgeable bookkeeper is vital to the success of any firm. Get some training for your bookkeeper if you don't already have it, or find someone else to be your bookkeeper.

The Indications That You Ought to Employ a Bookkeeper

1. Making your own books requires more time than you have available

A survey found that 39 percent of owners of small businesses put in more than 60 hours of effort per week.

Don't underestimate the value of your own time. In addition to increasing the risk of burnout, working too hard wastes time and money. One dollar is equivalent to sixty minutes of work.

First thing you should do is keep a log of how much time you spend on bookkeeping each week. The next step is to calculate how much your time is worth by utilising a calculator available online, and then compute how many "dollars" you spend each month on keeping your books.

When compared to the cost of hiring a professional bookkeeper, your "salary" as your company's bookkeeper should be considered. When you consider the time you spend keeping the books a true expense that must be paid out of pocket, you will have a clearer picture of whether or not you should continue to do so.

2. You never keep your books current

When you go behind on your bookkeeping, your financial records will no longer accurately reflect the current situation of your business. Because of this, it becomes more difficult (and often even impossible) to comprehend cash flow and appropriately evaluate the state of your company.

For instance, if it's been six months since your Cost of Goods Sold (COGS) was last updated, you won't be able to deduct that number from your revenue in order to calculate how much profit you've made in that period of time.

This indicates that you are unaware of the amount of money that you are making, as well as the actions that you may do to raise your income.

In addition, if your books aren't up to date, you'll have a tonne of catch-up bookkeeping to do during tax season, which will make what is already a difficult time of year even more challenging.

If you choose an appropriate bookkeeping solution, you should be able to anticipate receiving monthly financial statements that will inform you of the sources and destinations of your money.

3. Your books are kept by your accountant

Some business owners choose not to make any changes to their accounting records throughout the course of the year. Instead, they hand over their receipts and bank statements to their accountant during the tax filing season so that the necessary adjustments can be made retrospectively.

Although this may appear to be a straightforward approach to dealing with an unpleasant duty, we do not recommend taking this course of action.

This is why:

• If you are unable to keep your books up to date throughout the year, you will not be able to utilise monthly or quarterly financial statements as a basis for making choices regarding your company.

• It is a waste of financial resources. Bookkeepers typically charge less per hour than Certified Public Accountants (CPAs), who typically charge more. As a result, you run the risk of spending more money than is necessary on bookkeeping services.

• You shouldn't assume that an accountant would automatically supply you with backdated month-to-month financial data. Having detailed business records, on the other hand, is required in order to successfully obtain financing, attract investors or business partners, or sell your company.

Regardless of which method of bookkeeping you decide to implement, you should be able to receive regularly updated books, reasonable prices, and comprehensive records.

4. Lost opportunities for tax deductions

Imagine that you just found out that, because your place of residence is more than 50 miles away from your place of employment, you are eligible to deduct a portion of the costs associated with your commute.

That is very encouraging news. Only now are you considering all of the years in which you did not take advantage of this deduction, the additional sum of money you could have saved, and the ways in which you might have spent it. Your mind is filled with images of an in-ground swimming pool.

When it comes to tax deductions for small businesses, the sooner you are aware of them and the sooner you make use of them, the sooner you will see a benefit.

A bookkeeper's responsibility includes assigning the appropriate classification to each and every business expense that their client incurs. By doing so, companies are able to recognise expenses that are obviously tax deductible, such as mileage.

In the end, the person who is best suited to provide you with detailed advice regarding tax write-offs is an accountant who has prior experience working in your business. However, many business owners only consult their accountants when it is time to file their taxes. During the remaining months of the year, you may find that having a reliable bookkeeper who is familiar with the requirements of your company is of great use to you.

It shouldn't feel like a prolonged arm-wrestling contest when you have your accountant file your taxes; rather, it should feel like a swift hand-off.

5. You have erratic cash flow

Have you ever had the feeling that money from your customers or clients is on its way to you, but you are unsure of how much it will be or when it will arrive?

Or, when it comes time to pay freelancers or independent contractors, do you find that your wallet is empty?

If you have cash flow statements, it would be really helpful. A cash flow statement will inform you how much money you owe to other people as well as how much money other people owe to you. It's similar to looking into a crystal ball to see what the future holds for your savings account.

You will be able to obtain monthly updates on your company's cash flow if you use an appropriate bookkeeping solution.

6. The payment of projected taxes is a royal pain in the you-know-what

If you pay much less than the amount projected for your quarterly taxes, you will be subject to a penalty. If you pay them back more than they are owed, it is the same as giving them a loan with no interest.

There should be no room for speculation when it comes to making your estimated tax payments quarterly. When calculating how much money to set aside for taxes, there are a few different approaches you may take, but all of them require you to have an idea of your typical monthly income. If your bookkeeping is not up to date or if you do not have any financial statements on hand, calculating it will be difficult.

Your efforts to bring in new business are for nought if they are not accompanied by an increase in your financial gain.

7. There has been an uptick in sales, but no corresponding gain in profit

If you aren't increasing your profits, all of the effort you put into acquiring new consumers and maintaining the satisfaction of your existing ones is for nought.

It is imperative that you expand your profit margins if you find that your revenue is growing while your bottom line remains unchanged. If you want your company to be more lucrative, having financial statements that are prepared for taxes by a bookkeeper will help you identify areas in which you need to minimise expenditures.

It's possible that this is the reason why business owners that employ bookkeepers have an average rise in profits of 16%.

8. Computer security issues have been plaguing you

When you use your personal computer to track and save financial information, you need to be one hundred percent assured that it is both secure and stable.

The WannaCry ransomware assault occurred in May 2017 and affected over 230,000 systems across more than 150 countries around the world. Additionally, WannaCry encrypted the data of its victims, rendering it unavailable and demanding Bitcoin payments from the victims in order to decrypt the data.

It's bad enough that you might lose years' worth of financial information. However, data indicates that more than ninety percent of personal computers used in homes have been compromised by spyware at some point in time.

If you handle the bookkeeping for your company on a computer in your house, there is a considerable risk that someone else has access to the financial information for your company, or that this information will eventually get into the wrong hands.

To check if your computer is clean, use a free utility such as AVG. If it finds malware, it's a warning that you either need to boost up your security measures or pass over the responsibility of bookkeeping security to a professional. If it finds malware, it's a sign that it's time to beef up your security measures.

Tips To Avoid Bookkeeping Errors

1. Bring your books up to date

This piece of advice is not overly complicated. You need to keep your accounting books up to date so that they show each transaction that takes place between your company and a third party if you want to prevent any accounting problems. Whether you keep your books on a cash-based or an accrual basis determines how frequently they need to be updated.

When you receive money or make a payment, you should produce a journal entry if you use the cash basis method of accounting. If you adopt accrual accounting, you should record transactions at the time your company incurs them; this is true even if you have not yet received the money or made the payment.

You are required to keep your accounting books up to date no matter what style of bookkeeping you choose. Transactions that were not documented are referred to as mistakes of omission. Your accounting records will be thrown off if you make omission errors, which could lead to you filing your taxes erroneously, creating fraudulent financial statements, and spending more money than you actually have.

Maintaining up-to-date accounting books that include entries for all transactions will help you avoid omission errors.

2. Keep receipts and other papers safe

When you are getting rid of clutter, the temptation to toss out important documents such as receipts and bank statements may arise. However, keeping track of receipts and other documentation relevant to the transaction substantiates the figures in your records. In addition, these documents are necessary in the event that audits are conducted on your business. In addition to this, you'll need them in order to properly reconcile your books, which is covered in the following section.

For the sake of your company's security, you should keep records for at least three years. Put the records somewhere safe, like a cabinet that locks. You also have the option of storing digital papers on your computer, which can serve as a backup in the event that the paper records are lost or damaged.

3. Examine your records

Mistakes happen. Even accountants are prone to making errors every once in a while. Therefore, there is a good likelihood that you, too, may commit some errors. However, if you are able to identify errors before they become problematic, you will be in an excellent position.

Reconciling your accounts can be a useful tool for spotting inconsistencies early on, before they have the chance to snowball into more serious problems. A comparison of the figures in your books to those on an external record, such as a bank statement, is what is meant by the term "account reconciliation." After completing the process of balancing your accounts, you may find that your accounting records include a mistake. After that, you can make a new post in the diary to either add or take away money.

4. Keep personal and corporate money separate

Do you keep all of your money in a single bank account, or do you keep separate accounts for each? If this is the case, you need to establish a fresh bank account for your company. It is recommended that you keep your personal and business finances separate, even if it isn't required of you to do so. This applies to sole proprietors and partners who don't use DBAs.

Mixing your personal finances with the finances of your company is a surefire way to create chaos and disorder. Not to mention the fact that combining funds could lead to an error in the tax return that you file.

Your small company can benefit in many ways from establishing a separate bank account for its commercial transactions. First, you are aware of the whole amount of money available to your company, which can help you avoid unnecessary expenditures. You also won't be tempted to use some of your company money for your own personal expenses because you won't have access to those monies. Instead, you might invest the money that is in your business bank account into the expansion of your company.

5. Utilise software

The manual upkeep of accounting books requires a significant amount of time. When you manage a small business, you can find yourself spending hours upon hours managing your books. You might also make the costly decision to engage an accountant to handle all of your accounting tasks for you. This option is also available to you.

Instead of keeping track of your books manually or relying only on an accountant, do some comparison shopping for accounting software. For instance, with accounting software, you can easily record transactions in a timely manner and keep an eye on both incoming and exiting monies. You can swiftly generate reports, make and send invoices, calculate balances, and perform a variety of other accounting tasks when you automate your accounting responsibilities.

6. Establish budgets

Are the goals you have set for yourself and your finances being met? If you do not make budgets, you will not be able to determine whether or not your spending is excessive.

Developing a budget for your small business will assist you in planning for spending and making intelligent purchase selections. You can also make projections on incoming revenue, which will enable you to establish whether or not you have achieved your objectives.

You can develop a budget for your company by making projections regarding its income, expenses, and profits. When you make your budget, it will be more accurate if you use facts from the past.

Maintain a running comparison of your predicted profits to your budget throughout the year. If you find that your company isn't bringing in as much revenue as you anticipated, you can think about strategies to boost sales, such as providing discounts to customers. And if you find that your costs are more than you anticipated, you should look for ways to reduce those expenditures.