5 Small Business Bookkeeping Basics You Can’t Ignore

Bookkeeping is, or should be, an essential part of your small business operations. It plays a significant role in keeping your small business finances organized and can help generate the critical insights you need to make data-backed business decisions.

Learning bookkeeping tips and basics is vital whether you've been handling your books for a while or just starting. Doing so will save time and money and prevent headaches as you focus on your next business milestone. Use this excellent article to learn the five small business bookkeeping basics you can't ignore! 

Why Is Bookkeeping So Important for Small Businesses?

Bookkeeping is vital for your small business because it organizes accounts, invoices, and expenses. Poor bookkeeping can lead to missed payments, late invoices, and other problems when filing your taxes. 

You can use bookkeeping to help:

• Access important documents and records for business operations.

• Facilitate tax information by having business finances readily available.

• Identify transaction mistakes with time for reconciliation and transaction management.

• Keep your business and personal finances separate.

• Monitor your small business’s financial health for any changes or improvements.

5 Bookkeeping Basics You Can't Ignore

Use these five excellent bookkeeping basics to grow your small business and keep your books in order. 

1. Organized Record Management Is Key

Small businesses typically use one of the two record management systems to address their bookkeeping needs: bookkeeping software or spreadsheets. Whatever you decide to use, you must ensure that you're consistently updating your records and checking your work for accuracy.

Separate Personal and Business Expenses/Accounts

Maintaining separate expenses, business credit cards, checking accounts, and business bank accounts will help streamline the process of reviewing your financial statements and records. When it comes time to file a tax return or prepare for an IRS audit, the last thing you want to do is comb through endless bank statements and receipts to determine how to categorize each expense. 

Spreadsheets vs. Bookkeeping Software

Bookkeeping software and accounting software allow small businesses to maintain accurate records and improve their entries' accuracy. Because of the improved accuracy, you’ll save time by quickly completing your bookkeeping.

You can configure bookkeeping software to create custom reports for certain financial aspects of your small business. Similarly, bookkeeping software allows you to keep all your records in one place.

Spreadsheets offer small businesses a convenient way to save, store, and view large quantities of information. You can use spreadsheets to view data, such as customer data, financial data, and product data.For small businesses, spreadsheets might work well for tracking their budgeting and spending habits. You can also use spreadsheets to create financial charts, financial reports, invoices, and receipts.

2. Know the Difference Between Bookkeeping and Accounting

You need to know the differences between bookkeeping and accounting. Although the two terms are often used together, they are distinct professions.

Bookkeeping involves:

• Answering day-to-day financial questions

• Balancing and maintaining a ledger

• Entering debits and credits

• Maintaining expenditures and income

• Promoting financial statements, like the balance sheet

• Recording daily transactions

Accounting has different responsibilities, which involve: 

• Adjusting entries in the ledger

• Analyzing business costs

• Completing in-depth budgeting and forecasting

• Conducting strategic planning

• Preparing taxes

• Providing macro-financial advice

3. Be Aware of the Different Types of Bookkeeping Methods

There are two bookkeeping methods to choose from: cash basis and accrual method. The method you choose will impact your business. For example, how you deduct certain items from your tax bill, such as mileage, is affected by your bookkeeping method.

The 2024 standard mileage rate is 67 cents per business mile. If you use the standard mileage deduction, you must follow restrictions on depreciation expense deductions and car payments.

If your vehicle operating expenses exceed your standard mileage deduction, you can deduct transportation expenses (insurance, gas, repairs, etc.) using the actual expense method. Instead of deducting your business mileage, determine your expenses for business-related travel. The actual expense method usually allows for larger depreciation expense deductions.

Cash Method

The cash method is convenient for many small businesses due to its simplicity. With the cash method:

• You’ll record expenses when you pay a bill.

• You’ll record sales when you receive payments.

• You’ll record transactions when you receive cash or spend it.

The cash method differs from the accrual method in tracking expenses and revenue. With cash accounting, you track revenue when you receive it and track expenses when you pay it.

Accrual Method

This accounting method is based on the matching principle, matching revenue with expenses. It differs from the cash method in how you track expenses and revenue. With the accrual method:

• You’ll record expenses even though payment has yet to occur.

• You’ll record sales even though you have yet to receive funds.

• You’ll record transactions when they are incurred.

The accrual method also differs from the cash method for small businesses. Businesses must use the accrual method if they have generated more than $25 million in annual gross receipts for the three preceding years.

4. There Are Several Different Accounts to Track

You also must learn the basic bookkeeping account types. These accounts serve various purposes to help you form your general ledger or balance sheet. While you may hear some people use these two terms interchangeably, a general ledger and a balance sheet are not the same.

The scope is the main difference between a general ledger and a balance sheet. The general ledger is the financial record for the entire life of the business. It should include everything, all the way back to the beginning. On the other hand, the balance sheet is a financial picture of your business at a given moment in time.

A balance sheet shows your business's current assets and liabilities, giving you a quick understanding of its current state. The general ledger includes all of that information and more.  

Assets

Assets describe what your business owns. On a balance sheet, assets are the total of liabilities and equity. A balance sheet also lists assets as current assets and other assets.

Current assets include:

• Accounts receivable

• Assets

• Cash

• Cash equivalents (marketable securities, money market funds, treasuries)

A small business may have other assets, including:

• Financial assets

• Fixed assets 

• Intangible assets

Liabilities

Liabilities are what your business owes. You can find liabilities divided into two subsections: 

• Current liabilities

• Other liabilities

Together, these combine to determine your total liabilities.

Revenue/Income

Revenue is the income your business makes from its operations. There are two types of revenue: 

• Operating revenue

• Non-operating revenue

Operating revenue is revenue from sales or services. Non-operating revenue is revenue from investments or passive income.

Cash

Cash includes: 

• Bank accounts

• Currency

• Undeposited checks

On your balance sheet, cash is a current asset.

Accounts Receivable

Accounts receivable are current assets on your balance sheet. They are an account in your general ledger that describes a credit that businesses are owed.

Accounts Payable

Accounts payable is an account within your general ledger. It describes a debt that your business must pay. On your balance sheet, accounts payable are current liabilities.

5. Outsourcing your bookkeeping can save time and money

While small business owners can get away with doing their bookkeeping tasks themselves at first, it is a task that an outsourced professional bookkeeper should eventually handle. Outsourcing your small business books will save money and return the time you spent painstakingly inputting your data.

The right outsourced bookkeeping service will also review your books for accuracy and catch you up if you've fallen behind in addressing your small business bookkeeping duties and tax obligations. 

Keep Your Books Immaculate with Help from 1-800Accountant

1-800Accountant, America's leading virtual accounting firm, helps business owners with a suite of financial services, including bookkeeping and business tax preparation and filing. This way, you get the relief of leaving your books and business needs in the care of seasoned experts while freeing up time to focus on growth and operations.

Schedule a free consultation with 1-800Accountant–usually 30 minutes or less–to get the high-level bookkeeping and financial expertise required to move your small business forward.