One aspect of being an independent contractor is that you must wear multiple hats in your day-to-day operations for your business to thrive.
A sound bookkeeping system is essential for small business success, and many overwhelmed business owners need help knowing where to start. However, with some resources, you can gain the confidence to manage bookkeeping tasks and run your business with authority.
This article explains what bookkeeping is, its importance for small businesses, and the appropriate steps to do it. We also discuss why online accounting software may be an excellent option for some small business owners.
What Is Bookkeeping for Small Businesses?
You may be wondering, what does small business bookkeeping consist of? Well, you have come to the right place!
Bookkeeping is a system to organize and monitor all the financial transactions you make in your business — including all expenses and income. While these details were traditionally kept in meticulously written ledgers (thus the term ‘bookkeeping’), online accounting software has made it far less cumbersome.
When you utilize suitable bookkeeping methods, you ensure that you are doing the following: recording transactions accurately, maintaining up-to-date financial information, nurturing your financial health, and complying with IRS rules so that you are in good shape for tax season.
A quality bookkeeping system – with the right tools and background knowledge – is easy to implement. Even if it’s not your favorite thing to do, bookkeeping software makes it easier than ever for small business owners to excel at keeping their books balanced.
Why Is Bookkeeping Important for Small Businesses?
Bookkeeping is one of the most important tasks for small business owners to stay on top of. It is essential for the following reasons:
- Business expenses — As a small business owner, keeping a detailed record of all costs is necessary. Doing so will help you make more informed decisions and provide important information when you file your taxes. Expenses can be easy to overlook but add up to more savings.
- Accounts receivable — You should also keep track of all money owed to your business. You are protecting yourself from a big headache when you keep an updated accounts receivable document.
- Taxes — For US based businesses, the IRS requires you to have certain information on record. You need to maintain a sound bookkeeping method to be compliant. Should you be audited, your bookkeeping records will come in handy.
- Business accounting — Good bookkeeping makes your business accounting run smoother. With detailed records, you eliminate the need to chase down documents later. Your accountant will thank you for having a solid bookkeeping system as tax season approaches.
How to Perform Bookkeeping Tasks for Your Small Business
Bookkeeping doesn’t have to be a complicated task. Whether you do the bookkeeping yourself or hire someone, do the following tasks to keep your books in check.
Keep A Record of all Income and Expenses
Keeping a general ledger – that details every credit and debit as a line item – is essential. You must also include the account that received or transferred the funds. If you want to avoid leaving any money on the table, you can use accounting software to keep it streamlined and avoid human mistakes.
Open a Business Account
Opening a business checking account is one way to simplify your taxes and keep your personal transactions from muddling your business expenses and income. But that’s not the only benefit. A separate business account will also do the following:
- It increases your professionalism and credibility as a business.
- It provides an extra layer of liability protection with the clear separation of business finances and personal finances.
- It sets you up to better handle future growth, making it easier to apply for a business credit card and deal with payroll logistics.
You need to send an invoice for every transaction for the amount owed. If you use accounting software, it will generate an invoice for you. Each invoice should provide a date of purchase, price, item number, and tax amount (when applicable). You will then make a note in your general ledger.
Stay On Top of Payroll
If you employ more than yourself or work with independent contractors, you must gather payroll information at the end of every pay period. You should include the hours each employee or contractor worked and their rate. The net pay reflects any necessary taxes and withholdings for company employees before paychecks are released.
Outsource Bookkeeping to a Software Service
One of the more cost-effective ways for business owners to outsource their bookkeeping is with a reputable accounting software program. These programs make the day-to-day bookkeeping tasks less cumbersome and free up more time to take care of other essential tasks, like running your business.
The Difference Between Bookkeeping and Accounting
While bookkeeping and accounting are closely related, there are some key differences.
Small Business Accounting
Accountants must hold a degree in the subject, and many become certified public accountants (CPAs). Their role is to provide tax planning and file tax returns. The three types of small business accounting are: cost, managerial, and financial. Business owners can perform these tasks with an accountant or through online accounting software.
Small Business Bookkeeping
Bookkeeping only requires on-the-job training or certifications. Bookkeepers maintain a general ledger and focus on day-to-day financial logistics. They identify mistakes early and work with tax professionals to ensure compliance and save money.
Why Consider an Online Bookkeeping Software?
A possible option for small business owners is using online bookkeeping software. Many are drawn to this option because it speeds up bank reconciliations, reduces human data entry errors, and they offer automated payment systems.
They can quickly complete a double-entry for all credits and debits. Double-entry is a recommended method for bookkeeping because it ensures that every debit has a corresponding credit making it easier to reconcile your ledger with the bank.
With peace of mind, business owners can focus on the more fulfilling aspects of running their business.
FAQs About Small Business Bookkeeping
What happens if I don’t do bookkeeping for my small business?
- You wouldn’t want to drive your car if there was a slow leak in your tire. You also don’t want to run a business that slowly bleeds funds. Good bookkeeping prevents you from making small mistakes that add up over time.
What are the consequences of poor bookkeeping?
- Many issues may arise if you don’t maintain your bookkeeping efficiently. You open yourself up to cash flow problems, your balance sheet will become disorganized, and you will struggle to make prudent financial decisions.
What are common bookkeeping mistakes?
- Throwing away receipts — even those under $75
- Not reconciling your books with bank statements
- Not tracking reimbursable expenses
- Poor communication among stakeholders
- Not having a paper trail as backup
- Going it alone without professional help
What questions should I ask a bookkeeper?
- What are your credentials/experience?
- How do you communicate with clients?
- Do you have any familiarity with my service/industry?
- What services do you provide?
- How do you handle security and confidentiality?
Should I use accounting software?
- If you are an entrepreneur looking for a cost-effective way to ensure the financial health of your small business, accounting software will help you cut down on human error and provide you with timely financial information.
Now you are armed with more knowledge about bookkeeping for your small business! Go into the world with these resources and watch your business thrive!
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