Reviewed by Lexi Correll, CPA

If you’re a business owner and you’re thinking about doing your own bookkeeping, you came to the right place!

But before we walk through how to approach your bookkeeping, let’s first talk about the basics!

What exactly is bookkeeping?

In the simplest of terms, bookkeeping is keeping a record of a business’s financial transactions.

But why is it so important to keep a record of these financial transactions?

Bookkeeping is keeping a record of a
business’s financial transactions.

One of the biggest reasons (if not the biggest reason) why bookkeeping is so important is because you need it for tax purposes! In other words, business owners are legally required to have a record of their business’s financial transactions.

When filing for your taxes, you will need to represent how much your business earned and what your business spent to determine your tax liability. You are also required to provide support for the representations you make.

It goes without saying that you can’t provide this information without doing your bookkeeping for the year.

Aside from that, bookkeeping helps you keep track of your business’s financial status. If you don’t know how your business is doing financially, you won’t be able to make smart decisions for your business’s future.

For example, you want to expand your business by moving to a bigger building and hire more people. But first, do you have enough money to be able to do all this? And will your cashflow support the added ongoing costs? The only way for you to really know is to check your financial statements (hopefully the recent financials) and base your decision on what you see!

Another reason why bookkeeping is important is because it helps you catch financial errors quickly!

Did a vendor charge you the correct amount? Are there any strange transactions in your bank account?

Questions like these can be answered by doing your bookkeeping!

Read more reasons on why bookkeeping is important here.

Setting Up Your Bookkeeping

Now that we know why bookkeeping is important, here are a few items to consider as you set up your own bookkeeping processes:

1. Create a Business Banking Account
2. Cash vs Accrual Accounting Methods
3. Chart of Accounts

1. Create a Business Banking Account

When running your own business, we highly recommend using separate banking accounts for your personal expenses and your business expenses. Why is that?

First, if you choose to mingle your personal and business assets, you are possibly adding liability exposure to yourself. What do we mean by that?

It is highly recommended for business owners to use separate accounts for personal expenses and business expenses.

If you choose to set up your business as a corporation, your personal assets are protected to a certain degree. This means that when creditors need to collect on your liabilities (maybe due to your business going bankrupt), they can only do so with your business assets. However, if you decide to use the same banking account for your personal and business transactions, creditors can potentially “pierce the corporate veil” and the limited liability protection that you have may be compromised!

Second, mixing personal and business expenses can make it difficult for you to sell your business or apply for a loan. When both types of expenses are in the same account, it can make business transactions difficult to track. In turn, these can distort your financial statements and even prevent you from having an accurate picture of your business’s financial standing. These details are very important if you need to apply for a loan or if you need to sell your business.

Finally, choosing not to separate your personal and business expenses might cause tax problems for you. At best, you might miss out on certain deductions! At worst, you might accidentally expense non-business expenses on your tax return and violate tax laws!

All that to say, separating personal and business expenses will really benefit your company and possibly help you avoid quite a few problems.

2. Choose an Accounting Method: Cash vs Accrual

Before you start on your bookkeeping, it’s important to choose what accounting method to use: Cash or Accrual.

The main difference between these two accounting methods is the timing of when a transaction is recognized.

What do we mean by that?

Well, in the Cash Basis accounting method, transactions are recognized when cash is received (income) or paid (purchases).

For example, a business receives a utility bill in the amount of $125.00 for the month of March dated 03/31. The business then pays the bill on 04/20. Under the Cash Basis method, the expense is recognized on 04/20 when it is paid and will look something like this:

Accrual Basis, on the other hand, recognizes transactions when it is earned (revenue) or incurred (purchases). Therefore, using the above example, if the business received the bill on 03/31 for services rendered in March, they would recognize the expense on 03/31 in the month the cost was incurred.

The two accounting methods differ on the timing of which a transaction is recognized. Cash Basis recognizes it when cash is received or paid, while Accrual recognizes it when a transaction is earned or incurred.

Learn more about the two accounting methods here.

3. Setting Up Your Chart of Accounts

Another important detail to address is your company’s Chart of Accounts (or COA in short).

The COA determines the categories and groupings of your financial transactions. It defines whether a transaction is an expense, income, owner’s equity or other. Each category or account you define in your COA is equivalent to a line on your financial statements.

It goes without saying that if you don’t set up your COA properly, you won’t be setting up your financial statements properly either. So it’s important to get this right!

Want to learn more about the Chart of Accounts? Click here!

The Accounting Cycle

Now that we’ve gone through the basics, it’s time to actually do the accounting!

Here’s a brief overview of the bookkeeping steps to take each month:

1. Data Entry: Enter all your business transactions including bills, payments, invoices, checks, expenses, payroll, etc. using your accounting method of choice.
2. Bank Reconciliations: Complete a bank reconciliation for all banking and credit card accounts. This is the process of comparing the transactions that have cleared the financial institution per the statement to the entries recorded to your accounting records. This process is critical to ensure you’ve entered all your transactions correctly.
3. Closing Entries and Accruals: Enter your month end closing entries and accruals using journal entries. These can vary depending on your accounting basis. Examples include expense accruals, depreciation expense, prepaid expense adjustments and more!
4. Review: Generate your preliminary financial statements. This will help ensure you’ve entered everything correctly. Look for unusual fluctuations or differences and make changes when needed. Here are two basic financial statements that can help:
   1. Balance Sheet – this financial statement gives you a snapshot of your company’s financial standing.
   2. Profit/Loss Statement – this financial statement provides an insight on your company’s sources of income and expenses, as well as your net profit or loss.

We like running the Balance Sheet and Profit & Loss by month for the last 12-months.

5. Run Final Reports: After making the necessary changes, run your final financial statements and reports. Aside from a balance sheet and a profit/loss statement, here are other reports that can be very helpful too!
   1. Cash Flow Statement – this financial statement shows you the movement of cash in and out of your business. It shows you where your cash comes from, where it went, and how much you have left.
   2. Accounts Receivable Aging – shows the unpaid customer invoices as of the end of the period
   3. Accounts Payable Aging – shows the unpaid vendor bills at the end of the period
6. Make Decisions: Review your financial statements and reports with management to make decisions. The financial statements can be a powerful tool if you use them. Never step away from your financials without making some decisions for the future, even if the plan is to not make any changes – that can sometimes be the best decision for a business!

Hiring a Professional Bookkeeper

Okay, so you’ve been doing your own bookkeeping for a while and realize that it’s time to throw in the towel and hire a professional bookkeeper. What do you do? What should you look for?

When looking to hire a professional bookkeeper, one important thing to note is that bookkeeping isn’t a licensed profession. Unlike a licensed CPA (who had to meet state requirements of education, examinations and experience), bookkeeping doesn’t have an equivalent certification to ensure a bookkeeper’s capabilities. We’ve seen many businesses hire bookkeepers and later learn they didn’t possess the professional skills necessary to accurately complete the work, resulting in lost resources, errors and frustration.

As a business owner, always make sure that the bookkeeper you hire has the relevant experience and great references to back them up!

• Have they worked in a professional environment with accountability and supervision?
• Have they received proper training and oversight when developing their professional skills? Or were they just independently providing bookkeeping services with no oversight?
• Are there people/professionals (who have good knowledge of accounting) who can vouch for their skills based on their direct experience with this professional?

These are some things to ask yourself when scouting for a bookkeeper. Because there is so much at stake with your finances, you want to know you’re working with someone possessing the skill and knowledge to perform these services well.

Still looking for a bookkeeper? Our bookkeeping services might be a great fit! We know every business is different and we tailor our services to what it is you really need. You’ll also have a dedicated Account Specialist who will be assigned to know the ins and outs of your business, plus a managerial team that provides oversight and accountability! We have tried and true procedures and experience to ensure your books are kept accurately and timely. Check out our services if you want to know more. Or schedule a call with us!