Bookkeeping basics: A guide for small businesses

Must-know terms for bookkeeping

Bookkeeping is a critical part of managing your business's financial health. A bookkeeper records and organizes financial transactions to ensure accurate reporting of your business's income and expenses. Until you hire a bookkeeper for your company, you might be doing the bookkeeping yourself. Understanding a few basic concepts can help you get started. Here are seven bookkeeping terms you need to know:

Accounting equation

The accounting equation is the relationship between a business's assets, liabilities, and equity. This accounting formula ensures that the balance sheet remains balanced and accurate. The accounting equation is:

Equity = Total assets - total liabilities

Generally, if your assets are greater than your liabilities, your business is financially stable. Note that certain companies, such as those in service-based industries, may not have a lot of equity or may have negative equity.

Accounting ledger

An accounting ledger is a book or system you use for recording and classifying financial transactions. It’s the foundation of any business's financial recordkeeping.

Your accounting ledger serves as the hub for all your financial information—in particular, all your accounts and transactions. If you have accounting software, it will manage your ledger for you. QuickBooks Online users have year-round access to QuickBooks Live Expert Assisted to set up the software, then help manage finances.

Accrual accounting

One of the most popular accounting methods is accrual accounting. The accrual accounting method records financial transactions when they occur rather than when cash exchanges hands. 

Accrual accounting provides a more accurate picture of a business's financial health than cash accounting, as it considers all of the financial transactions for a given period. This accounting method is useful for businesses with inventory or accounts payable and receivable. 

Double-entry bookkeeping

Double-entry bookkeeping is a system where each transaction is recorded in two accounts: a debit account and a credit account. This system provides a more accurate picture of a business's financial health than single-entry bookkeeping and helps identify errors in recordkeeping while balancing an account.

For example, when a company purchases inventory on credit, it debits its inventory account and credits its accounts payable account. This shows that the company's inventory increases, but its cash account decreases.

Inventory

Your company’s assets are the things it owns. They're usually broken down into two categories: current assets and fixed assets. Current assets include cash, accounts receivable, prepaid expenses, and inventory.

Inventory is the stock of goods a business has on hand or in transit, waiting to be sold. The value of inventory can significantly impact a company's financial statements, so accurate tracking and management is vital.

Accounts receivable

Accounts receivable (AR) is the money your customers owe you for products or services they bought but have not yet paid for. It’s important to track your AR to ensure you receive payment from your customers on time.

Tracking your AR, usually with an aging report, can help you avoid issues with collecting payments. Understanding your AR can also help you set efficient credit terms for your customers.

Accounts payable

Accounts payable (AP) is what you owe to creditors for goods or services received but not yet paid for. Managing your AP helps ensure you pay your bills on time and avoid late fees or damage to your credit score.

What you need to set up small business bookkeeping

Setting up bookkeeping for your business is an essential step toward financial success. It lets you track your finances, monitor your cash flow, and make informed financial decisions. Let's take a look at the bookkeeping basics to get you started.

1. Business bank account

The first step you’ll need is a business bank account, which allows you to keep your personal and business expenses separate. Bank accounts allow businesses to safely store their money and make transactions easily. There are several types of business bank accounts, each with its own purpose and benefits.

The most common type of bank account is a checking account. This type of account is designed for everyday use and allows businesses to make unlimited deposits and withdrawals. Typically, checking accounts also come with a debit card for easy access to funds.

2. An accounting method

Now it’s time to select a bookkeeping method. The two key accounting systems are cash accounting and accrual accounting. If your business is still small, you may opt for ‌cash-basis accounting. If you carry inventory or have accounts payable and accounts receivable, you’ll likely use accrual accounting.

A cash accounting system tracks cash flow as it enters and leaves your business in real-time. Under this method, you don't record accounts receivable and accounts payable because they represent future transactions.

3. Your financial transactions

Financial transactions are business activities that involve money, such as sales, expenses, and payments. Recording and organizing these transactions in a timely manner is essential for effective bookkeeping.

One of the most important aspects of financial transactions is recording them accurately. This involves keeping track of all the money that comes in and out of a business.

Accounting and bookkeeping software can simplify managing your financial transactions. Most banks allow you to download account information directly into the program. After you load the data, your job is to review the entries. QuickBooks Online users can tap a Live Expert for help during this process with QuickBooks Live Expert Assisted*.

4. Accounting software

After you have a bookkeeping system in mind, the next step is to pick an accounting software. Spreadsheets, such as Microsoft Excel, can be used for simple bookkeeping. More commonly, entrepreneurs use comprehensive accounting software like QuickBooks that can handle a larger volume of transactions and provide a deeper analysis. QuickBooks Live Expert Assisted can help you streamline your workflow, generate reports, and answer questions related to your business along the way.

Bookkeeping best practices for success

As a business owner, bookkeeping might not rank high on your list of priorities. However, maintaining accurate financial records is key to your business's success.

Keep up-to-date records

Accurate financial records are the foundation of good bookkeeping. Without them, it's nearly impossible to make informed decisions about your business's financial health. 

Keeping track of financial transactions ensures you have a complete and accurate record of all money coming in and going out of your business. This includes keeping track of:

• Expenses
• Invoices
• Receipts
• Payments

Track expenses

Tracking your expenses is an essential part of managing your finances. By keeping track of every dollar you spend, you can gain insight into where your money is going and make informed decisions about allocating your resources.

Here are some tips when tracking expenses:

• Categorize your expenses: Start by dividing your expenses into categories, such as rent, utilities, and supplies. 
• Use receipts: Save all your receipts and organize them by category. 
• Record everything: Make it a habit to record every expense as soon as possible. 
• Regularly review your expenses: Take some time every week or month to review your expenses and compare them to your budget. 
• Automate where possible: Many banks and credit card companies offer automatic expense tracking, which can be a helpful tool to ensure that every expense is recorded accurately.

See how this flower farm slash florist uses QuickBooks Live Assisted Bookkeeping.

Set up budgets

Setting up budgets is a key step in managing your business finances. A budget is a plan that outlines your expected income and expenses over a specific period, usually a year or a quarter. 

To set up a budget, gather your financial data, such as income statements, balance sheets, and cash flow statements. This will give you a clear picture of your business's past financial performance and help you make realistic projections for the future.

Then categorize your expenses into different categories, start estimating your expected revenue for the upcoming period, and allocate your expenses accordingly.

Balance your books

Balancing your books allows you to catch any errors or mistakes in your bookkeeping. A good practice is to balance your books once a month. 

To uncover errors, check whether you forgot to record an entry in either column of your accounting ledger. Or if you listed the same entry twice. If not, try looking for a couple of common accounting errors.

The 3 golden rules of bookkeeping to follow

One of the best things you can do to ensure your books balance properly is to follow the three golden bookkeeping rules. 

The three golden rules bookkeepers should pay special attention to are: 

1. Debit what comes in, credit what goes out.
2. Debit the receiver, credit the giver.
3. Debit expenses and losses, credit income and gains.

The debited account is the one that receives or loses value, and the credited account is the one that gives or gains value. The golden rules of accounting can help ensure that your bookkeeping is accurate and up-to-date.

Note that the golden rules assume you use the double-entry bookkeeping system. 

Save time with expert help

By learning bookkeeping basics—with the help of bookkeeping courses—you can keep your business on track and set yourself up for success. If you don't have the time or energy to invest in learning all the details, QuickBooks Online offers its users access to bookkeeping services year-round.*

Get peace of mind, knowing that trusted experts are by your side. Our experts work however you want to work to meet your specific needs. QuickBooks Live Expert Assisted is already available to all QuickBooks Online subscribers who are ready to save time with personalized, one-on-one expertise for their books.

*QuickBooks Live Expert Assisted requires QuickBooks Online subscription. Additional terms, conditions, limitations, and fees apply.