Successful businesses need financial information to control costs, manage cash flow and generate a profit. Without reliable data, you may not be able to make the best decisions for your business. A bookkeeping system provides the information you need to manage your operations.
Read on to learn more about bookkeeping, the steps to get started and why it’s important to your business.
What is bookkeeping?
Bookkeeping includes gathering financial data into a record-keeping system and posting transactions to an accounting system. The definition often includes additional tasks to keep your business running smoothly. If you’re handling bookkeeping for your small business, you’ll work on several basic tasks.
If you’re acting as a bookkeeper for your business, you’ll review source documents and record basic accounting information. These are not administrative tasks. They’re critical steps that can affect your business.
You’ll post two common financial transactions to your accounting system.
Expenses: You’ll review suppliers’ invoices and suppliers’ payments and record expenses in your accounting system. Reviewing expenses can help you manage your spending.
Revenue: When a worker makes a sale, they record the transaction and customer number. Then you can generate financial reports to see which customers generate the most revenue.
Why does bookkeeping matter?
To understand the importance of bookkeeping, think about your company’s stakeholders. Investors, creditors, suppliers and regulators need accurate financial records regarding your business. Proper bookkeeping can help you provide much of that data.
Bookkeeping can help you manage BAS compliance
Using bookkeeping, you can record your revenue and expenses and prepare BAS lodgements. If the data is incomplete or contains errors, you’ll have to amend the lodgements, which may result in interest and penalties.
Bookkeeping can help you make management decisions
Managers need accurate data to increase sales, manage costs and oversee the cash flow. Using basic bookkeeping principles, you can post and access information that managers need to make decisions.
Bookkeeping can help you finance your business
Eventually, your business may need to borrow money to operate. Your lender will require accurate financial statements to fund your loan. You can use accounting transactions to generate balance sheets, income statements and cash flow statements.
Your business may post dozens of accounting transactions each week. When you have a reliable system, you post fewer errors. And if you make a mistake, you’ll be able to correct it much faster.
Four steps for basic small-business bookkeeping
1. Separate your business and personal expenses
Open a bank account using your company name and Australian Business Number (ABN). Activity in the business account should not include any personal expenses. Separating your expenses can protect your personal assets from any business liability or a lawsuit. If your business is a corporation, for example, it should be a legal entity separate from you.
If you post business and personal transactions in the same bookkeeping system, you risk the accuracy of your financial statements and tax returns. Let’s assume that you post $2,000 in personal expenses in the company’s accounting records. The expenses in the income statement won’t be accurate, and your business tax return will contain errors.
2. Choose a bookkeeping method: double-entry or single-entry
Every business should use the double-entry bookkeeping method. This concept is important because each accounting transaction impacts at least two accounts. Using the double-entry method, you can get a clearer picture of your business activity. And when it’s time to post a journal entry to your accounting system, the double-entry method accounts for debit entries, credit entries, and totals.
Debit entries are on the left side of each journal entry. In most cases, asset and expense accounts increase with each debit entry. Credit entries are on the right side of each journal entry. In most cases, liability and revenue accounts increase with a credit entry. Finally, the total dollar amount of debits must always equal credits. Accounting and bookkeeping software requires each journal entry to post an equal dollar amount of debits and credits. However, the number of debit and credit entries may differ.
On the other hand, the single-entry method of accounting presents a distorted view of the business results. This accounting method records one entry to one account for each transaction. Posting activity to your chequebook is a single-entry accounting system. When you write a cheque, you post one transaction that reflects a decrease in your bank balance.
Business owners should not use the single-entry option because they can’t generate the account activity required to create balance sheets or cash flow statements. If you’re managing your business with the single-entry method, a bookkeeper can help you move to the double-entry method.
3. Choose your accounting method: accrual or cash basis
You might be wondering which accounting method is right for you. Business owners should use the accrual basis of accounting so that their financial statements are clear and accurate. The accrual method matches revenue earned with expenses incurred to generate the revenue, which presents a clear picture of the company’s profit.
Let’s look at an example:
- Riverside Landscaping bought $1,000 of soil in February.
- Riverside Landscaping paid $2,000 in labour costs in March and billed the Jones Family for $3,500 on 20 March.
- The Joneses paid Riverside’s invoice in April.
Assuming Riverside paid $100 in overhead costs, you can subtract the revenue and material, labour, and overhead costs to calculate their profit from the Joneses’ project. Riverside’s profit is $400.
The material, labour and overhead costs and revenue from the landscaping job were posted when Riverside performed the work. Riverside’s $400 profit was posted when they billed the Joneses on 20 March. When you can match revenue with expenses, you’ll know the profitability of each product or service.
On the other hand, the cash method posts revenue and expenses based on the cash inflows and outflows. Using the cash method, Riverside would post $1,000 in sod expenses when they pay cash in February. Their $3,500 revenue would be posted when they receive the cash from the customer in April.
Essentially, revenue and expense transactions would be posted to different months. So Riverside couldn’t look at the March income statement and see the Jones project’s revenue and expenses. Therefore, they couldn’t determine the profit earned on that job.
4. Categorise your transactions
As you post transactions in your bookkeeping system, you need to consistently post the information to the correct accounts. Maintain an updated chart of accounts to post your accounting information to the right places.
Every business creates a chart of accounts—or a list of each account needed to manage the business. Sometimes the accounts are listed with a corresponding account number. As the company grows, you may add, remove or change the accounts you use to post transactions. The balance sheet accounts are numbered first, followed by the revenue and expense accounts.
Download a bookkeeping template for a balance sheet, income statement and cash flow statement for a particular business. Cash balances and net incomes link the financial statements.
In the balance sheet, the cash balance is the ending balance in the cash flow statement. In the income statement, the net income is also the retained earnings balance in the balance sheet. Net income increases the retained earnings.
An online accounting system may provide a number of benefits that can save you time and reduce the risk of error.
Three benefits of online bookkeeping
The right accounting solution allows you to automate many basic bookkeeping tasks. As a result, you can:
- Collect payments faster
Invoice your clients and accept payments automatically to speed up the cash collection process.
- Capture and organise receipts
Scan and attach receipts to a transaction to eliminate paper files and stay organised for the tax season.
- Manage tax deductions
Track your expenses to maximise tax deductions for things like travel expenses.
Excel bookkeeping vs. online bookkeeping
Many small businesses start accounting using Microsoft Excel. However, managing your books in a spreadsheet can be time-consuming and error-prone. If not managed properly, spreadsheet tabs may not be linked or up to date. In addition, you can’t integrate spreadsheets with bank statements, credit card reports or payroll records. And if you need someone to help you manage the books, you may find it challenging to train them in Microsoft Excel. As your business grows, your small transactions also increase. If you’re posting more transactions each month, entering data can make bookkeeping more difficult.