12 steps for bookkeeping cleanup (and free checklist)

Accurate bookkeeping is the key to getting a clear picture of your business's health. A cleanup doesn't just tame the clutter; it empowers you to understand your cash flow, identify areas for growth, and ultimately, take control of your financial future.

Our 12-step guide and downloadable checklist transform the bookkeeping cleanup process from a daunting task into a manageable system for solopreneurs and small business owners alike.

Table of Contents:

• 1. Gather all financial records
• 2. Reconcile bank statements
• 3. Categorize transactions
• 4. Review outstanding invoices and bills
• 5. Clear up accounts payable and receivable
• 6. Review and update fixed assets
• 7. Reconcile credit card statements
• 8. Review and categorize payroll records
• 9. Review and categorize inventory records
• 10. Ensure tax compliance
• 11. Backup your data
• 12. Schedule regular bookkeeping sessions
• Tips for maintaining your bookkeeping system by method
• Signs you need to clean up your books
• Spend more time growing your business
• Bookkeeping cleanup FAQ

1. Gather all financial records

The first part of bookkeeping basics is assembling all your financial records. This can include: 

• Bank statements: Checking, savings, credit card—all the accounts you use for business finances.
• Receipts: Physical receipts for purchases, travel, entertainment, or any other business-related expenses.
• Invoices: Copies of invoices you've received from vendors and any invoices you've issued to clients.
• Other financial documents: This might include loan statements, investment account statements, tax documents, and payroll records (if applicable).

Don't worry—you don’t have to spend hours sifting through mountains of paper. Digital tools can make this process a breeze. For example, for physical receipts and invoices, consider using a mobile scanning app. 

These apps allow you to quickly capture clear digital copies of your documents using your smartphone's camera. The scanned documents can then be easily stored and organized within the app or exported to a cloud storage service for safekeeping.

2. Reconcile bank statements

Now that you have all your financial records in one place, it's time to ensure your bank's records match your own bookkeeping. This process, known as bank reconciliation, involves comparing your bank statement balance to the balance in your accounting records and identifying any discrepancies.

Common culprits for these mismatches include:

• Outstanding checks: Checks you've written but haven't been cashed yet by the recipient.
• Deposits in transit: Deposits you've made that haven't yet been reflected on your bank statement.
• Bank errors: Occasionally, banks make mistakes, so be sure to review your statement carefully for any unauthorized charges or incorrect transactions.

By carefully addressing these discrepancies, you can ensure your bank records and your accounting software match, providing you with an accurate picture of your financial situation.

3. Categorize transactions

This seemingly simple step is crucial for gaining valuable financial insights from your data. By accurately categorizing each transaction, you can track your spending habits, identify areas for potential overhead savings, and monitor the health of your income streams.

Common categories include:

• Salaries and wages: All employee compensation, including salaries, bonuses, commissions, and payroll taxes.
• Marketing and advertising: All expenses related to promoting your business and attracting new customers.
• Supplies: The cost of any office supplies, inventory items, or other materials used in the day-to-day operations of your business.
• Travel: Expenses incurred for business travel, including transportation costs, hotel accommodations, meals, and incidental expenses.
• Rent and utilities: The cost of leasing your office space, along with associated utilities like electricity, water, internet, and waste removal.

While these are just a few examples, you can customize your categories to best suit your specific needs. The key is consistency and ensuring your categorization system provides a clear picture of your financial activity.

4. ​​Review outstanding invoices and bills

It's time to ensure you haven't missed any outstanding invoices or bills. This step involves reviewing any vendor invoices you haven't yet paid, as well as identifying any invoices you've issued to clients but haven’t collected.

 Let's explore how to handle each scenario:

• Unpaid expenses: For any unpaid invoices you owe to vendors, record them as accounts payable in your bookkeeping system. This ensures you don't forget about them and helps you manage your cash flow effectively.
• Uncollected income: For invoices you've issued to clients that haven't been paid yet, record them as accounts receivable. This allows you to track outstanding customer balances and follow up on overdue payments if necessary.

By taking account of these outstanding items, you'll gain a more accurate picture of your current financial obligations and potential sources of future income.

5. Clear up accounts payable and receivable

After you've identified outstanding invoices and bills, it's time to tackle them head-on. Understanding the terms accounts payable and accounts receivable is crucial for effective cash flow management.

Here is the difference between both:

• Accounts Payable (AP): The money your business owes to vendors or suppliers for goods or services purchased on credit. Effectively managing vendor relationships helps you maintain a good rapport and avoid late payment penalties.
• Accounts Receivable (AR): The money owed to your business by customers for goods or services you've already provided but haven't yet received payment for. Efficiently managing your accounts receivable helps ensure you collect outstanding payments.

By proactively managing both accounts payable and receivable, you can ensure timely payments to vendors and maximize the amount of cash readily available for your business operations.

6. Review and update fixed assets

The next step involves reviewing and potentially updating your fixed assets, which include:

• Equipment: This category includes various tangible assets used in your business operations, like machinery, computers, and office equipment.
• Furniture: This category includes desks, chairs, filing cabinets, bookshelves, and any other furniture used in your office or workspace.
• Vehicles: This category captures any company-owned vehicles, such as cars, trucks, vans, or delivery vehicles used for business purposes.

Over time, these assets lose value due to wear and tear, obsolescence, or other factors. This gradual decrease in value is known as depreciation—a crucial concept in bookkeeping that allows you to spread the cost of a fixed asset over its useful life.

7. Reconcile credit card statements

Just like with bank reconciliation, ensure your credit card statements align with your small business bookkeeping records. The process is similar, involving matching transactions on your credit card statement to corresponding entries in your accounting system.

However, with credit cards, there's an added layer of complexity—the potential for personal and business expenses to get mixed up. Carefully review each transaction to ensure only business-related charges are reflected in your bookkeeping. If you find any personal expenses on the company credit card, remove them from your business records.

8. Review and categorize payroll records

For businesses with employees, accurate payroll records are essential. This step involves reviewing and potentially categorizing your payroll costs within your bookkeeping system.

This data typically includes:

• Employee wages and salaries: The total amount of gross pay earned by each employee during a specific pay period.
• Payroll taxes: These encompass various taxes withheld from employee paychecks, such as federal and state income taxes, Social Security, and Medicare.

Accurate payroll records are crucial not just for ensuring your employees are paid correctly but also for tax compliance purposes.

9. Review and categorize inventory records

This step is particularly relevant for businesses that manage physical products. Here, you'll review and potentially categorize your inventory records within your bookkeeping system. This might involve:

• Cost of each item: The price you paid to acquire each unit of inventory.
• Quantity on hand: The current number of each item you have in stock.

Maintaining accurate inventory records is essential for several reasons. It allows you to:

• Track your cost of goods sold (COGS), a factor in determining your taxable income
• Identify potential shrinkage or theft within your inventory
• Make informed purchasing decisions to optimize stock levels and avoid overstocking or understocking

By meticulously reviewing and categorizing your inventory data, you can ensure your bookkeeping system reflects the true value of your on-hand inventory, which ultimately impacts your tax calculations.

10. Ensure tax compliance

Achieving a clean bookkeeping system goes hand-in-hand with ensuring your business is tax-compliant. Here are some key areas to focus on.

Categorize transactions accurately

Unassigned transactions can create a murky financial picture and hinder tax preparation. Review and categorize all income and expenses into appropriate categories. Avoid generic labels like "other" or "miscellaneous," as these offer little clarity to tax professionals.

Double-check your chart of accounts to ensure items like credit card payments are classified correctly. A credit card payment itself isn't an expense; it reflects settling a previous expense you categorized earlier. Finally, provide clear descriptions for fixed assets beyond simply listing them in the fixed asset accounts. Your tax preparer will need this information for accurate tax calculations.

Eliminate negative numbers

Negative numbers can arise from errors in recording transactions. For instance, a negative number in your accounts receivable report might indicate a payment received without a corresponding invoice. Address these discrepancies promptly to ensure accurate financial reporting and a smoother tax filing process.

Ensure your balance sheet balances

If your balance sheet doesn't balance, investigate potential issues like incorrect account closures, misplaced inventory entries, or the need for file verification and repair. Additionally, the prior year's balance sheet should align with the one reported on your tax return. 

This signifies no unadjusted entries were made in prior years, simplifying tax filing. Finally, verify that loan balances on your balance sheet match year-end loan statements, with separate accounts for interest, late fees, and principal.

11. Backup your data

Imagine a power outage corrupting your bookkeeping software, a hardware malfunction erasing your files, or even a cyberattack compromising your system. After all your hard work cleaning up your books, the last thing you want is to lose that valuable data. 

Regular backups are essential for safeguarding your financial information and ensuring disaster recovery in case of unforeseen events. Backups create copies of your data, allowing you to restore your bookkeeping system to a previous state if disaster strikes.

12. Schedule regular bookkeeping sessions

Just like a clean house needs regular maintenance to stay tidy, your bookkeeping system requires ongoing attention to maintain its clarity and accuracy. Scheduling regular bookkeeping sessions helps you avoid the chaos you just tackled. 

By dedicating designated time slots for bookkeeping tasks, you can consistently categorize transactions, reconcile accounts, and monitor your financial health. This regular upkeep prevents small issues from snowballing into a future clean-up project. Think of it as an investment in your financial well-being, ensuring you have easy access to accurate and up-to-date financial information whenever you need it.

If you find the thought of regular bookkeeping sessions tedious or simply don't have the time to dedicate to it, then consider hiring a professional bookkeeper. A qualified bookkeeper can remove this burden, ensuring your finances are meticulously maintained. They can also offer valuable insights and guidance to help you make informed financial decisions for your business.

Tips for maintaining your bookkeeping system by method

The best bookkeeping method depends on the size of your business and your comfort level with automated technology. Regardless of your preferred method, there are many bookkeeping tips to keep your books clean and efficient in the long run.

Pen and Paper

Pros: Simple and low-cost.

Cons: Time-consuming, error-prone, and difficult to analyze data.

This method is ideal for very small businesses with minimal transactions. A few ways to best utilize this method include:

• Use a dedicated bookkeeping notebook: Keep all your financial records organized in one place.
• Maintain separate ledgers: Dedicate sections for income, expenses, accounts payable, and accounts receivable.
• Record transactions daily: Regularly update your notebook to avoid a backlog of entries.
• Balance your books monthly: Regularly reconcile your records to ensure accuracy.

Spreadsheets

Pros: More affordable than bookkeeping software, allows for customization.

Cons: Requires some technical knowledge, formulas can be complex, and data sharing can be cumbersome.

Spreadsheets offer more flexibility and organization than pen and paper. Here’s how:

• Utilize bookkeeping templates: Many online resources offer free bookkeeping spreadsheet templates to get you started.
• Separate sheets for different purposes: Dedicate sheets to income, expenses, accounts payable, and accounts receivable.
• Leverage formulas: Spreadsheets allow for automatic calculations, saving you time and reducing errors.
• Back up your data regularly: Protect your data by regularly saving your spreadsheet to a secure location.

Bookkeeping software

Pros: Streamlines data entry, automates tasks, facilitates reporting and analysis, and secures cloud storage.

Cons: Typically requires a monthly subscription fee and can have a learning curve.

Bookkeeping software offers the most robust features and automation, which is ideal for businesses with significant transaction volume or complex financial needs. Here are some tips:

• Choose user-friendly software: Select software with a clear and intuitive interface to simplify data entry and reporting.
• Integrate with your bank accounts: Many programs allow automatic downloads of bank transactions, saving you time and reducing manual entry errors.
• Explore automation features: Utilize features like automatic bill pay and recurring invoices to streamline your financial processes.
• Invest in training: If needed, consider professional training to ensure you're using the software to its full potential.

Accounting software can cater to your bookkeeping needs and offers the most robust features and automation available. This is a great option for busy business owners who want to streamline their bookkeeping.

Signs you need to clean up your books

Here are some telltale signs that your bookkeeping system might need a clean-up:

• Cash flow constantly feels unstable: Uncertain finances can leave you feeling on edge, unsure of your financial footing.
• Financial blind spots hindering business decisions: Without clear financial data, making informed choices for your business becomes a guessing game.
• Tax season brings unexpected penalties. Messy books can lead to tax season surprises you'd rather avoid.
• Losing track of receipts creates financial chaos: Disorganized records can make it difficult to track income and expenses, leading to confusion and missed opportunities.
• Leaving valuable tax savings on the table: A clean bookkeeping system ensures you take advantage of all the tax breaks you deserve.
• Payroll mistakes causing stress and disruptions: Errors in payroll can have serious consequences, impacting your employees and creating unnecessary stress.
• Tax season turns into a bookkeeping nightmare: Don't dread tax season! A clean system can make filing a breeze.

By addressing these warning signs and taking steps to clean up your books, you'll gain control of your finances, make smarter business decisions, and experience a smoother tax season.

Spend more time growing your business

By taking these warning signs seriously and initiating a bookkeeping clean-up, you'll be well on your way to achieving financial clarity and peace of mind. Imagine the freedom of knowing exactly where your business stands financially, the confidence to make informed decisions, and the joy of a stress-free tax season.

Ready to reclaim control of your finances and free up valuable time to focus on growing your business? Many bookkeeping services can offer expert assistance to get your finances in order and keep them that way. Consider investing in solopreneur accounting software to level up.