Are you a small business owner trying to figure out accounting on your own but don’t know where to start? Well, this guide is for you. We’re here to give you a crash course in bookkeeping 101. In this article, we’ll walk you through the fundamentals of small business bookkeeping, why bookkeeping matters for your small business, and the seven steps to doing your own bookkeeping. Let’s get started!

Table of Contents

What is Bookkeeping?

Bookkeeping is the process of tracking all of your company’s financial transactions. This includes purchases, sales, payments, and more. Doing your own bookkeeping ensures that you know where your business is spending money, where your revenue is coming from, and which tax deductions you’ll be able to claim. Doing your own bookkeeping might not be the most exciting thing ever, but it’s essential for running your own business.

Why Bookkeeping Matters for Your Small Business

Bookkeeping matters for a few main reasons:

Tax Deductions

It helps you catch more tax deductions. When you record and categorise every transaction in your business, you’ll be able to see which expenses are tax deductible so that nothing falls through the cracks.

Without year-round bookkeeping, you’ll forget about one-off deductions like lunch with a client eight months ago that you could have deducted. Even with the best of intentions, deductions will always fall through the cracks at tax time unless you have bookkeeping in place.

Getting a Loan

It can help you get a business loan. If you’re applying for a small business loan, banks are going to need to see financial statements. This is something you’ll be able to get through bookkeeping.

Avoiding Mistakes

It can help you catch financial mistakes. When your bookkeeping, you’re keeping a close eye on the transactions in your business, which means you’ll be able to catch things like bank errors, invoicing mistakes, and sneaky subscription fees for services that you forgot to cancel.

Better Insights and Planning

It gives you a clear picture of where your money is going. When you have bookkeeping in place, you’ll be able to keep track of your expenses so you can budget better.

You’ll also be able to understand your cash flow so you can see what’s an expense versus payment to a loan or a credit card. On top of that, you’ll also be able to track how your business is growing and improving over time and what months are busy and slow. This will help you plan for the future.

The 7 Steps to Doing Your Own Bookkeeping

Now that you know why bookkeeping matters for your small business, let’s walk through the seven steps to doing your own bookkeeping.

Step 1: Separate Your Business and Personal Expenses

You’ll want to make sure that your business and personal transactions are not intertwined. This is important because you don’t want to open yourself up to legal problems when your finances aren’t separate from personal transactions.

Step 2: Choose Between Single Entry or Double Entry Accounting

There are two ways of doing accounting. We’ll briefly explain the differences here. Which one you should go with depends on the country you’re in and whether you are a sole proprietor or a legal entity.

Double-entry Accounting

Double-entry accounting is a system of accounting that tracks where your money comes from and where it’s going. You record every transaction twice, taking assets from somewhere called a credit and putting them somewhere else called a debit. Your debits and credits should always equal each other.

Single-entry accounting

Single-entry accounting is essentially just recording your transactions once as they happen. It’s less robust but if your business is a simple sole proprietorship with no inventory and no employees, you can probably use the single-entry method.

Step 3: Choose Between Cash or Accrual Accounting

On a cash basis, you only recognize revenue when you receive it. On an accrual basis, you recognise income when it’s earned. If you’re a small business or just getting started, you can probably use the cash method.

If your business is more complex, you may need to use the accrual method. Either way, you should talk to your accountant to figure out which method will be best for your business.

Step 4: Choose a Bookkeeping System

Your options are to do it manually using something like Excel / Google Sheets or just paper or use accounting software. If you do it in Excel, you can use something like our free income statement template.

If you choose to use accounting software, there are a few options for small businesses such as QuickBooks, Xero, or Zoho.

Step 5: Categorise Your Transactions

Categories are essentially classifications for your transactions. These types of categories can help you understand what your tax deductions are.

Not all transactions are equally tax deductible, so you’ll want to know what you’re spending on office supplies versus what you’re spending on meals.

Step 6: Organise and Store Your Documents

You need to keep records for your bookkeeping but there’s a bit more to it than just storing all of your receipts in a shoebox. As a general rule, if the expense is over $75, you should keep a record to prove the expense. This also depends on your local regulations.

You should also keep every receipt and financial record for three years. We recommend storing records digitally, as your tax office is totally fine with that and it’s an easy away for you.

Step 7: Make it a Habit

Bookkeeping isn’t the most exciting thing, but if you do it consistently, you’ll have smart financial insight into your business every month of the year and you’ll save yourself a lot of time and headaches come tax season.

We recommend entering all your transactions at least once a month. Block out a recurring time in your calendar and do it somewhere fun like a coffee shop or do something relaxing like putting on Netflix while you do the work.

The more automatic your bookkeeping habit, the easier your tax season will be.

Should You Do Your Own Bookkeeping or Hire Someone Else To Do It For You?

Doing your own bookkeeping is free, which is the biggest draw. But it can be complicated, time-consuming, and can take you away from running your business. Basic bookkeeping for small businesses is feasible though if you put in the work.

If you decide to hire someone to do your bookkeeping, it helps save you time, gives you confidence your books are being done correctly, and makes tax time a whole lot easier. Accounting services for small business owners start at around $100 a year.