How do I start bookkeeping for my business?

‍What is bookkeeping?

Bookkeeping is the regular process of recording, sorting, and storing a business's financial transactions. Accurate record keeping is the foundation for doing your taxes, building financial statements, making business decisions and spotting mistakes.

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How do you start bookkeeping? 

Step 1: Separate Business vs Personal transactions

Mixing personal and business transactions is a recipe for disaster. It is critical that you have separate bank accounts and credit cards for your business. The easiest way to start bookkeeping for your business is to open a business bank account and credit card, whichever is needed for your business. All of your business transactions should go through this new account. Do not use it for personal transactions and you will be on your way to success.

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Step 2: Choose a bookkeeping system

A bookkeeping system is a methodical way to record transactions in a safe place. There are a few options… you could use spreadsheets like excel or google sheets. These are cheap and relatively easy to use. But they can be time consuming to maintain and they can't cope with complex bookkeeping tasks. They also make it more difficult to create financial statements.

Instead, you could use accounting software. QuickBooks, Xero, Freshbooks, Wave, and Sage are all popular choices. These are much more robust than spreadsheets. You can use them to save time and reduce errors, but they are more costly and a bit more complicated.

If this all sounds a bit much, you can always outsource your bookkeeping to a bookkeeping service. This can free up your time to focus on your main business and you can lean on the expertise of a professional. However, it does come at a cost. The key is to find a bookkeeping system that aligns with your unique needs, budget, and expertise so it's important to do your research before jumping in.

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Step 3: Single entry or Double entry bookkeeping

Choose between single entry or double entry bookkeeping. Single entry bookkeeping only records one accounting entry for each financial transaction usually in a cash account. It is a convenient choice for new businesses, but it can oversimplify your finances which gives you an incomplete picture.

Double entry bookkeeping records at least two opposite accounting entries for every transaction. Debits and credits are the words we use to reflect each side. In the most ideal situation, this is how you should do your bookkeeping. It is widely accepted, more accurate, and gives you a lot more financial data. There’s a reason why all large businesses use double entry bookkeeping. On the flip side, it takes a lot more effort to set up and maintain so I’d recommend using accounting software or hiring a bookkeeper to give you a hand. It helps to have a basic grasp of accounting. 

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Step 4: Cash vs Accrual method of bookkeeping

Choose between the cash method or the accrual method of bookkeeping. In the cash method you record revenue and expenses when cash is received or paid out. It’s straightforward and gives you a good look at your cash flows. That makes it a popular choice for small business owners who want to keep things simple.

In the accrual method, you record revenue as its earned and expenses as they are incurred. Regardless of when cash changes hands. This method matches the revenue you earn to related expenses.

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Step 5: Recording transactions

This is where you enter your business transactions into your bookkeeping system. You can do this daily, weekly, or monthly. Hand them over to your bookkeeper or record them yourself in your spreadsheet or accounting software. While you’re at it, make sure you jot down some extra details. The seller or purchaser, the document number, date, description, and amount. This information will help you search through your transactions without having to keep going back to the original invoices. Make sure you record all of your transactions in each accounting period and you’ll be in a good position. 

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Step 6: Sorting transactions

When you record a transaction you also need to file it in the right accounts. An account is a place where we group together a set of related transactions. For example, if you make a sale then you should record the sale in your income account. Your complete list of accounts is called a Chart of Accounts. Sorting transactions into accounts allows you to make financial statements like the income statement which summarizes your income and expenses over a period of time, and the balance sheet which gives you a snapshot of your assets, liabilities, and equity. 

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Step 7: Storing transactions

So you’ve recorded and sorted a transaction, now you need to store it and by that I don’t just mean to click save. We also need to store the evidence that supports the transaction. You can pop the physical invoice into your filing cabinet or take a digital copy and save it on your computer in the cloud, or within your accounting software. Having a well-referenced system for securely storing source documents will keep your business compliant with tax and financial reporting requirements.

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Step 8: Budget for taxes

Understand the taxes that your business will owe. Then, open up a bank account for tax savings account that each month your business contributes to. A tax accountant will be able to help if you need assistance.

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Step 9: Do regular bank reconciliations

Monthly bank reconciliations provide an opportunity to double check your bookkeeping. You compare the transactions inside of your spreadsheets or accounting software with your bank statements to ensure things are matching. By reconciling your bank account at the end of every month, you can verify and confirm that your accounts are accurate and up to date. This is key to successful bookkeeping. 

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Step 10: Repeating the process each month

Each month the bookkeeping process will repeat steps 5 through 9.