Bookkeeping Basics for a Small Business
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Support Post for Phase 2 – Step 3
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Bookkeeping Basics for a Small Business is an essential part of running your own business that you must understand, regardless of the type of business that it might be. You need to keep careful track of the money; coming in, and going out, as well as which items are Tax Deductible, in order for you to keep the most money in your own pocket.
Down the road, once your business really takes off, you may want to hire a Bookkeeper to handle this for you. For now, you can easily do this yourself, and it is important for you to learn it. When you do finally hire someone to do this for you, you will know exactly how things should be done, making it easier for you to monitor their actions.
Although you’ll often hear the terms ‘Bookkeeper’ and ‘Accountant’ used interchangeably, they actually have entirely different functions. A Bookkeeper handles the day-to-day tasks of recording transactions and making sure everything is represented correctly. An Accountant focuses more on the big picture, producing high-level Financial Statements and helping you with things like filing Taxes and securing Financing.
I will be taking you through the process of setting up your Bookkeeping and managing it on a daily basis, as well as teaching you how to do your own Income Taxes. You will also be creating a variety of Spreadsheets to keep all of your Bookkeeping in order.
Some of these Spreadsheets will record your Income, while others will record your Expenses. Still, others, will be Projection Spreadsheets which will help you to monitor your ability to generate a Net Profit, as well as where your Break-Even point will be for Income compared to Expenses. All of these will help you keep your business on track and keep you motivated for the tasks at hand and for those to come.
This sounds more time-consuming than it really is. In the beginning, you will be able to complete the tasks involved in keeping up your Spreadsheets in a relatively short amount of time. I will be showing you how to create Spreadsheet Templates for you to use each year to make each year’s Bookkeeping Setup a real breeze. Down the road, as your business progresses, you will probably delegate these tasks to someone responsible, so that you can focus more on producing Income, than monitoring it. For now, let’s concentrate on learning the process first.
Let’s begin by going over some basic Bookkeeping Principles.
There are two common Bookkeeping Methods:
- Single-Entry Bookkeeping
- Double-Entry Bookkeeping
Most small, Sole-Proprietorships will usually use some variation of the Single-Entry Bookkeeping System, and do not require a Double-Entry Bookkeeping System. However, generally all Corporations do require the Double-Entry Bookkeeping System. Depending on your choice of Business Structure will determine which Accounting System that you should use. Allow me to discuss each one in a little more detail.
Single-Entry Bookkeeping is the simpler of the two systems to use, generally requiring only one General Ledger where all business transactions are recorded. Think of it like a checkbook register, where all checks written reduce your balance and all deposits increase your balance. This type of system should only be used with Cash System Accounting, not with an Accrual System.
Some of the advantages to using a Single-Entry Bookkeeping System are:
- Little or no background in Finance or Accounting is required.
- No need to hire a professional Bookkeeper or Accountant.
- No complex Accounting Software required
Double-Entry Bookkeeping, on the other hand, is more complex. It will require you to understand Debits and Credits, and how each transaction will need to be recorded as such. It involves determining which accounts your transactions should be posted to and can involve more than one ledger, journal, and even schedules.
Every transaction is recorded in at least two places, which makes sense, because every business transaction is an exchange of one thing for another. The Double-Entry System will show exactly how that exchange took place, and what the results were.
This type of system is recommended if you are using an Accrual Accounting System, as well as if you are forming a Corporation as your choice of Business Structure. However, you should either be very knowledgeable in the Accounting Field, or employ an Accountant when using this system.
Advanced Single-Entry Bookkeeping System
An Advanced Single-Entry Bookkeeping System, expands on the procedure of only using a single General Ledger by also allowing you to keep better track of your Income and Expenses on separate Spreadsheets. Each day’s entries will first be recorded into your General Ledger, and then copied into the appropriate Spreadsheet. This will allow you to keep better Records, making doing your Income Taxes that much easier at the end of each year.
The Advanced Single-Entry Bookkeeping System is the method that I would recommend you to use, and is the method that I will teach you here. You are certainly free to use any method that you prefer, based on your own knowledge, skills, and needs.
In time, as your business grows, keeping accurate accounts will become an ever increasingly time-consuming process. The amount of effort that it takes to enter all of the required information may be better spent building your business. You may eventually reach the point when you may need to hire a professional to assist you with this part of your business.
When this time does come, you can start by employing a Bookkeeper or an Accountant on a part-time or a freelance, hourly basis, and progress from there. When your business grows to have more than 30 employees, or more than $1 million in revenue, it will probably be prudent to consider hiring some full-time Accounting Staff.
Best of Luck in All That You Do, and May Success Come to You Quickly!
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Now, please return to my last Post: Best Bookkeeping for a Small Business – Phase 2 – Step 3.