Bookkeeping Meaning & Importance of Bookkeeping
What is The Bookkeeping
Bookkeeping can be defined as the process of tracking all of your company’s financial transactions so you can see exactly where your business is spending money, where your revenue is coming from, and which tax deductions you’ll be able to claim.
Importance of Bookkeeping
Why does bookkeeping matter for your small business?
Bookkeeping can help you catch more tax deductions.
When you record and categorize 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 of the deductions like lunch with a client eight months ago that you could have deducted even with the best intentions.
Deductions will always all through the cracks at tax time, unless you have kept them in place.
Bookkeeping can help you get a business loan.
If you’re applying for a small business loan, banks will need to see financial statements. You’re going to need to have something that shows your expenses and revenue, otherwise known as an income statement.
Bookkeeping 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 like paying twice, and sneaky subscription fees for services that you forgot to cancel.
Bookkeeping can give you a clear picture of where your money is going.
When you have to keep 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.
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.
How to Start A Bookkeeping Business (7 Step by Step Guide)
Steps 1: Separate your Business and Personal Expenses.
You want to make sure that your business and personal transactions are not intertwined. So, it’s clear to IRS what your business is burning or spending, and then what is your bottom line that profit is.
This is especially important for Corporations to have separate bank accounts for business and personal finances.
Corporations opened themselves up to legal problems when their finances aren’t separate from personal transactions.
Step 2: Choose Between Single Entry or Double Entry Accounting.
Double entry is a system of accounting that tracks where your money comes from and where it’s going to.
Essentially, you record every transaction twice, taking assets from somewhere called credit and putting it somewhere else called debit.
Your debits and credits should always equal to each other. That’s how you know that your books are balanced.
What Is the Double-Entry Method?
Entry accounting is kind of like double-checking your homework and help to create financial statements, which you’ll need to make smart financial decisions.
What Is the Single-Entry Method?
It’s 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 a single-entry method.
If your business is any more complicated than that, your accountant will probably recommend the double-entry method.
Step 3: Choosing Between the Cash Versus Accrual Method of Accounting
On a cash basis, You only recognize revenue when you receive it. For example, when you deposit the check into your account on an accrual basis, you recognize revenue when it’s earned.
For example, once you complete a project and write the invoice, you can probably use the cash method if you’re a small business or just getting started. It’s easy to switch from cash to a cruel if you need to if your business is more complicated.
For example, if your business earns more than five million per year in revenue or manages large assets or investments, you’ll probably 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 Excel or just paper or using accounting software.
If you do it in Excel, you can use our free income statement template for simple bookkeeping.
All you have to do is enter each transaction as it happens. If your bookkeeping means are straightforward, this is the easiest, cheapest way to go.
If you choose to use accounting software, there are a few options for small businesses, such as Quick-books, Zero.
You’ll pay a monthly fee for the software, which you can use to produce simple financial reports. Keep in mind, though; you may need to have an accountant’s help learn how to use it properly.
Step 5: Categorize Your Transactions.
Categories are essentially classifications for your transactions to understand what you’re spending on these categories can help you understand your tax deductions.
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.
For example, if you buy a box of pens for the office, you’ll categorize it as office supplies.
At the end of the year, you’ll see the total amount you spent on office supplies, and you’ll be able to deduct that cost on your taxes.
Step 6: Organize 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. There are two essential rules for your record-keeping
Rule One; If he expenses over $75, you should keep a record to prove the expense
Rule two; you should keep every receipt and financial record for three years.
As for actually keeping the records, we recommend storing them digitally.
The I. R. S is totally fine with that, and it’s an easier way for you. You won’t need the receipts actually to file your taxes, but you will need them to get audited.
Some tools you can use to keep your records digitally include receipt bank, Evernote.
Step 7: Make It A Habit.
Well, keeping 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.
At a minimum, we recommend entering in all your transactions at least once a month.
Block out a recurring time in your calendar, do it somewhere fun like a coffee shop, or do something relaxing like putting on Netflix while you do the work, more automatic, your bookkeeping habit.
Your tax season will come and nobody likes stressful bookkeeping.
Now should you do your bookkeeping or hire someone else to do it for you, doing your own books is free.
That’s the biggest draw, but it can be complicated, time-consuming, and can take you away from running your business.