This guide will outline the essential principles and practices of bookkeeping for small businesses, along with some best practices for managing documentation. Be realistic about how quickly your business is growing and ask the sales rep you’re working with how well their product grows with clients as their businesses scale. Of course, if your solution isn’t working for your company, you should find a new one as soon as you can.

Business accounting software and modern technology make it easier than ever to balance the books. A platform like FreshBooks, specifically designed for small business owners, can be transformational. Accountants rely on bookkeeping records to analyze and advise on the financial activity, health, and growth potential of a business. The Accounting and bookkeeping for small business world has become electronic and internet-based, and this is especially true for accounting and bookkeeping support. But if you use software on your own to manage your books, you don’t have an experienced set of eyes reviewing your work. Without a pro taking a look at your work, there’s a big chance your mistake will go unnoticed.

Keep Personal and Business Costs Separate

If you leave some of the categorizations for the end of the tax year, you can only imagine how much work there’s going to be. It’s a bigger-picture type of report that gives you a bird’s eye view of how well your business is doing. It’s also known as a statement of financial position or statement of net worth. To make the distinction even clearer, let’s use an example of a restaurant. It’s never too early to take ownership of your bookkeeping policies. By following the tips and best practices outlined in this guide, you’ll be more equipped to set a strong financial foundation for future growth, profitability, and ultimate success.

Businesses obtain non-operating revenue through secondary business activities, like bank account interest. Experts agree that small businesses commonly fail when cash flow runs dry. Your business should implement efficient record-keeping policies and a sound financial strategy to avoid this situation. While bookkeeping systems don’t rely on receipts to identify transactions, the IRS does require receipts for all tax deductions. An old-fashioned method of keeping receipts is to have a file folder for each vendor where you place paper receipts.

Accounting software offers features for tracking the revenue and expenses of a business. Small business accounting software is also useful for tax management, ensuring you’re accurately estimating all your tax liabilities and saving money accordingly. The best accounting software integrates with other key business systems like payroll software and HR software, eliminating the need to enter the same data manually in multiple systems. If you’re looking for effective, free accounting software, check out Wave Financial. It offers many important, high-quality accounting features at no cost to you.

One of Xero’s most impressive characteristics is its mobile experience, making it an excellent option for businesspeople who work on the go. The software allows you to send custom invoices, track inventory, and create purchase orders to attach to bills — all from your phone or tablet. So to help you find the resource that will work best for you, we’ve compiled a list of the best small business accounting software on the market. If you don’t connect any bank accounts, the Inbox will remain empty. For easy bank reconciliation, link your financial institutes with Wave for good expense tracking and month-end reconciliation. You can also track vendor bills and payments in Wave, as well as track business expenses by simply snapping a photo of a receipt with your smartphone.

Creating accurate financial records

If you’ve accurately kept track of and reported your employees’ salaries and wages, you can claim them with the Employee Retention Credit. With this credit, you can get up to $26,000 back per employee during COVID-19. The Self-Employed Live Tax Bundle also gives you access to a CPA to answer questions throughout the year and during tax season.

And the collection of those accounts is called the chart of accounts. As you’ve probably noticed, when running your own business, you’ll be tasked more with basic bookkeeping than advanced accounting. In reality, the duties of bookkeepers and accountants can sometimes overlap but the above descriptions and example provide a good working distinction. So let’s take a look at how to do basic business accounting, understand what your books tell you, and how to manage them efficiently with helpful software.

Whether you take on your small-business bookkeeping yourself or end up outsourcing to an expert, understanding the basics will help you better manage your finances. You’ll save time chasing receipts, protect yourself from costly errors, and gain valuable insights into your business’s potential. Again, most accounting software tackles the bulk of this process for you automatically, including generating the financial reports we discuss below. You have been recording journal entries to accounts as debits and credits. At the end of the period, you’ll “post” these entries to the accounts themselves in the general ledger and adjust the account balances accordingly.

The business shouldn’t directly pay any expenses of your personal vehicle, even for fuel that will be used entirely for business. You should use the 65.5 cents per mile received from the company to pay for your fuel and maintenance and make mileage expenses tax deductible in your tax filing. After creating your account, everything’s set up so you can get started right away. Your data is always available, and it’s backed up for extra peace of mind. Transactions will appear in your bookkeeping automatically, and you can say goodbye manual receipt entry. Simple bookkeeping for small business helps with financial planning and budgeting.

Reconcile Your Bank & Credit Card Accounts Monthly

If you can manage your job and some of the accounting each month but need a little extra help, a part-time bookkeeper might be a good fit for your business. They can do work such as inputting receipts and tracking employee timesheets, accounts receivable and accounts payable. When hiring a part-time bookkeeper, management still needs to have someone reviewing the work of the bookkeeper. The best applications suggest potential matches as you reconcile your accounts, and a few include a reconciliation tool in their mobile apps. If your business sends invoices, the ability to email them and accept online payments helps you get paid faster. Most accounting programs integrate with third-party payment processors; others require you to use their in-house processing services.

• Often bank fees, interest payments, deposits, and payments that haven’t yet hit your bank accounts will need to be accounted for.
• In contrast, credits generally increase liabilities and equity (on the right side of the accounting equation), while the reverse is true for decreases.
• Before you sign off on the debt, it’s important to calculate the ROI of the loan.
• You can connect the application with your bank accounts, and Sage Business Cloud Accounting also offers vendor bill management and good financial reporting.

From manufacturing to consulting to retail to finance, every business in every industry uses bookkeeping. Centuries ago, businesses would record their financial transactions in a physical book called the general ledger (GL). Each plan offers more advanced features like inventory management, time tracking, additional users, and cash flow.

Bookkeeping Options for Small Business Owners

Ultimately, you and your tax pro can make the decision about which method you prefer. One of the most important—and often most difficult—rules to follow when running a small business is keeping your business and personal expenses separate. You can find free templates online, but as your business gets more profitable—or more complicated—you’ll need to consider working with a professional to manage these documents.

The accounting method your business uses will have rules about when and how to document revenue and expenses in your own records and in reports to the IRS. It will affect how you track everything from your balance sheets to your cash flow statements. If not done at the time of the transaction, the bookkeeper will create and send invoices for funds that need to be collected by the company. The bookkeeper enters relevant data such as date, price, quantity and sales tax (if applicable). When this is done in the accounting software, the invoice is created, and a journal entry is made, debiting the cash or accounts receivable account while crediting the sales account.

Also, accounting software should connect to your bank and credit card accounts and automatically download your transactions. If your business is service-based, you may need project management tools. If your business sells products, you may want an accounting solution that has inventory management features. If you’re a small business owner, it’s important to know which features to look for. Most online accounting software offers accounts receivable, accounts payable, banking and reporting features.

Zoho Books also offers a free plan for businesses with under $50,000 in annual revenue. Melio is very easy to use, offering one of our favorite user experiences. Melio lets you enter a vendor’s information manually, upload a file with that date or snap a photo of an invoice. You can invite both internal users and accountants to use the software and then assign roles and permissions so you know who is accessing your information and what they are doing with it.