The Importance of Bookkeeping for Small Businesses
Initial Bookkeeping Terms Related to the Accounting Equation
For example, if the business makes a cash sale to a customer and your business uses double-entry bookkeeping, you would record the cash received in the asset account called Cash and the sale would be recorded in the revenue account called Sales. Here is another example of a bookkeeping entry for a cash sale. This one throws in another variable – what the bookkeeper has to do when sales tax is involved. Your small business accounting method matters both in terms of bookkeeping and tax filing.
Do you need an accountant, a bookkeeper or both? Let’s demystify things. Perhaps the simplest one on this entire list. A cash account is one where all of your business transactions pass through to track all of your financial activity.
Another important aspect that is directly connected to bookkeeping is the way you pay your annual taxes. If you have an organized https://www.bookstime.com/ balance sheet and you know everything about the cash flow in your business, calculating annual taxes becomes easy.
Self-employed people need to withhold taxes from their income, and remit these to the government in lieu of the withholding that an employer would normally conduct. For American store owners, you’ll need to pay estimated quarterly taxes if you’ll owe more than $1,000 in taxes this year. Canadians have it a little easier; if your net tax owing is more than $3,000 you’ll be required to pay your income tax in installments. Tax obligations vary depending on the legal structure of the business. If you’re self-employed (sole proprietorship, LLC, partnership), you’ll claim business income on your personal tax return.
If you are hiring staff and anticipate a lot of growth, you may hire a controller to handle your financial management and accounting. If your business is going to grow but you anticipate slow growth, you may simply hire an accountant or bookkeeper to handle the accounting system. The accrual basis accounting method is based on when revenues are earned, rather than received. This can be thought of a value being transferred between accounts.
Take the time to learn about importing goods into the US and Canada, and the associated taxes, so that you know the rules from the get-go. When your business is big enough you can opt to hire an in-house bookkeeper and/or accountant. Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is, and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements.
The fact is, no one starts a business to become a bookkeeper. It’s a time consuming and difficult task where mistakes can be quickbooks online costly. But no matter how begrudging bookkeeping can be—it’s a necessary part of any successful business infrastructure.
For example, a credit card transaction from an airline can be automatically categorized as a travel expense. Bookkeepers keep an eye on these transactions and make sure they are being categorized correctly. Stacy Kildal is owner/operator of Kildal Services LLC—an accounting and technology consulting company that specializes in all things QuickBooks.
A debit doesn’t necessarily mean cash is flowing out; likewise, a credit isn’t necessarily money you’ve earned. The type of account defines whether a https://www.bookstime.com/articles/quickbooks transaction either debits or credits that account. But to run a small business, you have to be at least a little skilled in the art of bookkeeping.
- Most bookkeepers will prepare three major financial statements for your business—the profit and loss statement, balance sheet, and cash flow statement.
- Stacy Kildal is owner/operator of Kildal Services LLC—an accounting and technology consulting company that specializes in all things QuickBooks.
- You had to set up ledger sheets, decide what kind of entry system you were going to use, and do all your calculations on an adding machine.
- Expenses are recorded when they’re paid.
- There you have it—all of the main skills that a bookkeeper can bring to your business.
- At least once a week, record all financial transactions, including incoming invoices, bill payments, sales, and purchases.
Imagine all the business you would lose! But if you had the cash on hand, you could replace the printer and be back to normal in no time. Retained Earnings. The Retained Earnings account tracks any company profits that are reinvested in the business and are not paid out to the owners. Retained earnings are cumulative, which means they appear as a running total of money that has been retained since the company started.
Categorize your income based on type of service so you know where your revenue is coming from. Want to know what types of software it takes to run your business?
10 Easy Examples of Bookkeeping for Small Businesses
It happens to every business from time to time. But those who make a habit of mixing business and personal expenses make their bookkeeping even harder. This also puts you at risk if you are ever audited by the IRS.
At the beginning of the year, take a look at the list of deductible expenses and determine which categories you’re most likely to spend money in. Consider creating a labelled file folder for each of these expense categories. This way, when you make a purchase, you can immediately file the receipt in the applicable expense category, saving you time when you need to make your expense calculations.
When in doubt, don’t be afraid to talk to other business owners and find out how they hired a bookkeeper and what bookkeeping methods they prefer to use. Business accounting and reporting standards vary slightly from province to province, so it’s important that you find a bookkeeper that’s based in the same region where you’re operating your business, so you know that your accountant understands the specific regulations that you’re going to be dealing with.
The accounting method affects the way that income and expenses are recorded on your financial statements, and the tax year in which those transactions are reflected. At a basic level, your bookkeeping service or bookkeeper should be managing the transactions brought in through your accounting system’s bank feed. Bank feeds link up your accounting software with your business bank account, allowing you to see each transaction in real time.