Basic Bookkeeping

Why Bookkeeping Matters

Bookkeeping is the practice of recording every financial transaction in your business. It’s not glamorous, but it’s the foundation of every other financial decision you make. Without accurate books, you don’t know if you’re actually profitable, you can’t file accurate tax returns, and you can’t get a loan or bring on investors.

Good bookkeeping also means fewer surprises. Businesses that stay on top of their numbers catch problems – a customer who hasn’t paid, an expense that’s crept up, a slow month coming – while there’s still time to react.

Cash vs. Accrual Accounting

These are the two methods for recording when income and expenses happen:

Cash basis: You record income when you actually receive the money and expenses when you actually pay them. Simple and intuitive – most small businesses start here. Required if your annual revenue is under $25 million (for most business types).

Accrual basis: You record income when it’s earned (even if not yet received) and expenses when they’re incurred (even if not yet paid). This gives a more accurate picture of profitability over time but requires more discipline. Required for businesses with inventory and revenues over $25 million.

For most small businesses, cash basis accounting is simpler and sufficient. Your accountant can help you decide if accrual makes more sense for your situation.

The Chart of Accounts

A chart of accounts is the organized list of every category you use to track your finances. Think of it as the folders in a filing cabinet. Common categories include:

• Assets: Cash, accounts receivable, inventory, equipment
• Liabilities: Accounts payable, loans, credit card balances
• Equity: Owner’s investment, retained earnings
• Revenue: Sales, service income, interest earned
• Expenses: Rent, payroll, supplies, advertising, software

Your bookkeeping software will set up a default chart of accounts when you start. Customize it to match your actual business – don’t pay for categories you’ll never use, and add specific ones for expenses you track closely.

Key Financial Statements

Profit & Loss Statement (P&L): Also called an income statement. Shows revenue minus expenses over a period of time. This tells you if the business is profitable. Review it monthly.

Balance Sheet: A snapshot of what the business owns (assets), what it owes (liabilities), and what’s left over (equity) at a specific point in time. This tells you the financial health of the business.

Cash Flow Statement: Shows the actual movement of cash in and out. A business can be profitable on paper but still run out of cash – this statement shows you where money is coming from and going. The most important statement for day-to-day survival.

Accounts Receivable and Payable

Accounts receivable (AR) is money customers owe you. Invoice promptly, set clear payment terms (Net-30 is standard for B2B), and follow up on overdue invoices before they become a problem. Every dollar in unpaid invoices is money you’ve earned but can’t use.

Accounts payable (AP) is money you owe vendors and suppliers. Pay on time to maintain good supplier relationships. If cash is tight, prioritize payroll, rent, and tax obligations – missing these has serious consequences.

Separating Business and Personal Finances

Open a dedicated business checking account and business credit card the day you start your business. Never mix personal and business transactions. This is the single most important bookkeeping habit to establish early – it saves hours of untangling at tax time and is required to maintain LLC liability protection.

Pay yourself from the business account as either a salary (if structured as an S-corp or C-corp) or an owner’s draw (if structured as a sole proprietor, partnership, or LLC). Document every transfer.

Bookkeeping Tools

QuickBooks Online is the most widely used small business accounting software. Full-featured, integrates with most banks and payroll providers, and most accountants are familiar with it. Plans start around $30/month.

Wave is free for invoicing and accounting – a good option if you’re just starting out and keeping costs minimal.

FreshBooks is designed for service businesses and freelancers who need strong invoicing features.

Spreadsheets work for very simple businesses, but outgrow them quickly. If you’re issuing more than a handful of invoices per month or have multiple expense categories, software will save you time.

When to Hire a Bookkeeper or Accountant

A bookkeeper handles day-to-day transaction recording, reconciliation, and financial report generation. You need one when keeping up with your own books is taking more than a few hours per month.

An accountant (CPA) provides higher-level guidance – tax planning, financial analysis, business structure advice, and tax return preparation. At minimum, consult a CPA before you file your first business tax return and annually thereafter.

Many small businesses use both: a bookkeeper for ongoing maintenance and a CPA for year-end taxes and strategic advice.

Common Mistakes

• Falling behind. Catching up on 6 months of unrecorded transactions is painful and error-prone. Reconcile your accounts monthly at minimum.
• Not keeping receipts. The IRS requires documentation for business expense deductions. Keep digital copies of every receipt – apps like Expensify or your phone’s camera make this easy.
• Treating owner draws as expenses. Money you take out of the business for personal use is not a business expense – it’s an owner’s draw against equity.
• Ignoring unpaid invoices. Implement a collections process – automated reminders at 7, 14, and 30 days overdue. The older an invoice gets, the less likely it is to be paid.

Where to Go Next

Once your books are in order, you’ll have everything you need for Taxes 101 – estimated quarterly payments, deductions, and payroll taxes all depend on accurate bookkeeping. For tax obligations specific to your business structure, see the Federal Law section covering IRS requirements for sole proprietors, LLCs, S-corps, and C-corps.