Category: Accounting

Basic bookkeeping for the small business

While keeping track of business records can be a daunting activity, basic bookkeeping will help you to stay on top of your business income and expenditure – and in control of your finances. In this article, we’re going to cover bookkeeping basics such as the management of business loans, business finances, financial transactions, income tax and other assets liabilities.

What is bookkeeping?

Bookkeeping is the first part of the accounting process. It concerns the way in which financial transactions are recorded and organised into your company accounts.

For example, every time a supplier is paid or a customer makes payment this information needs to be tracked and recorded. Doing so accurately, will help you keep track of your business incomings and outgoings and, in turn, ‘balance the books’. However, unlike accounting, bookkeeping doesn’t go into reporting on and interpreting financial data.

Why is bookkeeping important?

Bookkeeping involves the organised processing and storing of your business records and financial statements. It is important to ensure that you are up-to-date with the financial affairs of your business. Such as: accounts receivables, accounts payables, corporation tax, liabilities and equity and other financial activities. There are a number of business bookkeeper guides available online for small business.

Having adequate bookkeeping systems in place will help you:

• know when to pay suppliers and when payment is due
• allow you to keep track of customers that owe you money
• process sales invoice documentation
• review the cash flow of the business – such as paying bills
• prepare profit and loss accounts and balance sheets
• prepare business finance reports
• forecast and set projections for the future.

As a business owner you are required to keep and store accounting records for a minimum of six years.

How to work with your bookkeeper

One of the benefits of hiring a freelance bookkeeper is that you can work with them remotely. Many bookkeepers work from home or online, which will help you keep your business overheads down.

Here are some tips for building a good working relationship with your bookkeeper:

1. Work out the terms of your arrangement

Whenever you start working with someone, discuss the responsibilities and expectations of both parties.

Discuss the tasks you need done and ask for an estimate of how much that will cost you. They’ll probably want set boundaries around their working conditions and how available they’ll be for your business on a weekly basis.

2. Find out how you prefer to communicate with each other

Good communication is crucial for any professional relationship to work.

Whether you prefer to communicate via email, text message or phone call is something you should discuss with your bookkeeper.

As your business grows and their role in it evolves, keeping communication open and honest will help maintain a good working relationship.

3. Have semi-regular catch ups

Even if they work from home, having face-to-face meetings, either in real life or via video call, will go a long way towards making sure you’re both on the same page.

Consider catching up every fortnight or once a month.

Top 3 takeaways

• Bookkeepers are involved in the day-to-day financial running of a business. They typically record revenue and expenses, prepare wages and maintain accounting systems.
• One way to remember the difference between bookkeepers and accountants is that bookkeepers record business data and accountants analyse the data.
• Consider hiring a bookkeeper as soon as you start your business to get your financial records right from the start.

Bookkeeping Basics for Beginners

1. Assets

Assets are the things the business owns.

Tangible and intangible assets are part of the Balance Sheet. Intangible assets include royalty and goodwill, while tangible assets include the following:

• Cash Account – This is the cash on hand and cash on banks.
• Marketable Securities Account – This covers all cash equivalents such as government or corporate bonds.
• Accounts Receivable – This is the money to be collected from customers for the products they purchase and services they purchase or avail. Bookkeepers carefully track and update this to ensure they send accurate invoices or bills on time.
• Inventory – These are the products not yet sold, which business owners should always keep track of. Previously recorded inventory should be regularly reviewed against the current inventory on hand through manual counting.
• Fixed Assets (i.e., properties and equipment)

2. Liabilities

Liabilities are what the business owes. This includes short- and long-term debts: accounts payable and loans payable (current and non-current):

• Accounts Payable – This is what the business owes to its suppliers. Bookkeepers need to work diligently to pay suppliers on time or even earlier, which can qualify the business for a discount.
• Loans Payable – This account keeps track of the current and non-current loans the business incurred. These loans are usually when the company borrows money to buy property, equipment, or vehicles necessary to operate.

Liabilities are also part of the Balance Sheet.

3. Equity

Equity refers to the ownership of the business owners and investors in the company. In the Balance Sheet, the equity accounts cover all the claims they have over the company.

Equity includes the investment the business owner/s put in as well as the other investments the company made.

Owners’ equity monitors the amount the owners and investors put into their business.

4. Single-Entry Bookkeeping

The single-entry system is one of the two main types of bookkeeping. This works for sole proprietors and small business owners who deal with minimal and uncomplicated transactions.

In single-entry bookkeeping, you record earnings and expenses upon incurring them. The following documentation also comes with this type of bookkeeping:

• Cash Disbursements Journal – Where you record the expenses the business pays for
• Cash Sales Journal – Where you record the business’ revenues
• Bank Statements – The documentation you use to check transactions to avoid error in the journal entries

5. Double-Entry Bookkeeping

The double-entry system is the second type of bookkeeping. This works for any business size with complex transactions.

In this system, each transaction has at least two entries: debit and credit. Bookkeeping software, such as QuickBooks, uses the double-entry system.

What follows is a basic overview of what bookkeeping for a small business entails:

• Prepare source documents for all transactions, operations, and other events of the business.

Source documents are the starting point in the bookkeeping process.

• Determine and enter in source documents the financial effects of the transactions and other events of the business.

Transactions have financial effects that must be recorded — the business is better off, worse off, or at least “different off,” as the result of its transactions. The bookkeeping process begins by determining the relevant information about each transaction.

• Make original entries of financial effects into journals and accounts, with appropriate references to source documents.

Using the source document(s) for every transaction, the bookkeeper makes the first, or original, entry into a journal and then into the business’s accounts. The journal entry records the whole transaction in one place; then each piece is recorded in the two or more accounts that are affected by the transaction.

• Perform end-of-period procedures.

These procedures are the critical steps for getting the accounting records up-to-date and ready for the preparation of management accounting reports, tax returns, and financial statements.

• Compile the adjusted trial balance.

This balance (a complete listing of all accounts) is the basis for preparing reports, tax returns and financial statements.

• Close the books.

Bring the bookkeeping for the fiscal year just ended to a close and get things ready to begin the bookkeeping process for the coming fiscal year.

Whether you do your bookkeeping yourself or hire someone else to do it, here are a few useful tips:

Hold on to your receipts and invoices

HMRC requires you to keep them for up to 6 years. Keep them safely and securely for your own records as well, in case you have a disagreement with a client or a customer.

Do your job

Even if you don’t do your bookkeeping yourself, you will still need to do a minimum of filing. Invoicing your customers or clients and gathering all proof of your expenses is part of your job.

Number your invoices and receipts

This will make things easier to track down, especially if you do your bookkeeping yourself.

Photocopies can help with organisation

Although it is not exactly environmentally friendly, photocopying receipts and statements to put them in different filing categories could save you time in the future if you are looking for them.

Put aside time to do your bookkeeping

It can be an hour per week or 10 minutes per day. Whatever way suits you best, reserve some time on a regular basis to do some basic bookkeeping. This will both ensure your accounts’ accuracy and avoid having them snowball into an unmanageable heap by the year’s end. When it comes to accounting, procrastination is definitely not your friend.

Separate your personal banking from your business one

Open a business account which will only handle your business transactions. Use a business credit card and a business cheque book. This way your bank reconciliation will be easier and faster and you will never mix your personal finances with your business ones. It will also give you a clear idea of how your business is doing.

Keep track of cash payments

They can be easy to forget and a nightmare when it’s bank reconciliation time. Even if it is in manual format, register your cash payments.

If you use an accountant, send them all invoices the moment you issue them. This means you won’t have a massive list of unregistered invoices at the end of the financial year. And it also means that you will have reported all your income, thus avoiding being accused of tax evasion.

What Does a Bookkeeper Do, and How Can They Help My Business?

Bookkeepers ensure that all of a company’s expenses, income, and transactions are recorded in the company’s books and reconcile the company’s financial accounts, typically on a monthly basis. Bookkeepers might also help with financial statement and financial report preparation. Although bookkeeping can be in-house staff position, most businesses employ bookkeepers on a freelance basis.

Bookkeepers can wear many different hats depending on what a business needs. That said, most bookkeepers nowadays use business accounting software to do their work. Plus, there are a few things that almost every bookkeeper can take care of for your business. Though the role of a bookkeeper is multifaceted, there are some core tenets to what bookkeepers do.

What Does a Bookkeeper Do?

There’s no one simple way to answer this question. Just like any other field of work, bookkeeping can look different from business to business.

However, these are the most common tasks that bookkeepers tends to tackle:

Record financial transactions

Reconcile bank accounts

Manage bank feeds

Handle accounts receivable

Handle accounts payable

Work with your tax preparer and assist with tax compliance

Prepare financial statements

Take on some payroll and human resource functions

Make technology and process streamlining recommendations

Reconcile Your Bank Accounts

The most important task for any bookkeeper is to reconcile your financial accounts. Account reconciliation ensures that transaction details in your accounting software match transaction details on your bank account statements, credit card statements, and other financial account statements.

How to Set Expectations for Your Bookkeeper

As a business owner, you are probably used to being pulled in a million different directions. You can only do so many things and do all of them well; at some point, you have to decide which tasks you are willing to delegate. For many business owners, the best choice is to hire a bookkeeper. This can be a great way to make sure that all of the important details are attended to while taking a little bit off your own plate. Before you hire someone, though, you need to set some expectations. Use these guidelines to help you set expectations for your bookkeeper.

Your bookkeeper needs to understand the basic terms that are commonly used in bookkeeping and accounting. There are five basic types of accounts: assets, liabilities, equity, income, and expenses. Your bookkeeper needs to know the differences among all of them.

Your bookkeeper needs to be detail-oriented. Bookkeeping is all about the details, and it doesn’t do you any good to hire a bookkeeper if you have to watch his every move. Your bookkeeper must be able to deal with all the little details that are involved in your financial operations.

Your bookkeeper needs to get the big picture. There’s more to it than simple math. When the time comes to make a big purchase, like a piece of equipment, your bookkeeper needs to know how to set up asset and liability accounts and allocate the payment to interest expense and liability principal reduction.

Your bookkeeper needs to follow through. Once again, you can’t check up on them all the time or track down every detail. You need to know that you can rely on your bookkeeper to take care of the details and complete all aspects of your financial projects.

In House Accounting Vs Outsourcing

In their earliest days, many small business owners will choose to take care of their accounts themselves. For some, this can be a helpful way to familiarise themselves with the inner workings of their business and its financial process. For many, it is simply a way to keep costs down until they find firm footing. But as the business grows, almost all will choose to hand over this task to someone else. At this point, a decision must be made as to who will be responsible for one of the most complex, but important, aspects of the business moving forward.

Weighing Up The Cost

Cost is obviously one of the biggest factors behind any business decision, but particularly one that involves a potentially major expense such as hiring a new employee. If you’re going to take on such an expense, you need to know that you are getting enough in return to justify it. For the majority of small or medium sized businesses, there simply is not the volume of work to warrant a full-time financial role.

Weighing Up The Potential Quality

As you likely already know, bookkeeping and accounting are not particularly easy tasks. They are complex processes that require various mathematical skills, an incredible eye for detail, and years of training to master.

Factoring Efficiency In To The Equation

Bringing someone in to manage your books can be appealing for many reasons, not least of which is the ability to see that they are working, and working solely for you. Many employers simply feel more comfortable with having someone on-site at all times, with a vested interest in the success of that business. But apart from the costs associated with this, and the increased risk of mistakes, the argument can easily be made that this is a counterintuitive approach

The Risk Of Employee Fraud

The final point is one that not usually a major consideration for most people, even though it unfortunately should be. Unfortunately, research how shown that between 22 & 28% of businesses are victims of employee fraud, with small businesses being the most likely to be affected. And the longer an employee has been with a company, the more likely they are to commit fraud, and the greater the size of the fraud will be.

Small Business Bookkeeping: IT’S HARDER THAN YOU THINK

Every business has a bookkeeper and in the world of small business, it’s often a family member or someone you are loyal to. After all, how hard can it be to keep the books, right? Here’s the thing: it’s harder than you think if you want good books.

Your books are a record of your company’s financial and non-financial life. Poor, sloppy bookkeeping can have a negative impact on your business in many ways:

Paying more taxes than necessary

Cash flow problems

Penalties and interest on payroll, GST, and other remittances

Poor business decisions based on incorrect information

CRA reviews and audits

Increased year end preparation fees because the accountant needs to rectify your books

A good accountant can’t do effective work based on shoddy books. In the past, we’ve often had to spend a lot of time fixing clients’ books before we could prepare their financial statements or tax returns. This is costly for our client, who has already paid the bookkeeper for what we now have to fix, and it is an ineffective use of everyone’s time.

WHAT GOES WRONG WITH BOOKKEEPING

There isn’t one single right way to do bookkeeping. How your books are kept needs to be based on what information you need to make good decisions for your business. A good bookkeeper works with you to understand how you and your business work and what information is needed. A good bookkeeper also has a strong understanding of accounting and of your accounting policies and procedures, and is able to effectively manage your cash flow.

WHAT TO LOOK FOR IN A BOOKKEEPER

Many business owners think all bookkeeping is the same and are unable to tell a good bookkeeper from a poor one. Here are a few things to look for to determine whether your bookkeeper is working for you:

Your bookkeeper asks a lot of questions. Great! You’ve got a good bookkeeper. It may be a pain to have to answer questions, but if your bookkeeper doesn’t ask questions, you’ve got a problem, because your accountants are going to ask them at your year-end. And your accountants will charge you more.

Your bookkeeper refrains from offering tax advice. In general, bookkeepers are not tax experts and should not be advising you on matters related to tax.

Your bookkeeper embraces automation. We’re living in the 21st century with a lot of technology at our fingertips. Using it can reduce the cost of bookkeeping or give you more value for your money. For example, rather than keeping all of your receipts in a shoebox to bring to your accountant, technology allows you to snap a photo of the receipt and you’re done. Easy as that.

Your books are always up to date, allowing you to make timely decisions.

There are very few adjusting entries at the end of the year. This indicates that the accountant spent minimal time fixing the books.

How to Manage Bookkeeping for Your Small Business

For new entrepreneurs especially it can be overwhelming to wear so many hats so much of the time. Some things are bound to fall to the wayside, and one of the most commonly overlooked responsibilities is bookkeeping. This article addresses the basics of bookkeeping for small business.

Very small businesses and solopreneurs tend to handle bookkeeping internally, not making enough to justify having an accountant on call. Established small businesses may have an accountant who handles their books, but that doesn’t mean there aren’t ongoing responsibilities to organize and track revenue and pending. Let’s take a closer look at some of the best practices you should follow to make bookkeeping a simpler, less overwhelming task every month.

What Does Bookkeeping for Small Business Entail?

Bookkeeping is a specific component of accounting focused on collecting, organizing, and maintaining financial documents for your company. When your accountant asks for your receipts and invoices every January, a bookkeeper (or you) should have been organizing those documents throughout the year to handoff.

Choosing Your Method of Bookkeeping

There are two primary methods of bookkeeping for small business. Which you use will largely depend on the type of business you operate. They include:

Single-Entry Bookkeeping – This means simply that when a transaction occurs, you record it once in your ledger. So if you sell something for $50, you note a $50 sale and you’re done.

Double-Entry Bookkeeping – This method is most commonly used by companies that maintain a physical inventory of goods. You’d first enter the $50 sale but then deduct the value of the item sold from your inventory.

Another major question for your accounting system is whether it will use a cash or accrual basis:

Cash Accounting – Cash accounting records a transaction on the date that money changes hands. Even if you invoiced for a service or good in March, if the payment isn’t made until April or May, that’s when you would record the transaction.

Accrual Accounting – Accrual on the other hand records transactions when they are initiated. So when the invoice is delivered, you would record the transaction.