Nail Down the Bookkeeping Essentials to Gain Confidence

Eric Weynand, Founder

Bookkeeping can keep even the most skilled entrepreneurs up at night. The world of finances can be intimidating, especially when you’re an entrepreneur juggling multiple responsibilities. 

However, understanding the basics of bookkeeping is essential for the financial health and longevity of a business. By gaining confidence in managing your books, you’ll not only feel more in control, but also make more informed decisions about your finances. 

Let’s explore the key steps to nail down the bookkeeping essentials.

bookkeeping essentials

The Basics of Bookkeeping 

Bookkeeping is the systematic process of recording, organizing, and managing financial transactions within a business.

Most business owners understand why bookkeeping is crucial: accurate bookkeeping is the cornerstone of sound financial decision-making for businesses of all sizes. 

Differences Between Bookkeeping and Accounting 

While bookkeeping and accounting are often used interchangeably, they serve distinct purposes in the financial management process.

Bookkeeping primarily involves the recording and categorization of financial transactions, focusing on the day-to-day tasks of maintaining accurate records. 

Accounting encompasses a broader range of activities, including interpreting financial data, preparing financial statements, and providing strategic insights based on analysis. 

Bookkeeping lays the groundwork for accounting by ensuring that financial transactions are accurately documented and categorized.

Setting Up Your Bookkeeping System

Cash vs. Accrual Accounting 

Firstly, you’ll want to consider if you’ll be implementing cash or accrual accounting. If this is a new topic for you, our overview and recommendations can be found here

Selecting Software

Choosing the right bookkeeping software is fundamental when building your bookkeeping system. There are many options offering user-friendly interfaces and features tailored to small businesses, and some offer support from bookkeeping professionals

Set Up Your Chart of Accounts

Once you’ve selected your software, it’s time to create a chart of accounts.

The chart of accounts categorizes your income and expenses, organizing your financial transactions for reporting and analysis. Here’s how to get set up: 

  1. Identify Account Categories: Determine the main categories of financial transactions relevant to your business, such as assets, liabilities, equity, income, and expenses.
  2. Create Subcategories: Break down each main category into subcategories to provide more detailed insight into your financial activities. For example, under expenses, you might have subcategories for office supplies, utilities, rent, and marketing expenses.
  3. Assign Account Numbers: Assign unique account numbers to each category and subcategory for easy reference and organization. Most software can automatically do this for you. 

Our in-depth guide to setting up a chart of accounts, including our free template, is available here

Organize Receipts & Invoices

Organizing receipts and invoices makes life easier year-round, but especially at tax time. Follow these best practices:

  • Digitize Receipts: Scan or photograph paper receipts and store them electronically.
  • Create a System: Establish a filing system for organizing both digital and physical receipts and invoices. Categorize receipts and invoices by date, vendor, expense type, or project to ensure easy retrieval and reference.
  • Record Transactions Promptly: Enter transactions into your accounting software promptly to avoid missing or duplicate entries. 

Tracking Income and Expenses

Tracking your income and expenses is key to understanding your business’s financial health. 

It’s important to accurately record income from every revenue stream, including:

  • client payments
  • product sales
  • investment income from savings accounts, dividends, etc.

As a business owner, every day you may feel there is a new bill to be paid. Though daunting, it’s important to record all expenses, such as:

  • insurance
  • office supplies
  • advertising
  • travel
  • taxes
  • licenses
  • loan payments
  • software subscriptions
  • …the list goes on! 

Categorizing Expenses

When recording expenses, it’s important to consider how you will categorize each item

Categorizing expenses will help not only for tax time but also enable you to recognize areas where your spending could be improved

For example, you may notice you only spent $100 on professional development one year, and realize it’s worth investing in more training to stay competitive. 

Similarly, you may realize you’re spending a great deal on office rent and utilities, and decide to consider a coworking space. 

Regular Reconciliation 

Reconciling bank statements involves comparing the transactions recorded in your accounting records with those reported by your bank to ensure they match. This process helps identify discrepancies, such as missing or duplicate transactions and ensures the accuracy of your financial records. 

Many accounting software can automate this process, but it’s important to still double-check reconciliations periodically. At PlotPath our approach is “Two sets of eyes on every reconciliation.” There should be a doer and a reviewer of each reconciliation – this ensures reconciliations are accurate – and that there are no uncleared, illegitimate items. This is a critical internal control that not only improves the accuracy of financial reporting, but helps prevent fraud or misappropriation of funds.

Managing Cash Flow 

Cash flow is the movement of money in and out of your business. Positive cash flow is important not just for paying bills, but reinvesting into your company for growth. 

To manage cash flow, businesses should regularly prepare and review a comprehensive budget outlining expected revenues and expenses. Your business should also prepare its financial statements, including a cash flow statement that tracks inflows and outflows of cash. 

Invoicing and Payments for Cash Flow

Consider implementing the following to maintain a healthy cash flow: 

  • Timely Invoicing: Issue invoices promptly, clearly outlining payment terms, including due dates and accepted payment methods, to minimize delays.

  • Encourage Prompt Payment: Offer incentives such as discounts for early payment, and late fees or penalties to discourage payment delays.

  • Negotiate: Negotiating favorable payment terms with suppliers can optimize cash flow. Extended payment terms or discounts for early payments can help manage cash flow fluctuations.

bookkeeping essentials

Bookkeeping Doesn’t Have to Be Your Expertise

Hopefully, you now have a better understanding of bookkeeping and feel more confident about the steps involved to set your business up for success. 

The good news is, you don’t have to be an expert at bookkeeping.

Our team at PlotPath already has the expertise, and we specialize in working with small businesses so that you feel confident about finances. 

Get in touch for a free consultation today!