An introduction to bookkeeping for a small business

What is bookkeeping?

Bookkeeping is the process of tracking, recording, and classifying business transactions. Bookkeepers summarize transactions into reports that highlight how the business is doing. Bookkeeping involves administrative tasks that include:

• Creating invoices and receiving payments from customers
• Tracking debits and credits for accounts
• Paying bills
• Organizing and maintaining financial records, cash flow statements, bank documents, and loss statements
• Managing payroll
• Reconciling financial statements
• Monitoring key performance indicators (KPIs)
• Preparing tax returns

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What bookkeeping concepts are important for small business owners to know?

As a small business owner, it’s important to understand universal concepts and definitions associated with bookkeeping. Without understanding the language and concepts associated with bookkeeping, you may struggle with developing and maintaining bookkeeping processes. Important introductory concepts to know include:

• Ledger: A ledger hosts and classifies records of business transactions.
• Accounts: Accounts categorize business transactions.
• Assets: Assets include resources, items, properties, etc. that have a positive value in company transactions. They can include cash, accounts receivable, prepaid expenses, long-term investments, equipment, and vehicles.
• Liabilities: Liabilities are the unpaid bills, taxes, wages, loans, and other debts the business owes.
• Revenue: Revenue is the money the business is generating through sales, interest, or dividends.
• Expenses: Expenses are the costs to maintain a business.
• Financial statements: Financial statements reflect the financial activities and performance of a business. They include the balance sheet, income statement, and cash flow statement.
• Balance sheet: Balance sheets list the assets, liabilities, and shareholders’ equities at a specific point in time.
• Income statement: The income statement is an overview of revenue, expenses, net income, and earnings per share for a business. Income statements cover a period of time, usually on a quarter or annual basis.
• Cash flow statement: The cash flow statement evaluates how well a company generates cash to fund its operating expenses, pay debt obligations, and fund investments.

What are the types of bookkeeping?

There are two types of bookkeeping that businesses use. Based on your business needs, one method may work better than the other.

Single-entry bookkeeping

Single-entry bookkeeping is frequently used by smaller businesses or companies with minimal transaction activity. Transactions are kept in just one row. This method of bookkeeping uses three documents—a cash sales journal, a cash disbursements journal, and bank statements. It’s a simple and sufficient method for tracking expenses, cash, and taxable income.

Double-entry bookkeeping

Double-entry bookkeeping records transactions in two accounts¬: credit and debit. To ensure your books are even, debits and credits recorded must match. If your business accrues more expenses, this is a great method to record and track transactions. However, it is more complicated and requires more documents than single-entry bookkeeping. Necessary documents include general ledgers, cashbooks, inventory, accounts payable, accounts receivable, loans, and payroll. It helps bookkeepers notice the ripple effect of a transaction and how it can impact the business.

Bookkeeping is an integral part of business management. Bookkeepers track, manage, and record transactions, to ensure that debits and credits match. Without proper bookkeeping, transaction organization can become poor and negatively impact the business. It’s an important part of accounting that helps to maintain the financial health of your business. Learn more financial and budgeting tips to sustain your small business.