Bookkeeping for Small Business: Everything You Need to Know

Bookkeeping is a vital part of running any business—whether you consider yourself a freelancer, solopreneur, or small business owner, you’re going to need to do some bookkeeping. This process helps you keep updated on how your business is performing financially and ensures that you aren’t spending more money than you’re making.

That said, it can be a tough subject to get into when you’re new to it, and many small business owners are new to it. To help, we’re going to walk through everything you need to know about small business bookkeeping. Let’s dive in!

What is bookkeeping?

Bookkeeping is the process of recording and reconciling your business’s transactions. It helps you keep aware of exactly how much money you’re bringing in and how much you’re spending. 

Two key parts of bookkeeping are logging your transactions and reconciling your logs against the actual money in your accounts. Logging your transactions regularly ensures that everything is in its place and nothing falls through the cracks. Reconciling helps ensure that what you think should be in your accounts and what’s in the accounts match up. This latter part is important because it can help draw attention to other issues, such as internal or external theft, unpaid invoices, and other problems that need to be addressed. 

Bookkeeping is a core part of running a successful business. If your books aren’t up-to-date and accurate, it’s hard to know how your business is performing. Accurate books also help ensure you have the money to pay employees and cover other critical expenses.

What is the difference between bookkeeping and accounting?

You might wonder how bookkeeping and accounting differ. The two functions are similar and complement each other. The main difference is in focus—bookkeeping is centered on tracking numbers on a routine basis, while accounting is more concerned with the bigger picture that those numbers paint.

In other words, bookkeeping looks mainly at recording and reconciling daily transactions. Accounting is more likely to be focused on forecasts, budgets, and other “elevated” aspects of business finances. In a small business environment, the two functions are often performed by the same person.

Why strong bookkeeping is essential for small businesses

Bookkeeping for small businesses is a crucial process. Here are just a few of the reasons why:

• Enables informed decisions. A solid workflow helps ensure that your numbers are always accurate, which in turn enables you to make informed business decisions. If your books are out of date, you can never be sure whether you can afford that expansion or new hire.

• Provides insight into the health of your business. Accurate books enable you to get a clear view of how your business is doing. Without them, you can only guess at critical financials like profit, total expenses, and unpaid invoices. 

• Helps you stay organized. Doing a bit of organizational work daily or weekly is a lot better than having to dig through a mountain of unorganized data at tax time or when you need to find something in a hurry.

Ultimately, effective bookkeeping enables you to run a more efficient organization, which in turn enables you to serve your customers better and grow the business.  

The basics of bookkeeping for small business

If you’ve never done any bookkeeping before, it can be overwhelming. Let’s explore some of the basics of bookkeeping for small businesses so you can start your business confidently.

Step 1: Log your transactions

The first question you might have is what to keep track of. The simple answer is everything. You should record every transaction, no matter how big or small. This includes income from all sources and all expenses (including payroll). You’ll log each entry as either expense or income, with the date, time, amount, and perhaps a brief note on what the transaction is. 

Step 2: Reconcile your books with your bank account(s)

Once you’ve logged your transactions, the next step is to compare your logs to your bank statements. This process is called reconciliation. Ideally, everything should match up. However, if you find that there is a discrepancy, you’ll need to determine the cause and correct it. 

For example, if your records indicate an invoice was paid, but your business bank account does not show the deposit, you’ll need to investigate to determine why. It could be that the funds were held up, or that the wrong invoice was marked paid in your system. 

This step is important because it enables you to catch errors like the above, ensuring that your business’s cash flow remains strong. Without a firm bookkeeping process, you might never notice the missed payment—or by the time you do, it’s too late to do anything about it.

Best practices for small business and freelancer bookkeeping

Here are some tips to help as you undertake your bookkeeping process:

• Track every transaction. The single biggest tip we can offer is to make sure you log every single transaction. If you don’t, you face two problems. One, things can fall through the cracks. Two, you can start to lose trust in your system to provide the data you need regarding your business.

• Reconcile regularly. Bookkeeping isn’t just about logging your transactions. An equally important part of the process is to reconcile your transactions. Some small businesses neglect this aspect of the process, but if you don’t reconcile regularly, you’re largely defeating the purpose of logging your transactions. Reconcile your books weekly at a minimum—daily is best. 

• Don’t cut corners. Bookkeeping can feel like a lot of tedious work—especially if you’re trying to do it all manually. Trying to find shortcuts or skip steps like reconciling can be tempting. Resist this temptation! While this might save you a little time in the short term, it can end up costing you a lot of time if you have an issue down the road and your records aren’t updated.

• Keep business and personal separate. We can’t overstate the importance of this. Trying to keep your business and personal accounts and records organized when combined in one place will almost always make your life harder in the long run.

• Connect your bank account to your software. Many bookkeeping platforms enable you to tie in your bank account so that transactions are automatically recorded as they occur. This can save a tremendous amount of time.

• Organize transactions using IRS categories. The IRS has defined categories for expenses that you intend to claim as tax deductions. To save time and frustration during tax season, categorize your transactions using these criteria as you enter them. The IRS has a fantastic resource for tax-deductible expenses.

Of course, this can be a difficult and time-consuming process for a busy business owner—that’s where software comes in.

What to look for in small business bookkeeping software

The best way to handle your small business bookkeeping is to use software designed specifically for this purpose. Trying to keep your books manually, or use a general-purpose tool like a spreadsheet, is almost always more trouble than it’s worth. 

However, there are a lot of bookkeeping solutions on the market, and picking one for your business can be overwhelming. Here are a few things to consider to make the choice easier.

Automation

One of the biggest issues with many bookkeeping systems is the amount of repetitive data entry and calculations needed. Your software should help reduce this load by offering useful automation, like categorizing expenses.

Receipt tracking

You’ll usually need to keep receipts for all of your expenses, especially if you intend to claim them as tax deductions. Your bookkeeping software should make capturing and saving receipts with the logged transactions easy.

Flexible reporting

Bookkeeping is important because of the powerful data analytics it enables. Your software of choice should offer robust reporting that makes it easy to see where your business stands.

The ability to pay taxes or send out invoices directly from the app

A highly useful bonus feature is creating and submitting invoices and tax payments directly from your bookkeeping platform. The software can then automatically log those items, saving time.

Ease of use

Your bookkeeping tools should make the process easier, not harder. To that end, look for a platform that’s easy to use and accessible. You should be able to quickly enter new transactions on both a computer and mobile device and access key reports no matter where you are.

Integrations

Business finances don’t exist in a vacuum. You likely have multiple ways to receive payments and multiple platforms that you sell products on. Your bookkeeping tool should integrate with all of these, so you can automatically pull in transactions and cut down on repetitive data entry.

Small business bookkeeping terms

The world of accounting and bookkeeping can be confusing when you’re new to it. This is partly due to the terminology used. To help make things easier, we’ve collected definitions for some common bookkeeping terms.

Accounts payable

This common term refers to all the expenses a business has incurred but has not paid yet. In other words, these are your unpaid bills. 

Accounts receivable 

The opposite of accounts payable, these are the invoices your business has sent out but not yet collected payment on. This is money left on the table, so you need a process for handling them.

Balance sheet

A balance sheet is a financial statement that covers all of a company’s assets, liabilities, and equity. The balance sheet summarizes all of this and provides an overview of a business’s health for a given period.

Asset

An asset is anything owned by a business or company that has monetary value. This includes cash in the bank and less-obvious items like buildings and the land they’re constructed on. 

Liability

Any debts that a company hasn’t paid yet. These can include loans, payroll that hasn’t been processed yet, and anything in your accounts payable. 

Expense

Any costs incurred by the business. Expenses can include payroll, office supplies, mortgages, utilities, inventory, and any other costs of doing business. Expenses are often tax-deductible, so keeping an accurate log of them is essential.

Revenue

Money earned by the business. Any money brought in falls under the revenue umbrella, but the most common forms of revenue are the sale of the company’s main product or service offerings. 

Cash flow

Cash flow describes the “flow” of cash both into and out of the business. Cash flow can be both positive and negative. If your expenses exceed your revenue, that’s a negative cash flow—you have more money going out than coming in. On the other hand, if your revenues exceed your expenses (which they ideally should), then you have a positive cash flow.

Overhead

Overhead is a broad term that covers expenses required to run a business. However, it usually does not include expenses that go towards making a product or providing a service. In other words, rent on your building is overhead, but the cost of the dough that you use to bake your cookies is not.

Frequently asked questions (FAQs) about small business and freelancer bookkeeping

If you still have questions about bookkeeping, you’ve come to the right place. Here are a few of the most common questions we’ve seen about the process.

How do you do basic bookkeeping for a small business?

The basic bookkeeping process involves two processes: recording transactions and reconciling transactions. First, you should record every single transaction that occurs in your business. This includes all business-related purchases and all income from any source.

Then you’ll need to reconcile each transaction by comparing your records to your bank statements. The goal here is to ensure they match. You’ll need to determine why and correct the issue if they don't.

This process can be handled manually in a paper log or spreadsheet, but a better way is to use bookkeeping software for small businesses. A small business bookkeeping app can automate many of the repetitive tasks and make reconciling easier.

Can I do my own bookkeeping for my business?

Generally, yes. Many small business owners handle their own bookkeeping. As your business grows, there may come a point where you no longer have the time to dedicate to bookkeeping, at which point you should either hire someone to fill this role or outsource the task to small business bookkeeping services. However, it can take a while to reach this point. 

If you’re doing your own bookkeeping, having the right tools is important. The best bookkeeping software for self-employed people enables online bookkeeping and makes the process much easier. The right app can save hours each week in data entry alone.

What’s the difference between bookkeeping and accounting?

There is a lot of overlap between these two fields. Technically, bookkeeping tends to be more focused on the daily data entry and reconciliation aspects of finances, while accounting tends to focus more on higher-level aspects like budgets and forecasts. 

Have you Found your small-business bookkeeping solution?

Bookkeeping is a straightforward process that profoundly impacts your business’s health. By keeping your books up to date, you ensure you can get a clear view of your financial status at any time. 

Keeping your books up-to-date is challenging, but Found can help. Our self-employed bookkeeping software can help improve your life and business.