Updated: Jul 15, 2021
According to the IRS, it is a must that all businesses keep basic financial records in order to track gross receipts, purchases, expenses, and other transactions accurately. You can decide the exact nature of your record-keeping system, however, a well-designed small business bookkeeping system will keep your financial information in order, make reporting easier, and scale with your firm as it grows.
Cash or Accrual accounting system
One of the first decisions you'll have to make is whether or not to use cash or an accrual accounting system. Businesses with revenues under $5 million per year may use either cash accounting or accrual accounting to track expenses and incomes.
Cash accounting records revenues when the money is received from customers, and records expenses when the money is transferred to vendors.
Accrual accounting records revenues when they are earned, which may be long before actually received money from customers. Similarly, expenses are recorded when the business incurs them, not when transfer money to the vendor.
If you are managing a small, one-person business from home or even a larger consulting practice from a one-person office, you might want to stick with cash accounting. Sometimes firms start their business using cash accounting and switch to accrual accounting as they grow.
Set Up a Business Bank Account
A separate bank account for your business is a must-have for businesses of all sizes. Make sure that all business-related transactions flow into and out of this account, not your personal bank accounts. Similarly, never make personal transactions using your business bank account.
Having a dedicated business bank account solves a lot of problems. For example, you can automatically import transaction information from your business bank account straight into your bookkeeping software without having to waste time separating personal transactions.
Choose Bookkeeping Software Package for Small Businesses
Technically, a business can manage its books using Excel. Theoretically, they could just do it with pen and paper. But, practically speaking, bookkeeping software is much more helpful for all businesses. Manually typing or writing transactions day after day is a tremendous waste of time and resources, and such a manual approach is also easily mistaken. A basic bookkeeping software solution is not terribly expensive and it can save you several hours of manually handling the book.
When choosing a bookkeeping software package, you’ll want to weigh factors such as the features needed, the budget available, and the software’s ability to scale with your business.
Why Would You Need to Do a Bank Reconciliation Monthly?
Create a Chart of Accounts
The chart of accounts is a list of the accounts you have set up in your bookkeeping system to track all financial activities. Most bookkeeping software packages will set up a basic chart of accounts for you, based on your entity type. But you’ll likely need to customize the chart to better match your business’s specific needs. Each account should have an account name, a type (asset, liability, expense, and so on), a description, and a code if needed.
Build an expense tracking system
The foundation of solid business bookkeeping is effective and accurate expense tracking. Transaction receipts generally come in either paper or electronic form. Paper receipts can be kept in something simple such as a box, but it’s much better to keep those receipts in order — whether by date, in alphabetical order, or with some other system. Electronic receipts can live on your computer or in an online storage system.
Another easy way to simplify your expense tracking procedure is to take pictures of all paper receipts using your smartphone, and then store those images along with your electronic receipts. This means you won’t have to store paper receipts at all.
Whatever expense tracking system you choose, make sure it’s one that makes it easy for you to record receipts the moment you get them. Procrastinating on entering your receipts into your bookkeeping system means you’ll struggle to remember how to categorize transactions correctly at a later date, or when you face an audit.
Prepare Your Bank Reconciliation Process
While having your bank transactions automatically imported saves time, it does not eliminate the necessity for bank reconciliation. This is the process of comparing your monthly bank statement to the Cash account in your business's chart of accounts to ensure that they are both correct. A typical reconciliation process goes as follows:
Take the bank statement and add any outstanding items, such as uncashed checks. Write the new total at the bottom of the statement.
Check for any errors in the bank statement's transactions. Contact the bank as soon as possible if you discover an error.
Ideally, the corrected bank-statement balance and the corrected Cash account balance will now be equal. If not, you’ll need to dig into both the bank statement and the bookkeeping account transactions to figure out what’s causing the discrepancy.
Finding the source of a discrepancy between your bank statement total and your Cash account amount can be difficult. If you make it a habit to reconcile your accounts every month, you'll be able to narrow your search to transactions that occurred in the previous month. However, if you haven't been reconciling your accounts on a regular basis, you may need an accountant to help you.
Irvine Bookkeeping offers a full range of bookkeeping services and promises that in 2-3 weeks, we clean up a whole book for you to prepare for tax seasons. We believe knowing your company's financial health is the key to maintaining control of your business.