Bookkeeping Basics for SMEs

bookkeeping basics

This is another simple one, as it’s simply all of the money you spend on products or services which you plan to sell to customers. Bookkeeping How to Track Your Small Business Expenses Effectively? Read easy and effective step-by-step process for tracking small business expenses & to know more about business expenses, why you need to track them. To record all your transactions in an organized way, you need to correct errors shortly after they occur. If you don’t have a competent person to record your data, errors will likely go unnoticed.

Especially if your accountant ends up telling you you’ve been using them incorrectly for the past year. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Revenue is all of the money you collect in the process of selling your services and goods. There are even some companies that collect revenue in other ways, such as selling assets their business doesn’t need. Equity is all of the money you invest in the company as the owner plus all the accumulated profits. As a small business owner, your equity is shown in a capital account.

Choose a system for storing your documents

Every time you perform a financial transaction—for instance, make a sale, accept a client’s invoice, or pay a bill—you should record that transaction in your general ledger. Recording a financial transaction in your general ledger is referred to as making a journal entry. If you choose to use double-entry bookkeeping—and we strongly suggest you do! We’ll show you examples of how to record a transaction as both a credit and debit later on. If you’re struggling with getting started with your bookkeeping, don’t keep struggle on your own. Although you don’t have to be an accountant to master bookkeeping basics, it can still be challenging — especially for a more complex business.

You can’t run a healthy, successful business without having your books in order. It’s like driving a car without a fuel gauge or a map—sooner or later you’re going to get lost or run out of gas. Expenses are all the money that is spent to run the company that is not specifically related to a product or service sold. Thomas J Catalano is a CFP and Registered business bookkeeping Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

What Is Bookkeeping?

You have been recording journal entries to accounts as debits and credits. At the end of the period, you’ll “post” these entries to the accounts themselves in the general ledger and adjust the account balances accordingly. Bookkeeping is the process of recording your business’s financial transactions so that you know exactly how much you’re making and where your money is going. By this stage, you’ll have set up all your financial accounts and chosen a bookkeeping method. You wouldn’t go to the doctor and ask to only have your legs checked. You need to know everything about your business’s finances, not just your bank account balance. As small-business writer Joshua Adamson-Pickett explains, it not only helps you make solid decisions now and plans for your company down the road, an efficient bookkeeping systemsaves time.

bookkeeping basics

Notably, it prepares you for government audits and helps prevent fraud. Our bookkeepers here at Bench can do your books for you entirely online. We’ll also give you simple software to produce financial statements, keep track of your daily expenses, and help make tax time a breeze.

Income Statement and Bookkeeping: Revenue, Expenses, and Costs

It also eases the complexity of tracking receipts and disbursements until you establish a formal accounting system while also building up business credit. Whether your transactions appear on your personal or business credit report depends entirely on the business card issuer you choose. Every business should use thedouble-entry bookkeeping method. This concept is important because each accounting transaction impacts at least two accounts. Using the double-entry method, you can get a clearer picture of your business activity. And when it’s time to post a journal entry to your accounting system, the double-entry method accounts for debit entries, credit entries, and totals. Eventually, your business may need to borrow money to operate.

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See’s top picks for the best bookkeeping software. If they don’t match, you’ll have to go through your bookkeeping record to find the error or missing entries. Jesus Morales is an Enrolled Agent and has 7 years of bookkeeping and tax experience.