You think that the online store you opened last year to sell hand-knit beanies made a profit. Yet with hundreds of different business expenses, you’re not sure which qualify astax deductions减少你发送the IRS.
If you report too little, you could end up with a hefty penalty. If you pay too much, it could take months to get yourtax refund—money your business might need to survive. Bookkeeping can help you figure out exactly how much you owe.
In this article, we’ll walk you through the bookkeeping basics you need to know about in order to run your brand-new business.
Table of Contents
What is bookkeeping?
Bookkeepingis the process of recording and organizing the financial transactions of a business. For example, if your ecommerce store purchases office supplies, that expense would be recorded in a spreadsheet or a software program, along with the date of the purchase, cost, and the payment’s impact on the business’sfinancial statements. Bookkeepers may also record other financial transactions, such asloans和investment returns.
How to get started bookkeeping for your startup
- Choose a bookkeeping method
- Set up a table of accounts
- Record transactions
Setting up an accurate bookkeeping system is essential for a business to manage its finances and to comply with tax rules. The following steps can help.
1. Choose a bookkeeping method
There are many options for keeping track of your transactions, ranging from manual entry using physical record books to different types of software. Manual bookkeeping tends to be less expensive but is time-consuming and subject to human error.
Digital bookkeeping, on the other hand, can speed up parts of the process by using automated invoicing and receipts. For example, some startup bookkeeping apps allow you to upload pictures of receipts on the go, digitizing them and adding the expense to your books, reducing the amount of data entry you or your bookkeeper may need to do.
2. Set up a table of accounts
Well-run businesses usually keep a general ledger, which is a combined record of all company transactions. Most businesses find it helpful to categorize similar types of transactions in sub-ledgers, such as separate records foraccounts receivableoraccounts payable.
A newbusiness ownerwill usually need to set up a separate chart for each sub-ledger. This can mean a separate physical accounting book if using manual bookkeeping, or a separate accounting spreadsheet if usingaccounting software.The table of accounts lists all the different categories of sub-ledgers that the business tracks.
3. Record transactions
Businesses record transactions in one of two ways: single-entry and double-entry. In single-entry bookkeeping, a transaction is recorded only once on the general ledger and isn’t accounted for in sub-ledgers.Sole proprietorshipsor very small start-ups tend to use this method.
In double-entry bookkeeping, every transaction is recorded in two separate accounts. For example, if you borrow $1,000, the business’s financial statements will record both an increase in the assets account and an increase in the liabilities account.
Common bookkeeping mistakes
It’s easy to make bookkeeping errors, especially if you have never done this type of recordkeeping before. Here are some common mistakes to look out for:
- Not keeping accurate records. Small errors in data entry can lead to big problems. Slight miscalculations of profits and losses could trigger IRS audits and payroll shortfalls that might limit your borrowing ability.
- Mixing personal and business finances. Sometimes, small businesses aren’t diligent aboutseparating business and personal expenses. This can throw off other bookkeeping calculations and make it hard to track how your business is doing.
- Not staying current with bookkeeping. Small business owners, especially those who do the bookkeeping themselves, are prone to falling behind on recordkeeping. Playing catch-up can be much harder than keeping current, making it more difficult to ensure your business is tax compliant and that employee pay and tax records are up to date.
Bookkeeping vs. accounting: similarities and differences
Bookkeeping and accounting both involve tracking a business’s finances. However, accountants tend to focus more on the analysis of business transactions while bookkeepers do more on recordkeeping. Which you decide to hire for your business ultimately depends on your company’s needs. Here are the differences between bookkeepers and accountants to keep in mind as you start your number-crunching journey.
What are the similarities between accountants and bookkeepers?
- Recordkeeping. Both bookkeepers and accountants keep meticulous records and play an important role in monitoring thefinancial healthof a business.
- Both use GAAP. Both bookkeepers and accountants followgenerally accepted accounting principles(GAAP) to maintain consistency throughout financial documents and comply with accounting standards.
What are the differences between accountants and bookkeepers?
- Complexity. Bookkeepers tend to handle the data entry and simple financial reports, while accountants often take on complex tasks or in-depth analysis that business owners and investors need to understand a company’s overall performance.Business accountingfocuses less on the daily operations of a company than bookkeeping.
- Education. In the US, anyone with a high school diploma or who has passed an equivalent general educational development (GED) test can work as a bookkeeper. The process for becoming an accountant, however, is more rigorous. It usually requires a bachelor’s degree, while passing the certified public accountant examination allows an accountant to supervise all aspects of a company’s financial affairs.
- Responsibilities. Among other things, bookkeepers trackaccounts receivable和accounts payable. They also prepare financial statements such asbalance sheets,cash flow statements, andprofit and loss statements, and ensure that monthly transactions match a business’s credit card andbank statements. They also sometimes handlepayroll. Accountants might provide tax advice and prepare tax returns, help apply for loans, and give advice to guide strategic business decisions. Accountants also confirm the accuracy of financial documents.
When to consider hiring a bookkeeper
Hiring an employee to provide bookkeeping services can be helpful to some startups, especially when business growth leads to a large increase in transaction volume. Bookkeepers are helpful because they can focus solely on maintaining accurate and timely records, whereas startup founders often have to juggle bookkeeping with running a business. If your business has more transactions than you have time to track each day, hiring a bookkeeper is probably a good idea.
To hire a bookkeeper, you can start by contacting accounting firms that offer startup bookkeeping services. Because you don’t need a degree to do bookkeeping, you could even hire a talented and diligent recent high school graduate for simple record keeping. If you want to hire a more experienced bookkeeper, you will likely have to pay a higher hourly rate.
Startup bookkeeping FAQ
What financial records should startups be keeping track of?
A startup needs to track all transactions. Most startup accounting also involves organizing separate ledgers for assets, liabilities, revenue, and expenses.
Should my startup get an accountant or a bookkeeper?
Accountants and bookkeepers can both help startups, although in different ways. Bookkeepers are best for keeping track of day-to-day transactions. Accountants are best for providing small business owners with financial analysis based on the information recorded by bookkeepers. More often, accountants help businesses file their taxes and apply for loans.
Should startups use cash or accrual accounting?
Cash basis accounting only records a transaction when cash is received or paid. Accrual accounting tracks all business transactions, even when cash isn’t involved. For example if a business records its invoices before they are paid, this is considered accrual accounting. The cash accounting method tends to be simpler and more convenient for most startups. However, accrual accounting can be better when applying for a bank loan to finance your business, or it can help a buyer assess your business if you plan to sell.
How can startups handle tax responsibilities?
For most businesses, careful bookkeeping is critical to making sure you pay the proper amount when tax season comes. Startups should also consider hiring an accountant to make sure everything is filed correctly.