Basics of Bookkeeping

Zachary Runyan, CPA
Jun 7
3 min read

Updated: Jun 9

This article will help you navigate the basics of bookkeeping and the initial steps you should take as a business. Bookkeeping is how a business organizes, classifies, and keeps its financial records. Bookkeeping is important so that your business records are up to date and accurate so that you can 1) understand your profitability & account balances, 2) make business decisions, and 3) prepare tax returns efficiently.

Starting off, here is a very brief accounting lesson. What your business has for cash, bank accounts, receivables, equipment, and property are assets. What your business owes its vendors, employees, or banks are liabilities. And finally, what your business has generated from profits/losses, selling stocks, or capital contributions are equity. The accounting equation is always: Assets = Liabilities + Equity. This is your balance sheet.

Your income statement (also called a profit and loss statement) includes your revenue and expenses of the business. The net income or net loss will always close into equity under retained earnings. This information is helpful on how you categorize transactions and where they are posted. Amounts are posted as debits and credits. Most accounting software will do this automatically for you by using the various modules, but it is still helpful to understand. Revenues are increased by credits, expenses are increased by debits, assets are increased by debits, and liabilities are increased by credits. You can never have more debits than credits; it must be equal.

That said, the first step is to establish your accounting & finance policies. This could include items such as the basis of accounting, check disbursement, company credit cards, and fixed assets. These policies should allow you to determine how items are recorded and any authorization that is required to disburse funds. You may be early in your business, and not all of these may be needed; however, it might still serve you well to document these items sooner than later.

The second step is to determine how you want to document your transactions. There are several software vendors available such as QuickBooks and Xero just to name a few. Most accounting software packages increase in price with the number of features that become available. There can be pro’s and con’s with each. Larger businesses may do well with QuickBooks with the additional features while smaller businesses might enjoy Xero’s pricing with simpler features. I do not recommend using excel when there are low-cost options on the market but excel/google sheets can work if you have an extremely low volume of transactions.

The third step is to set up your chart of accounts. This will drive where transactions are recorded. This will be driven by your method of accounting, but some common accounts could be cash, accounts receivable, accounts payable, credit cards payable, and various revenue and expense accounts. I recommend having enough accounts to understand your financial picture without having an enormous number of accounts. On the other hand, however, don’t be afraid to add accounts for significant transactions or vendors that you want to track. I also recommend adding accounts to separate out non-deductible expenses for taxes, which will make your life a little bit easier at the end of the year. This can be done on the fly, but it is best practice to set up in advance if possible.

Finally, I recommend setting up transaction feeds from your bank accounts and credit accounts to import transactions. This will allow you to match transactions to expense and revenue that has occurred. You can also normally attach receipts into the accounting system at this point, allowing you to record and document in one step. This is also a great time to mention that your business should be operating separately from your personal checking account. If not, this is a great time to set one up. Separating your business from personal is absolutely vital for recordkeeping and protection of personal assets (if you are an organization with limited liability such as LLC, LLP, or corporation).

From there, you need to reconcile your bank accounts and credit cards monthly. Payroll information should be imported on a regular basis, if not integrated with your accounting software. You may have accounts receivable invoices and accounts payable bills to handle as well, depending on your business need. Most accounting software should be able to handle both of these items. Finally, financial statements should be generated to review the business performance.

If you need help or if the process seems overwhelming (or if you want to use your time doing other important tasks), then reach out for a consult. I provide bookkeeping, accounting, advisory/consulting, payroll processing, and tax prep and planning services.

For more information, please reach out and book a meeting to get started! Click here to book a call or call 719-285-7554.