Many small businesses and start-ups are second to none when it comes to producing great products and building a strong presence in the market. However, the same thing cannot often be said about their bookkeeping practices.
Why you need to keep your books?
Bookkeeping is just a way to keep track of your income and expenses, which consequently
improves your chances of making a profit. It also helps you collect and organize all the
financial information that is necessary to file various tax returns appropriately and on time. Obviously, it also enables the IRS to evaluate your operations.
You don’t have to be a qualified accountant to do basic keeping. Here are a few
bookkeeping basics to help you maintain proper financial paperwork for your small
As long as you have adequate records that reflect the income and expenses of your
business, you can keep them in any way that you like. Depending on how big your business is, you can either maintain your books on your own ledgers or use an accounting software.
There are three basic steps to keeping your books
- Keeping receipts of every payment and expenditure
- Daily, weekly, or monthly summary of your income and expenditure records
- Creating basic financial reports that provide key pieces of information about the business
Keeping your receipts
Every purchase and expenditure of your business must be backed by a record of receipt
which lists out the amount, date, and other relevant information. You can either keep all
your receipts in a shoe box, or record it in a software system. Choose a method that suits
your needs. If your business is very small, you may just need to collect all your receipts in a box file and not splurge on other complex filing systems.
Summary of revenues and expenditure
You must maintain a periodic summary of income, expenditure, and other financial
information that you are keeping track of. These summaries are later used to create specific financial information about your business.
Make it a habit to post to the ledger on a regular basis, say daily, every Friday, or at least
once a month. Post the receipts by entering the amount indicated in the physical record into the ledger. This is called ‘posting to the ledger’. Your posting schedule depends on the number and frequency of your sales and expenditures, and how detailed you want to keep your books. A busy business may want to use a cash register and post daily sales, while a smaller business can get by with a weekly or even monthly posting. There are accounting software programs which will generate its own ledgers when you enter relevant information.
Creating basic financial reports
Financial reports are key because they reveal key aspects of the financial health of your
business. You may have an income ledger which tells you that your business brought in a lot of money, but unless you measure it against your actual expenses you wouldn’t know
whether you made a profit or loss. This is why you need financial reports which combine
crucial data from multiple ledgers to give you an overall view of what is happening in your business. The basic reports that you need to create on a regular basis or cash flow analysis, profit and loss statement, and balance sheet. Using a software makes it easy to generate these reports.