Bookkeeping Basics

My aim here is to help those who need to start keeping books for their company but don’t yet need to hire a bookkeeper. The volume of transactions and the time you can devote to bookkeeping will determine when you need to hire it out. It is common for portions of the bookkeeping to be done by several employees instead of just 1 bookkeeper. That is more likely the scenario in larger companies. When you are just starting out in business, you can handle this task on your own.

For those that are unfamiliar, bookkeeping is a method to keep track of all financial transactions in a company. Every transaction is categorized and recorded and then reports can be created on that data. For example, there is a need to see the amount of income during a certain timeframe and the type of income, too. Maybe you want to see how much is being spent on expenses and which expenses. You can also get a report to show how much was invested in an asset. Assets are things like major equipment, buildings, land, etc. Bookkeeping software has what we call, canned reports. They are predesigned in standard formats to help all the people who review them to be able to comprehend and interpret them in similar fashion. So you, the CPA, the banker, and the insurance broker would all interpret the data the same way.

The 2 most common reports are a Profit and Loss or Income Statement and a Balance Sheet. Together these 2 will show the status of the company’s financial state at a given time.

There are many other canned reports and you can also customize your own reports. So you can be sure you will be able to get a report that shows you only what you want to see.

Every company needs bookkeeping to be done. The information gleaned from it is used for reporting to various entities. Banks, insurance companies, CPA, owners, investors and the IRS to name a few. It is a deadline oriented job because reports may be needed regularly by a specific date, such as income tax filing deadlines. So bookkeeping is not something you can wait until tax time to do. If you throw all your receipts into a shoebox and hope to sort it out at tax time instead of keeping your books up to date, you will regret it. Most likely your return will be late and you may have to pay penalties too. I doubt most people could look at a receipt from a year ago and remember what they purchased, in order to categorize it correctly. I couldn’t. Even to get an extension to file a tax return requires the bookkeeping be up to date, just ask your CPA. So it is something to stay on top of. It doesn’t have to be done every day, but at least once a week if there are under 30 transactions per month. Over that amount and it should be done daily.

Bookkeeping is also called double entry bookkeeping. In the old days bookkeeping was done by entering data in ledgers and there were a whole set of different ledgers, each had a separate account to track. Every transaction was entered in 2 different ledgers. For example when you write a check it needs to be recorded in the bank account ledger and also whatever the check was for is recorded in an expense account ledger. These days there are still 2 accounts for each transaction but only 1 entry point in the software, so you will only see 1 account being affected. Now that it is computerized you will barely notice the 2 accounts involved in the transactions. You’ll soon see what I mean.

I’m sure you have heard of debits and credits and probably don’t know what that means, which is fine. Thanks to bookkeeping software, you won’t need to. I am keeping this simple for you and that includes the terminology that I use.

In case you think the only reason to keep your books is for income tax returns, think again. You will need it to be up to date when your CPA needs a report from you to do whatever you have hired them to do on your behalf. The CPA will need it to determine the amount of your estimated tax payments you may need to pay to the IRS. They need it to do your income tax return and your franchise tax return. Shoot, they need it to have a conversation with you about your business. You need it because your banker will ask for a report to approve a loan, or credit card, or a line of credit, or an increase in your line of credit. Your insurance broker will ask for reports to sell you insurance. Keeping books means you are legitimate and serious about your business. And you will want to be taken seriously when you ask a bank for money! Also, you may find out that you need 2 years of financial records from your business to be provided in order to be considered for whatever it is you’re trying to get, such as a loan. This is why you need to start keeping books from the very beginning and not put it off. You will be able to provide standard professional reports with your bookkeeping software at the touch of a button, as long as you have kept up with recording your transactions.

On that note, dates matter. If you pull up a report for June in this example, that means June 1 through June 30. If you made a bank deposit at 5 pm on June 30, the banks receipt might show the date as July 1 because it will go on the next business day’s records. In your bookkeeping you would enter it with a date of July 1 to match the banks and that deposit will not be included on your June report. Each transaction needs to be recorded with the date on the receipt for accuracy. Also, don’t delay in taking your deposits to the bank!

You will need to reconcile bank and credit card accounts in your books. I know many of you hate that or have never done it before. It is necessary for several reasons. One is to catch bank errors, which happen more often than you would think. Two is to catch your own errors. Three is to make sure you haven’t missed recording a transaction or put it in a different time period. Every transaction in the books should mirror what you see on your bank statement. Again, dates matter. If you have transactions in a different time period than shown on your statement, you won’t be able to complete reconciling. I will go into detail about reconciling bank statements in the Bookkeeping Reconciling Accounts section.