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Small business bookkeeping and accounting basics

Friday, September 01, 2023

Baseball and hot dogs. Pumpkin and spice. Campfires and ghost stories. Bookkeeping and accounting … While you might not think of bookkeeping and accounting as the most exciting pairing of the bunch, few dynamic duos can do more to keep your business strong and healthy.

Gauging the financial pulse of your enterprise is a must for keeping your business afloat. And it all starts with developing a solid understanding of small business bookkeeping and accounting basics.

Love it or hate it, these two disciplines are the lifeblood of your business’ financial health. They play a key role in shaping your operational decisions, future financial planning, tax preparation and even the overall value of your business.

But let's face it. The world of debits, credits, balance sheets and income statements can be daunting for many small business owners and entrepreneurs. Don’t worry. We’re here to help.

In this article, we'll provide clarity around these concepts with a comprehensive guide to small business bookkeeping and accounting basics. By the end, you'll have a solid understanding of these critical business processes — and possess the tools you need to navigate your business' financial landscape like a pro.

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Bookkeeping basics for small businesses

What’s bookkeeping again? It’s the systematic recording and organizing of a business’ financial transactions, such as money spent and money received. Bookkeeping is a key part of accounting and helps to measure and communicate your business’ financial situation for tax and growth purposes. Essentially, it’s the practice of managing your business’ finances, so you can make informed decisions.

Bookkeeping methods: single-entry vs. double-entry

There are two types of basic bookkeeping you can use depending on the size and scope of your operation.

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Single-entry bookkeeping

Single-entry bookkeeping is a less complicated form of bookkeeping that resembles a checkbook register where only one entry is made for each transaction in the form of either income or expense.

The primary advantage of single-entry bookkeeping? Its simplicity.

This method is ideal for small businesses, solopreneurs or startups that have a low amount of transactions. It allows for easy tracking of cash flow and provides an immediate understanding of income and expenses. But keep in mind that it doesn't track assets or liabilities, so you won’t be able to judge your business' broader financial health with this bookkeeping style.

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Double-entry bookkeeping

Double-entry bookkeeping, on the other hand, is a more complex system that records two entries for each transaction — a debit to one account and a credit to another.

While more complicated, this robust method provides a more comprehensive view of your business' financial position as it not only tracks income and expenses but also assets, liabilities and equity (assets minus liabilities).

Double-entry bookkeeping is suitable for larger businesses that have more complex transactions. It’s also a great method for detecting any errors, since in the end, everything has to balance out.

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Which should you choose?

Choosing between single-entry and double-entry bookkeeping comes down to the complexity and size of your business.

Running a small, cash-based business with few assets or liabilities to track? Single-entry bookkeeping could be a solid, user-friendly choice.

Does your business have a larger scale, carry inventory, operate with credit or have more complicated financial transactions? You might need the comprehensive approach double-entry bookkeeping provides.

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Key elements of bookkeeping

Now that we’ve covered what bookkeeping is and the two main types, let’s go over a quick rundown of the key elements that go into bookkeeping.

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Financial reports

Financial reports provide an overview of your business' financial activities over a specific period of time. These reports often include income statements, balance sheets, cash flow statements and more. They’re typically used by stakeholders to assess a company's financial health.

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Balance sheet

A balance sheet is a financial statement that paints a picture of your business' financial status at a specific point in time. It contains information regarding your business’ assets, liabilities and equity, allowing stakeholders to understand how stable your financials are.

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Cash flow

Cash flow refers to the net amount of cash (and cash equivalents) being transferred into and out of your business. A cash flow statement is a financial report that provides information about your business’ cash inflows from its regular operations, investments and financing activities — and the cash outflows used for those activities.

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Tax returns

A tax return is a form businesses file with a tax authority to report income, expenses and other relevant financial information. As a small business owner, you’re required to complete tax returns to calculate your tax liability, schedule your tax payments or request refunds for any taxes that have been overpaid.

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Bank statements

A bank statement is a summary of all transactions in a bank account over a specific period of time. It’s issued by the bank that holds your business' accounts. Bank statements are crucial for tracking revenue, expenses and overall business performance.

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Income statements

An income statement (sometimes called a profit and loss statement), is a financial report that showcases your business’ revenues, costs and expenses throughout a certain time frame. These statements provide insights into your business’ profitability and financial performance.

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Recording transactions

Recording transactions refers to the systematic documentation of your business’ financial activities. Every type of exchange pertaining to accounts payable, accounts receivable and investments are logged in a ledger to help maintain an accurate and up-to-date record of your business' financial status.

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Payroll taxes

Payroll taxes are taxes employers are required by law to withhold or pay on behalf of their employees based on each employee's salary or wage. These can include federal and state income taxes, Social Security and Medicare taxes. Payroll taxes are a critical part of employment and compliance in any business operation.

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Accounting basics for small businesses

Now that you’re up to date on bookkeeping, let’s move on to accounting. While bookkeeping centers around recording and organizing your financial info, accounting takes it a step further by interpreting, classifying, analyzing, reporting and summarizing that financial data.

At its core, accounting involves managing revenues and expenses to calculate profits, recording transactions to keep track of money inflows and outflows and compiling this information into detailed financial reports.

The ultimate goal of accounting is to provide a clear picture of your business' financial health, so you can make more informed decisions about the future of your business — and present an accurate analysis of your finances to stakeholders and investors.

Accounting methods: cash vs. accrual

When it comes to small business accounting, you have two main choices: cash-based or accrual accounting methods. Which one is right for you largely depends on your business needs and legal requirements.

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Cash-based accounting

Cash-based accounting is relatively straightforward. Businesses record their revenues only when cash is received and when their expenses are paid. This method offers a clear view of how much cash your business has at any given time — though it might not accurately represent your long-term financial situation.

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Accrual accounting

Accrual accounting is when a business records revenues and expenses when they are earned or incurred, regardless of when cash actually changes hands. This method provides a more comprehensive picture of your business’ financial health — though it might not accurately depict cash flow.

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Which should you choose?

When choosing between these methods, you’ll want to consider the nature of your business and its size. For example, a self-employed individual with a cash-based business or a sole proprietorship might prefer the simplicity of cash accounting.

However, if the business is larger or has more complex transactions like sales on credit, long-term projects or stock inventory, accrual accounting might be the better move.

In any case, the point of accounting is for small business owners to manage their financial operations confidently and ensure they meet all regulatory requirements. So, the choice you make should align with your business' legal requirements and provide you with the most accurate reflection of your financial activities to help you make informed decisions.

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Top tips for acing bookkeeping and accounting

Accurately record transactions

If you want to ace bookkeeping and accounting, you first need to learn how to keep an accurate record of transactions to ensure your financial information is reliable.

Every business transaction, whether it's revenue from a sale or an expense for supplies, must be recorded to maintain an up-to-date account of your business finances and overall performance. Keep reading to find out how to accurately record transactions at your business:

  1. Identify your transactions: First, identify the business transaction you want to record. This could be anything from a sale to a purchase, payment or receipt of money.

  2. Categorize the transaction: Next, you'll need to categorize the transaction based on what it represents — revenue, expense, asset, liability or equity. This step is essential to ensure you place the transaction in the correct spot on your financial report.

  3. Prepare source documents: For each transaction, you need a source document such as a receipt, invoice or pay stub. Think of this as proof that the transaction occurred. It also provides you with essential details about the transaction.

  4. Determine the affected accounts: Once you've identified and categorized the transaction, and prepared your source document, you'll need to decide which accounts are affected. This depends on the nature of the transaction. For example, if you purchase office supplies, the accounts affected may be "cash" if you pay with cash, or "accounts payable" if you buy it with credit, and be classified as an "office supplies expense."

  5. Choose between debit or credit: The rules of accounting dictate that you must decide whether the affected accounts are to be debited or credited. Typically, debits make asset and expense accounts increase, while credit makes liability, equity and revenue accounts increase.

  6. Record the transaction: After that, record the transaction in a journal, noting the date, accounts affected and whether the accounts have been debited or credited. Enter the amount as well as a brief description of the transaction.

  7. Post to your general ledger: Post the transaction from your journal to the corresponding accounts in your general ledger — your business’ official accounting record. Doing so will successfully update your account balances.

  8. Review and correct any errors: Review your entries for errors regularly. If you find any, make the necessary corrections immediately to avoid costly consequences down the road.

  9. Reconcile your accounts: Compare your records with bank statements or other external records regularly to ensure they align. This process is known as reconciliation. It helps to identify and rectify any discrepancies or errors.

  10. Create your financial statements: Once you’ve recorded all of your transactions, you can use your balanced ledger accounts to generate financial statements such as balance sheets, income statements and cash flow statements.

Recording transactions on time is crucial — don't let receipts or invoices pile up. It’ll only get more difficult to face the longer you avoid it. Build updating your books into your regular routine to ensure that all transactions are accounted for. That way, you don’t have to play catchup. You’ll have an up-to-date, real-time view of your business' financial health at all times.

Know the benefits and responsibilities of using business credit cards

Using a business bank account and business credit card is a convenient way to purchase supplies, build credit and even gain rewards or cash back on business-related purchases. But they go deeper than that.

Business bank accounts and credit cards are powerful tools for keeping your business and personal expenses separate. This translates directly into building a strong foundation for your small business bookkeeping and accounting.

When you use a business credit card for business expenses, it makes it easier to track those expenses and record transactions for tax preparation. But don’t assume all transactions made using your business credit card are accurate. Check your statements regularly to make sure nothing is amiss.

If you see any financial discrepancies on your credit card statement or suspect fraud, be sure to report it immediately. It’s also a good practice to submit regular, on-time payments to avoid interest charges while boosting your business credit score.

Meet all compliance requirements for payroll taxes

As you’ve likely found out for yourself, payroll taxes are a key financial responsibility for small business owners. These taxes include amounts withheld from employees' wages, including federal and state income taxes, and FICA taxes, which fund Social Security and Medicare. Employers like you are required to match FICA contributions for employees, which adds to your payroll tax responsibilities.

In order to ensure compliance with tax regulations, your business must keep accurate records of all payroll transactions and submit tax payments on time to the respective authorities. Fail to do so, and your business could face harsh penalties or interest charges.

This is why calculating payroll taxes accurately is so crucial.

You have the option to manage payroll and the associated taxes in-house or use payroll services or software to streamline the process. Either way, staying updated with changing tax laws and rates is key. But it’s no walk in the park. That’s why many business owners opt to outsource their payroll taxes to ensure their small business is meeting all of its payroll tax obligations — without doing the heavy lifting.

Understand sales tax for small businesses owners

If you sell goods and services (which if you run a small business, we’re guessing you do), you’ll need to factor in sales tax as a key consideration for your bookkeeping and accounting records.

Not familiar? This tax is typically added to the price of a product or service and then collected from customers at the point of sale (POS). The specific rules and rates for sales tax vary by state, and sometimes by the type of product or service. As a small business owner, it's essential to understand which of your goods or services are taxable, what the tax rate is and how to charge it correctly.

Once you collect sales tax, you'll need to report it and pay it to the appropriate government authority, usually on a monthly or quarterly basis. You can visit your state's Department of Revenue website for more information. Overall, this process involves accurately tracking all taxable sales, calculating the total tax collected and filling out the appropriate tax return forms.

Keep in mind that if you don't collect, report and remit sales tax accurately, you could face penalties, interest charges and even audits. If you don’t feel confident you can handle this in-house, consider using sales tax software or consulting with a tax professional to ensure accuracy and compliance.

Conduct regular bookkeeping audits

Regular bookkeeping audits are a crucial part of maintaining accurate and up-to-date financial records for your business.

What do they involve? An in-depth review of your books to validate the accuracy of recorded transactions and identify any discrepancies or irregularities. This helps you detect potential errors or fraud, ensure compliance with laws and regulations, and verify that your financial statements provide a true and fair view of your business' financial position.

Bookkeeping audits can also help you make informed business decisions and strategize for the future, as they give you an in-depth understanding of your business' overall financial health.

You don't have to do them yourself, either — hiring an external auditor can help you save time and avoid headaches, while still contributing to the reliability and integrity of your financial information.

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Outsourcing options for small business bookkeeping and accounting

At this point, we’ve mentioned the possibility of outsourcing your bookkeeping and accounting duties a few times. Whether it’s a lack of resources or a lack of time making it difficult to handle internally, outsourcing could be a smart choice. Let’s talk about your options.

Accounting and bookkeeping software: modern technology solutions for small businesses

One of the best ways to take time-consuming manual work off your plate is by offloading it onto technology. Bookkeeping and small business accounting software are powerful tools that can help make keeping track of financial transactions, such as income, expenses, taxes and invoices a breeze instead of a headache. Bookkeeping software simplifies and automates the bookkeeping process, saving you time and money.

Depending on your business' bookkeeping needs and budget, you have a variety of software options to choose from. Not sure where to start? We go over some of the most popular business accounting software and bookkeeping software options below.

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QuickBooks Online

QuickBooks is a widely used bookkeeping software with features such as:

  • Expense tracking

  • Invoicing

  • Inventory

  • Sales tax

  • Reporting

  • User-friendly interface

  • Mobile app

  • Many integrations

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Xero is a popular bookkeeping software for freelancers and small businesses with features such as:

  • Unlimited users

  • Dashboards

  • Bank feeds

  • Invoicing

  • Project tracking

  • Reporting

  • User-friendly

  • Mobile app

  • Over 800 integrations

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Zoho Books

Zoho Books is a bookkeeping software that is part of the Zoho suite with features such as:

  • Expense tracking

  • Invoicing

  • Bank reconciliation

  • Inventory

  • Budgeting

  • Tax compliance

  • Multilingual invoices

  • Integrates with other Zoho apps and services

Professional bookkeeping and accounting services: Leveraging financial experts

Aside from technology, you also have the option to outsource bookkeeping and accounting to experts in the field or companies dedicated to handling those specific areas.

Outsourcing your bookkeeping this way gives you access to professional expertise and saves you time trying to figure it all out on your own — plus, it can even be cost-effective.

You can opt to hire a freelance bookkeeper or a remote bookkeeping firm to handle complex payroll taxes and reporting requirements. The best option for you depends on the size of your business, the volume of transactions and your budget.

What is a CPA and how can they help your business?

A Certified Public Accountant (CPA) is a financial professional who has met specific state licensing requirements in order to be designated as a qualified accountant.

CPAs offer a wide range of services, including financial auditing, tax preparation, financial planning and consulting. They help small businesses by preparing and reviewing business tax returns to ensure the accuracy and optimization of any tax deductions. A CPA can also represent your business in case of an Internal Revenue Service (IRS) audit by providing guidance and any necessary documentation.

Navigating tax season with a CPA

Tax season can be a difficult time for everyone — small business owners are no exception. From complex tax laws to endless forms and important deadlines you don't want to miss, it’s a perfect recipe for stress.

If you dread every time tax season rolls around, you might want to think about adding a CPA to your team to get some peace of mind. CPAs will accurately prepare and file your business tax returns and take advantage of all eligible tax deductions and tax credits while ensuring compliance. If any issues arise with your returns (or if you get audited), your CPA is authorized to represent you before the IRS.

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Ready to work with a partner who knows what it’s like to start a business?

The reality of small business bookkeeping and accounting is that a lot goes into it, and it’s all too easy to make a mistake. Mistakes that can cost you.

You have enough stress on your plate. If you’re thinking outsourcing is the right move for your business, we can help.

Heartland Payroll+ lets you skip the headache of clunky, disconnected systems with payroll software that integrates seamlessly with your bookkeeping software. You can easily exchange information with a variety of partners to update your general ledger. Additionally, we make it easy for third-party CPAs to securely import payroll data directly into popular accounting software programs, including QuickBooks.

You can even trade guesswork for full-service payroll tax management and rest easy knowing your payroll taxes will be paid on time and accurately, so you don’t have to worry about staying on the right side of local and federal requirements. We’ll manage everything from calculation to filing to automatic payments, giving you the freedom to focus on growing your business.

Reach out whenever you're ready to learn more about how we can help take stress off your plate and unlock growth for your business.

Frequently asked questions (FAQs)

Small businesses usually use either single-entry or double-entry bookkeeping. The choice depends on the complexity and volume of the business' transactions.

Yes, you can handle your own bookkeeping, especially with the help of bookkeeping software. But as transactions become more complex, it may be beneficial to hire a professional bookkeeper or accountant.

Setting up a bookkeeping system involves choosing a bookkeeping method (single-entry or double-entry), setting up your chart of accounts, selecting a bookkeeping software or tool, establishing a review schedule and regularly recording all business transactions.

Double-entry bookkeeping is a system that records two entries for each transaction — a debit to one account and a credit to another. This system helps maintain accuracy by ensuring that everything balances correctly.

Doing bookkeeping means systematically recording, organizing and maintaining all financial transactions within your business. This includes tracking your income and expenses, reconciling bank statements, handling payroll and preparing your financial reports.

The two main types of bookkeeping systems are single-entry and double-entry. These can be further categorized based on whether they are managed manually, with software or outsourced to a bookkeeping service.

Bookkeeping involves the day-to-day recording and organizing of financial transactions. Accounting is a broader field that includes interpreting, classifying, analyzing, reporting and summarizing financial data. Bookkeeping is part of the accounting process.

Bookkeeping tasks for small businesses include recording financial transactions, categorizing expenses and income, reconciling bank and credit card statements, managing invoices and bills, preparing payroll and generating financial reports such as balance sheets and income statements.

Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed.

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