Skip to content
× FreshBooks App Logo
Official App
Free - Google Play
Get it
You're currently on our US site. Select your regional site here:
9 Min. Read

Small Business Bookkeeping: A Beginner’s Guide

Small Business Bookkeeping: A Beginner’s Guide

Bookkeeping is how businesses, entrepreneurs, and decision-makers monitor the overall financial health and activity of a company. Without basic bookkeeping practices, it’s easy for financial transactions and spending activities to get out of control, which can lead to confusion, disorganization, and loss of profit.

Despite the importance of accurate bookkeeping practices, most people don’t feel entirely confident with maintaining detailed business finances. Whether it’s a lack of interest or knowledge, many businesses outsource this process to a professional bookkeeper.

If you’re new to bookkeeping, this guide will establish important definitions, introduce various financial options, and provide tips to get your finances on the right track.

Here’s What We’ll Cover:

What is Bookkeeping?

Why Do Small Businesses Need Bookkeeping?

Bookkeeping Options for Small Business Owners

How to Start Bookkeeping in a Small Business

Become Familiar with Bookkeeping Statements

6 Tips for Small Business Bookkeeping 

How to Budget for Bookkeeping Services

Small Business Bookkeeping Mistakes to Avoid 

Reminders and Takeaways

More Small Business Accounting Resources

What is Bookkeeping?

Bookkeeping is the regular practice of updating a company’s financial records to reflect all transactions, credits, and debits. Professional bookkeepers are responsible for preparing and tracking all financial documents (including invoices) that flow in and out of a business during the course of normal operations.

Bookkeeping is different from accounting in that it is the critical first step in tracking all business activities. While bookkeeping provides oversight into each individual transaction (in order to catch discrepancies and correct mistakes), accounting provides a thorough analysis of these numbers.

Accountants rely on bookkeeping records to analyze and advise on the financial activity, health, and growth potential of a business.

FreshBooks For Billing "Awesome", Bench For Bookkeeping "Exceptional"

Why Do Small Businesses Need Bookkeeping?

Maintaining bookkeeping tasks is essential for the stability and success of small businesses. With so many moving pieces (including credits, debits, assets, and liabilities), small business owners must understand where the money is going. 

Bookkeeping can help businesses:

  • Create organized and detailed financial records
  • Be more prepared at tax time
  • Understand businesses transactions at a granular level
  • Correct discrepancies on bank statements as they happen (rather than after the fact)
  • Make a plan for profitability that leads to long-term success 

Bookkeeping Options for Small Business Owners

Fortunately, small business owners don’t need to be experts in mathematics to find success. There are many ways to divide bookkeeping responsibilities and to leverage powerful technology and accounting platforms for more accurate expense tracking. 

Of course, it’s always possible to handle bookkeeping internally. If your business chooses to keep this task in house, it’s best to stick to a predictable expense tracking schedule. Developing a bookkeeping routine prevents you from accidentally forgetting important steps in the accounting process.

Bookkeeping Software Platforms

Business accounting software and modern technology make it easier than ever to balance the books. A platform like FreshBooks, specifically designed for small business owners, can be transformational.

Bookkeeping software options are flexible, mobile, and secure, which makes it easy to manage several important tasks, including:

  • Tracking business expenses 
  • Managing financial reporting for a set period of time
  • Producing customer invoices
  • Tracking incoming payments 
  • Using double-entry accounting to ensure compliance and accuracy

External Consultants and Outsourcing

Professional bookkeepers and accounting professionals are available to manage, track, and report on financial activities.

When hiring external team members, keep in mind that some of the responsibility still falls to you as the proprietor. For instance, if you own a service-based business, a bookkeeper may still ask you to provide access to an online accounting system, pass along receipts, or grant approval for major decisions that impact the bottom line.

How to Start Bookkeeping in a Small Business

Don’t let the process of bookkeeping become too intimidating. 

Establishing a strong financial foundation begins with a few simple steps:

  • Open the right accounts. Business accounts should always be kept separate from personal bank accounts. Additionally, it’s important to recognize that the term “accounts”  in bookkeeping refers to certain types of transactions, rather than to actual bank accounts. These accounts include assets, liabilities, revenues (income), expenses, and equity.
  • Choose a bookkeeping method. Just as there are different accounting methods, there are two different ways to handle bookkeeping: single-entry bookkeeping and double-entry bookkeeping. Double-entry bookkeeping is the industry standard since it more accurately records and matches activity to every affected account.
  • Establish realistic payment terms. Whether the business needs to pay or receive money, it’s wise to make and record transactions on time. This step involves establishing proper timeframes for Accounts Receivable (AR) and Accounts Payable (AP). It also includes informing customers and clients of expected deadlines for payment.

Become Familiar with Bookkeeping Statements

Financial statements showcase the stability of a business. This is particularly true once the business accounts for its operational costs and recurring expenses. 

Below are some of the most common statements a bookkeeper uses to monitor activities. 

Income Statement

The income statement is a holistic report that shows revenue and expenses over a set period of time. It is sometimes referred to as the Profit and Loss Statement. 

Balance Sheet

A balance sheet is an accounting tool that shows the overall financial situation as represented by the equation: Assets = Equity – Liabilities

Chart of Accounts

Bookkeepers use a chart of accounts to see all of the accounts in a company’s general ledger. In many instances, an accountant prepares the initial chart, and the bookkeeper references it while recording transactions.

6 Tips for Small Business Bookkeeping 

Bookkeeping beginners need quick wins to get started quickly and efficiently. The tips below are industry standards that will help any small business excel at bookkeeping.

1. Bring Your Bookkeeper Up to Speed

Occasionally, you might hear financial professionals reference a “backlog.” This refers to a collection of past records, transactions, and financial statements that a bookkeeper needs in order to learn the history of a business. When you first begin the bookkeeping journey, collect everything you have that could be relevant to establishing financial history.

2. Keep Personal and Business Costs Separate

A separate bank account is the first step in distinguishing between business and personal finances. Bookkeeping becomes more difficult when business transactions are lumped together with personal activity. Keep all cash, credit card, and other financial activities separate.

3. Track Absolutely Everything

As businesses grow, it becomes easier to let small activities slip. Since good record keeping relies on accurate expense tracking, it’s important to monitor all transactions, keep receipts, and watch business credit card activity. Many bookkeeping software options automate the tracking process to eliminate errors.

4. Plan Ahead for Taxes 

Efficient bookkeeping involves foresight. This means that a business should always plan for upcoming financial events, including tax time. Good preparation and documentation are critical for paying taxes (including payroll taxes) on time. 

5. Set Aside an Emergency Fund for Major Expenses

The specific amount of an emergency fund may depend on the size, scope, and operational costs of a given business. Regardless, work with your bookkeeper and accountant to set aside cash assets for unexpected costs.

6. Regularly Cross-Check and Audit Files 

Never leave the practice of bookkeeping (or your business assets) to chance. No matter what system you implement, incorporate a practice of auditing. This habit improves communication, boosts transparency with your bookkeeping team, and promotes longevity and compliance. 

How to Budget for Bookkeeping Services

Although bookkeeping is an investment, it’s generally much more affordable than attempting to correct costly mistakes down the road. 

When it comes to budgeting for bookkeeping, the difference hinges on whether you hire or manage using software tools.

  • A professional bookkeeper may charge $20-$30 per hour for services. This amount can range based on the bookkeeper’s location, level of expertise, and availability.
  • Bookkeeping software ranges from free services with limited functionality to full-fledged accounting suites. For instance, FreshBooks pricing ranges from $7.50 to $25 per month, based on the number of clients and accounts required. Typically, higher priced service plans offer greater visibility, functionality, and automation.
Tax Season, Minus The Stress

Small Business Bookkeeping Mistakes to Avoid 

When it comes to bookkeeping tasks, there’s a great deal to learn. If you have mistakes to fix or transactions to track down, don’t stress. Most of the time, a qualified professional can correct or document these errors.

By avoiding these common mistakes, small businesses can skip unnecessary financial hassle associated with poor bookkeeping habits. 

  • Hiring a bookkeeper only at tax time. The best results happen when a business implements a bookkeeping strategy over a period of time or builds a long-term working relationship with a qualified bookkeeper. Waiting until crunch time to prepare documents and fix bookkeeping errors is too late.
  • Failing to communicate about financial reports and activities. Every involved party should understand a company’s bookkeeping practices and expectations. Because of the number of accounts and moving pieces, collaboration is critical for successful implementation.
  • Choosing the wrong accounting method. Whether it’s cash basis or accrual, choose the system that’s most appropriate for your specific needs and industry. The chosen method affects record keeping, expense tracking, and most importantly–interactions with the IRS. 

Reminders and Takeaways

Bookkeeping is one of the most important tasks that a business owner will delegate over the life of a business. Without it, it’s nearly impossible to produce an accurate record of financial activities that affect everything from profit, to equity, to payroll and more.

Fortunately, bookkeeping doesn’t have to be daunting. There are several effective ways to manage bookkeeping responsibilities in-house or externally by using helpful tools and technologies.

It’s never too early to take ownership of your bookkeeping policies. By following the tips and best practices outlined in this guide, you’ll be more equipped to set a strong financial foundation for future growth, profitability, and ultimate success.

More Small Business Accounting Resources