Welcome to Bookkeeping 101, where you'll learn Everything you Should Know About Bookkeeping basics (And Then Some)
The term "bookkeeping" might conjure up scenes from a classic gangster flick, with back-alley deals, horse betting, and offers "you can't refuse." But the reality is that this couldn't be farther from the truth. Sure, we have our fair share of excitement—an unreconciled transaction or an uncategorized charge (we kid, we kid). Bookkeeping is an arduous and time consuming process, a marathon that begins the day you open for business, to the day you (hopefully never) close your doors.
The purpose of this article is to give business owners a full overview of what bookkeeping entails so that they can:
A. Implement proper bookkeeping practices
B. Decide which bookkeeping methodology to use (yes, there's more than one way to keep your books...)
C. Decide if it's something you really can and should do.
Since there is a lot of information contained on this page, we recommend you bookmark this page and refer to it often.
What is Bookkeeping?
Bookkeeping is simply keeping tabs on all of your financial transactions pertaining to business expenses. Or for the real nerds out there (and don't worry, that includes most of us here in the office), here's the Wikipedia answer:
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, such as the single-entry bookkeeping system and the double-entry bookkeeping system, but, while they may be thought of as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.
WHAT IS THE IMPORTANCE OF BOOKKEEPING?
How you go about doing your books is up to you, but even if you don't use a 3rd party bookkeeping service you must keep solid records of business transactions.
If you don't, not only could you lose out on thousands of dollars in potential deductions—you could also lose compliance with the IRS. If the latter happens, not only will you not be eligible for deductions, you might end up owing the IRS money.
What are Good Bookkeeping Practices?
Rather than list a million things you should be doing, we will list some of the most common bookkeeping pitfalls and how you can avoid them, starting with unreconciled transactions.
Do you have unreconciled transactions on your books? Your books cannot be complete until all transactions that occurred in 2015 are categorized correctly. Solution? Think and act chronologically.
Do you have loan payments on your books? You may not have accounted for the principle and interest portions of the payments correctly. If you have categorized the whole payment to a single expense, your books are probably incorrect. Make sure you always account for the principle, as well as interest.
The infamous “shoe box”
Simply put, if your receipts are sitting in a box somewhere, then you haven’t even begun to keep your books. There is really no way to reconcile this pitfall except for to suggest that business owners abandon this practice and implement correct accounting principles from the beginning. Trust us when we say, it’s a lot easier to start documenting your transactions from the start, than to go through a year of coffee stained receipts to try and categorize transactions you may or may not remember.
Your books may have inaccurate values for inventory and Cost of Goods. This can be due to a miscount or, just as common, theft. This is especially important for business owners who have a physical product. Always stay current on inventory, and December 31 is always a good date to do a proper inventory check. This is a crucial step as you aim to properly keep your books.
Like a bicycle wheel, you’re payroll needs truing. Such maintenance requires that your income statement show payroll at gross but without a manual adjustment to the standard bank feeds, this account is probably only shown at net payroll.
Accrual basis bookkeeping
There are numerous accounts that need to be manually updated at year-end. This task is often far too difficult if you do not have an accounting background. It’s best to discuss this process with a CPA or accountant.
Should I do my Own Bookkeeping?
The question of whether or not you should do your own bookkeeping really comes down to a couple of things.
Bookkeeping is an extremely time consuming and tedious task. If you are in the early stages, you are most likely stretching yourself as it is--perhaps trying to manage your marketing, sales, PR, customer service, and inventory all at the same time. As a startup, we understand the "hustle" mentality.
Does your accounting experience boil down to a couple of college courses? Have you ever taken the time to get to the state and federal tax codes that apply to you? Are you familiar with the term "nexus"?
Many business owners think they have what it takes to do their own books, and they very well might. But chances are, most business owners overestimate their "expertise" when it comes to proper accounting.
Side note: On a philosophical level, you also need to ask yourself, what makes you happiest. Why did you start your business? Was it to categorize transactions, or was it to fulfill a need, explore your passions, share your gifts, better a product, or change the world?
Chances are that you didn't become a business owner so you could practice bookkeeping. Hiring a bookkeeper will allow you to focus on the real reason you decided to put blood and tears into your product.
What are the Different Bookkeeping Services Available?
The O.G. or “Traditional” Bookkeeping Services: Accounting Firms
The most traditional method of bookkeeping is to hire an accountant or accounting firm. (We’re talking local mom and pop shops and freelancers.) These guys offer great benefits over the DIY self method—like the fact that you’ll barely have to lift a finger and you’ll also be privy to expert insight (pending their qualifications of course).
Of course there are also some drawbacks with these bookkeeping services, such as higher fees and slow turn around times. Many of these institutions charge high hourly fees for consultations which can make it difficult to set a steady course for your monthly budget, not to mention their services can often be “behind the times” in terms of integrating technology.
When it comes to the traditional method, business owners will have to consider whether or not they want to hire an in-house bookkeeper or an external accounting firm. Both methods can be expensive with hourly consulting fees and salary/benefit considerations for in-house hires. In-house accountants can be a solid option if you own a large operation and need constant oversight. Smaller businesses however, might find that the costs don’t outweigh the rewards when it comes to hiring a full-time accountant.
The "Semi-Traditional” Bookkeeping Service: DIY Software
DIY software is an increasingly popular option, giving business owners a great UI to track their finances. Companies like Quickbooks provide robust software that can help facilitate advanced accounting functions. Not only are many of these types of tools extremely helpful, they can also save money when it comes to hiring a traditional accountant. Although this is a great option for accountants, it may not be optimal for business owners.
Having a good piece of software doesn’t make you knowledgeable about the US tax code, regulations or requirements. Business owners can miss out on deductions, disqualify themselves as a compliant business, and face IRS auditing through improper tax filing. Having simply taken an accounting class in college is no substitute for the wealth of knowledge an accountant brings to the table.
Even if you feel confident enough in your accounting, there is still the consideration of time. Anyone who has started a business knows that they will soon find themselves being pulled in lot’s of different directions. Bookkeeping is a time consuming task—business owners need to ask if reconciling transactions is the best use of their time. A more honest labeling of "DIY" software is not a bookkeeping service, rather a bookkeeping tool.
The "Fully Automated” Bookkeeping Service: Software+Human Touch
The third and final option which we will most definitely compare to a puppy being wrapped in a blanket—are software as a service options. This hybrid service provides the best of both worlds, giving users access to customized software as well as a dedicated bookkeeper. Instead of having to reconcile your own transactions, a bookkeeper (accountant) will do it for you. Some of these services like KPMG Spark, offer unlimited consultation at no hourly cost. Instead they prefer the more modern “Netflix” model of a monthly flat-rate fee. This gives business owners comfort, knowing the can reach out for advice without fear of incurring extra costs and make more accurate monthly budget predictions. Rather than a mean (tool) to an end, this option is a completely automated solution.
This option will not be for everyone, for example—extremely large and complicated corporations or accounting firms (just covering our bases). However for the other 90% of business owners—this type of bookkeeping service is likely to be the most inclusive and cost effective. It offers all of the good (and more) of the aforementioned methods without the bad. The hybrid mixture of cloud-based tech combined with a human element of a bookkeeper takes away the headache of navigating tax law and entering data—while still providing a high touch high tech solution to your bookkeeping service needs.
Before clicking the X on your browser, or the button below, remember to ask yourself two things: "Do I have the expertise to make the most of my tax returns?" and "Are my talents best spent doing my own bookkeeping?" If you find yourself unsure on either of these fronts—click the button below and we'll give you a no-hassle consultation where you can ask any questions you might have and even get a free month trial of our services.