Bookkeeping is an integral part of the accounting process in which you record all of your business’s financial transactions. Because they are used to create your financial statements and act as the backbone of your accounting, it’s important to ensure that it is done correctly.
Why is bookkeeping important for a business?
- Improvement: keeping an eye on the financial health of your business can help you identify ways to improve your business processes.
- Organization: when you have your records and documents organized, it becomes easier to apply for business loans.
- Avoiding Financial Issues: by recording transactions, you can quickly identify and remedy any mistakes to avoid complex financial issues later on.
Bookkeeping Basics
1. Choose a bookkeeping method
There are two different entry systems to choose from: single-entry and double-entry. Single-entry bookkeeping records all of your transactions once, either as an expense or income. This method is the simpler choice and can be good for smaller businesses that have little inventory or equipment. Double-entry bookkeeping enters every transaction twice as both a debit and credit. This is done in order to “balance the books” between accounts and prevent errors in recording transactions. Double-entry bookkeeping is typically recommended because it’s more accurate and makes it easier to catch small mistakes.
2. Choose an accounting method
Just like choosing your bookkeeping method, there are two accounting methods to choose between. The first option, cash-based accounting, records invoices or your company’s outstanding bills once they’ve been paid. Accrual-based accounting records invoices and bills even if the funds have yet to be exchanged.Typically, accrual-based accounting is recommended since it can give you more of an accurate picture of your business’s financial health.
3. Set up your general ledger
A general ledger is where all of your transactions– sales, invoices, bills, etc.– are recorded. General ledgers were once physical books, but are now found online– either in the form of a spreadsheet or accounting software. Using a spreadsheet is free, but can get complicated if you manage multiple accounts. Accounting software, such as Quickbooks, can automatically generate a general ledger for you and simplify the bookkeeping process.
4. Create your business accounts
The bookkeeping process begins with setting up every account that is necessary for your specific business so that you can record your transactions in the appropriate categories. The five basic account types are asset accounts, liability accounts, revenue or income accounts, expense or expenditure accounts, and equity accounts.
5. Record every financial transaction
Once everything is set up, you can begin recording all of your transactions. It’s crucial that each transaction is recorded correctly and in the right account. This is where it can get tricky if you’re doing your bookkeeping manually. Accounting software has the ability to import your bank data so that you don’t have to do this yourself. With an Innovator Business Checking Account, you can seamlessly integrate your data into Quickbooks, one of the most popular accounting softwares, and let the software do the tricky work for you.
6. Balance the books
At the end of the day, month, quarter, and year, you should be balancing your books. This is when you tally up your debits and credits to ensure the totals match. When the account types are combined, the adjusted balances should meet the accounting equation: assets = liabilities + equity. If the two sides of this equation don’t match, that means there’s some sort of error that needs to be corrected. If the two sides of the equation do match, your books are “balanced.”
7. Prepare financial statements
To get a closer look at what your books really mean for your business, you should be summarizing the flow of your money into financial statements, the most common being a balance sheet, income statement, and cash flow statement. These reports can help you get a better understanding of your business’s financial health.
Bottom Line
Grasshopper recognizes that bookkeeping is an essential part of running a business, which is why we are committed to making the process as easy as possible for small business clients. When you sign up for an Innovator Business Checking Account, you can bank with confidence knowing that you have the ability to seamlessly integrate your financial data into Quickbooks, making the bookkeeping process as simple as possible.
By Michaela Lenahan in Small Business
