While small business bookkeeping can initially feel overwhelming, it isn’t an insurmountable obstacle. This guide will outline the essential principles and practices of bookkeeping for small businesses, along with some best practices for managing documentation.<\/p>\n\n\n\n\n\n\n\n
Key Takeaways:<\/em><\/strong><\/p>\n\n\n\n Before you can master bookkeeping, you first have to understand what it is. <\/p>\n\n\n\n Bookkeeping and accounting go hand in hand, but they aren’t identical. Accounting<\/a> is a broader discipline that encompasses recording and interpreting financial accounts at every level of the organization. Accountants journalize transactions, post them to the general ledger, and use that data to prepare financial documents.<\/p>\n\n\n\n Bookkeeping<\/a> is a slightly narrower definition. Bookkeepers do the day-to-day work of recording transactions and creating limited reports but typically hand that data off to accountants who analyze that data to find long-term insights and create reports with larger scopes.<\/p>\n\n\n\n These definitions are not set in stone\u2014the distinction between bookkeeping and accounting differs in every organization. The common understanding is that bookkeepers are responsible for day-to-day recordkeeping, while accountants are responsible for big-picture reporting.<\/p>\n\n\n\n At larger businesses, bookkeepers prepare records up to the trial balance, and accountants create financial reports from there. In smaller businesses, bookkeepers will have more overlap with accounting. At the smallest businesses, the same individual (sometimes even the owner) performs all bookkeeping and accounting activities. From manufacturing<\/a> to consulting to retail to finance, every business in every industry uses bookkeeping.<\/p>\n\n\n\n Bookkeeping doesn’t look the same at every company, but the principles stay the same: bookkeepers record day-to-day transactions and prepare financial reports for managers and accountants.<\/p>\n\n\n\n While it’s important to know that the fundamental definition of bookkeeping is recording financial transactions, several core principles govern how bookkeepers should record those transactions.<\/p>\n\n\n\n The most basic question that bookkeepers and accountants answer is: how much money do I have?<\/p>\n\n\n\n In a cash-only world, answering that question would be as easy as opening your wallet and counting the bills, but things are more complicated in today’s business world.<\/p>\n\n\n\n Bookkeepers use three main categories to measure a company’s finances: assets, liabilities, and equity.<\/p>\n\n\n\n It isn’t important to understand every nuance of these principles, but it is<\/em> important to understand the accounting equation:<\/a><\/p>\n\n\n\n Assets = Liabilities + Equity<\/p>\n\n\n\n The accounting equation must always balance, so when a company’s assets increase, there will always be a corresponding increase in a liability (for example, taking out a loan), an increase in equity (the owner’s stake in the company is worth more than it was before), or a decrease in another type of asset (for example, receiving payment on an account receivable is increasing the Cash asset but decreasing the Accounts Receivable asset by an equal amount).<\/p>\n\n\n\n Businesses don’t need to use double-entry accounting. However, it is the industry standard, and for good reason: double-entry accounting provides the clearest way of recording the flow of resources and keeping accounts reconciled in real time. <\/p>\n\n\n\n The fundamental idea behind double-entry accounting is that every transaction has two parts: bookkeepers debit resources from one account and credit them to another. For example, paying off an account payable would involve crediting the Cash account (recording where the money is coming from) and debiting the Accounts Payable account (recording where the money is going to).<\/p>\n\n\n\n\n
Defining Bookkeeping<\/h2>\n\n\n\n
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<\/a>Core Principles for Small Business Bookkeeping<\/h2>\n\n\n\n
1. The Accounting Equation<\/h3>\n\n\n\n
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<\/a>2. Double-Entry Accounting<\/h3>\n\n\n\n