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14 min read

How to Keep Books for a Small Business: Tips and Strategies

How to Keep Books for a Small Business: Tips and Strategies


Hello, entrepreneurs and small business warriors! Let's dive into the thrilling world of small business accounting. Yes, you heard right - 'thrilling' and 'accounting' in one breath!

Accounting is your business's unsung hero, the pulse that keeps your enterprise alive. It's not just about crunching numbers; it's your growth driver, your financial safety net, and your opportunity finder.

Is small business accounting different from corporate accounting? Absolutely! Think speedboat versus cruise ship. They both sail, but the scale, complexity, and goals greatly differ. Today, we're piloting the speedboat, the versatile small business.

We'll demystify ledgers, journals, financial reports, and more. It's an eye-opening journey you won't want to miss.

So, grab your beverage of choice and settle in. It's time to unravel the world of small business accounting and celebrate its pivotal role. Remember, at Accountingprose, we ensure your numbers harmonize with your path to success!



What is Small Business Accounting?

Ah, small business accounting, the unsung hero of entrepreneurship! If your company was a movie, accounting would be the behind-the-scenes maestro, quietly directing your financial symphony. But what exactly is small business accounting?

In a nutshell, it's the diligent tracking, analyzing, and interpreting of your business's financial data. It's like the pulse of your business - it keeps you in tune with your financial health, helps identify opportunities for growth, and warns you of potential issues before they become big scary monsters.


What's the difference Between Small Business Accounting and accounting in a large organization? 

The worlds of small business accounting and large organization accounting might seem like they operate on the same principles — and to some extent, they do. After all, accounting, regardless of the business size, is about recording, classifying, and interpreting financial information. But as we dive deeper, we find that the scale, complexity, and objectives can vary significantly between these two realms.

Let's explore these differences in detail...


Scale and Complexity

The most apparent difference lies in the scale and complexity of operations.

Large organizations typically have more transactions, more employees, more customers, and often, more regulatory requirements. This results in more complex accounting processes requiring advanced accounting systems or software.


Small businesses usually have fewer transactions and a more straightforward operational structure. As such, their accounting can often be managed with simpler systems, sometimes even manual record-keeping or basic accounting software.



Regulatory Requirements

Larger organizations need to prepare financial statements in accordance with Generally Accepted Accounting Principles (GAAP) and are subject to regular audits.


Small businesses, especially privately-owned ones, are not subject to these same stringent rules. Their financial statements might not need to follow GAAP to the letter. 



Resources and Expertise

Large organizations generally have an entire accounting department with specialized roles, including accounts payable clerks, payroll officers, tax accountants, and more.


Small businesses often don't have the resources to maintain an accounting department. It's not unusual for the business owner, an office manager, or outsourced partner to handle the books



Management Reporting

In large organizations, management accounting plays a crucial role. Detailed management reports and variance analysis are prepared to help managers make strategic decisions, control costs, and plan for the future.


Small businesses, while also benefiting from management reports, may not require them with the same level of detail or frequency. Their focus could be more on immediate cash flow management, tracking receivables and payables, and ensuring profitability.




Key Components of Bookkeeping

Bookkeeping, the cornerstone of any successful business, is composed of several key components.

Let's dive into each of them:

  1. Financial Activity: Every financial transaction that takes place within your business — such as sales, purchases, income, and payments — needs to be accurately recorded. This record-keeping is crucial to monitor your business's financial health and make informed decisions.

  2. Ledgers: Consider a ledger as your business's financial diary. It houses a detailed account of all your financial transactions. Each entry, or page, tells a unique story about a financial event in your business.

  3. Journals: While the ledger is a categorized record, the journal is a chronological one. Every transaction first enters in the journal, in the order they occur, before they're classified into the ledger.

  4. Chart of Accounts: This is your financial directory, listing all the accounts your business uses in its operations. The accounts include revenue, expenses, assets, liabilities, and owner's equity. Think of it as the cast of characters in your business's financial story.

  5. Financial Reports: These are the comprehensive summaries of your business's financial activity. The most common ones are the balance sheet (a snapshot of your business's financial position), the income statement (a report of revenues, expenses, and profits or losses), and the cash flow statement (an overview of cash inflows and outflows).

  6. Bank Reconciliations: This process ensures that your financial records align with your bank statements. It's essential to spot any discrepancies and maintain accurate financial records.

  7. Bill Pay (Accounts Payable): This involves managing the debts your business owes to suppliers or vendors. Timely bill payments help maintain good relationships with suppliers and avoid penalties.

  8. Invoices (Accounts Receivable): This involves managing the money customers owe to your business for goods or services provided. Prompt invoicing and follow-up help maintain a healthy cash flow.

  9. Payroll: For businesses with employees, managing payroll is a crucial task. It includes tracking wages, benefits, taxes, and other forms of employee compensation.


Does that list encompass every last component of bookkeeping? No way, Jose.

Accounting can get more complex, especially as a small business becomes a big business. However, if you are not publicly traded or don't have investors to keep happy, that list covers most of what you will see in a small business' financial life. 


Why is Accurate Bookkeeping Important?

Let's face it, the phrase "accurate bookkeeping" might sound as exciting as watching paint dry. But hold onto your calculators, folks, because we're about to delve into why it's not only crucial, but can also be a thrilling aspect of your business journey.


Why Bookkeeping for Small Businesses is Important

In the intricate workings of a business, accurate bookkeeping emerges as an essential function, often under appreciated yet profoundly impactful. Its role extends far beyond mere number-crunching, shaping the very foundation upon which a successful business stands.

Accurate bookkeeping serves as a navigational compass, guiding businesses towards informed decision-making, strategic planning, and credible financial reporting. It ensures compliance with regulatory requirements, builds trust with stakeholders, and provides valuable insights into a company's financial health.

In the upcoming sections, we shall delve deeper into why accurate bookkeeping is not just important, but integral to the operation and growth of your business. Let's explore the compelling reasons that underscore the significance of precision in bookkeeping. 


Navigating the Business Landscape

Imagine driving a car with a faulty GPS. You'd end up lost, right? Similarly, accurate bookkeeping acts as your business's GPS, providing you with precise data to navigate your business landscape. It helps you understand where your business stands financially, what direction it's headed, and how fast it's going. It's your roadmap to success.


Making Informed Decisions

Accurate bookkeeping equips you with a clear picture of your financial health, empowering you to make informed, strategic decisions. Want to expand your product line, invest in new equipment, or hire more staff? Accurate financial data will guide you in making these decisions wisely.


Planning for the Future

"A goal without a plan is just a wish," said Antoine de Saint-Exupéry. Accurate bookkeeping allows you to plan effectively for your business's future. It gives you insights into revenue trends, seasonal fluctuations, and expense patterns, enabling you to forecast, budget, and set realistic goals.


Keeping Uncle Sam Happy

Accurate bookkeeping isn't just a good practice; it's a legal requirement. It ensures you comply with tax laws by accurately reporting income and expenses. It also makes tax time less stressful, as you'll have all the necessary financial records at your fingertips.


Building Trust with Stakeholders

Whether it's investors, lenders, vendors, or employees, accurate bookkeeping helps build trust with stakeholders. It shows you run a tight ship and are responsible and transparent in your financial dealings.


Spotting Opportunities and Challenges

Ever wish you had a crystal ball to predict your business's future? Accurate bookkeeping is the next best thing. It helps you identify opportunities for growth, like profitable product lines or services. It also flags potential challenges, like cash flow issues or overdue customer payments, allowing you to address them proactively.



How to Keep Books for a Small Business

Bookkeeping for small businesses may initially seem overwhelming. However, understanding the key components and applying a systematic approach can make it an efficient and integral part of your business operations.

Master this checklist and you will be golden.

Learn Basic Bookkeeping Concepts

Start by familiarizing yourself with elementary bookkeeping principles, such as the difference between debits and credits, interpretation of financial statements, and the workings of the accounting cycle. This knowledge serves as a cornerstone for effective bookkeeping.

Choose a Payroll System

If your business employs staff, it's critical to have an efficient payroll system. This system should accurately calculate wages, withhold the appropriate amounts for taxes, and manage employee benefits effectively.

Recommended Software: Gusto

Determine Your Tax Obligations

Work with a tax professional to understand your business's tax obligations. Recognize the taxes your business is required to pay, when they're due, and any potential deductions or credits for which you might be eligible.

Choose a Bookkeeping Software

Select a bookkeeping system that is suitable for your business's needs. This could range from a detailed spreadsheet to sophisticated cloud-based accounting software. The right system will streamline your bookkeeping process and will save you hours of frustration.

Recommended Software: Xero

Develop Your Chart Your Accounts

Create a chart of accounts that accurately reflects your business's financial activities. This chart will serve as the backbone of your bookkeeping system, outlining your sources of income and areas of expenditure.

Recommended Reading: How to Hack Your Chart of Accounts

Track Your Expenses

Maintain a detailed record of all business expenses. This record is not only useful for monitoring your expenditure but also crucial during tax season when identifying deductible expenses.

Recommended Software: Ramp

Record and Monitor Receivables

Keep an up-to-date record of all outstanding invoices. This practice ensures you have a clear view of the income due to your business and helps maintain a steady cash flow.

Manage Your Payables

Just as it is important to keep track of money coming in, it's equally essential to monitor what's going out. Payables, or the money you owe to suppliers or vendors, form an essential part of your financial obligations.

Recommended Software: Ramp

Establish Sales Tax Procedures

If your business collects sales tax, ensure you have a reliable system for tracking and remitting it. This step is essential for maintaining compliance with tax regulations and avoiding penalties.

Recommended Software: Anrok (if you are a SaaS company) and Avalara (if you are not) 

Determine How Your Customers Will Pay You

Choose the payment methods that are most convenient for your customers and compatible with your bookkeeping system. Providing multiple payment options can facilitate prompt payments, thus improving your cash flow.


How to Find a Bookkeeping Service for Small Businesses

Finding the right bookkeeping service for your small business is a little like dating. You need to know where to look, what questions to ask, and how to recognize when you've found "the one." So, let's jump into the dating pool of bookkeeping services and find your perfect match!


Where to Look

  1. Accounting Directories: Websites like Xero will allow you to search for an accountant who focus on your industry and are in your area (if that is important to you). 
  2. Payroll Directories: Gusto has a similar partner directory that will pair you with an accountant that fits your criteria. 
  3. Business Network: Ask fellow business owners in your network. Personal recommendations can often lead to finding reliable and tested services.
  4. Local Listings: Don't underestimate the power of local listings in your area. Check out the Chamber of Commerce directory or your local newspaper's business section.


Questions to Ask

Choosing an accountant is a significant decision for your small business. This professional (or professionals) will have a direct impact on your financial health, so it's crucial to be thorough during the interview process.

Here are some key questions to guide your selection:

  1. What industries do you specialize in? Each industry has specific accounting requirements and nuances. An accountant experienced in your industry will be familiar with these and can provide more targeted advice.
  2. Do you have experience with businesses of my size and stage of growth? The accounting needs of a startup differ from those of a well-established company. An accountant who understands your business's stage can better align their services with your needs.
  3. How accessible will you be to answer questions or provide advice? Accessibility is key in a working relationship with an accountant. You want someone who can be available when you have questions or need immediate assistance.
  4. What services do you offer beyond basic bookkeeping? Many accountants offer advisory services such as payroll, human resources consulting, sales tax filing, and budgeting and forecasting. These services can be invaluable for your business growth.
  5. How do you charge for your services? Understanding how an accountant charges—whether it's a flat rate, hourly rate, or retainer—helps you budget for their services.
  6. Can you provide references from other businesses you've worked with? References can offer insights into the accountant's competency, reliability, and how they interact with their clients.
  7. What accounting software and tools do you use? If the accountant uses the same software that you do, it can make data sharing and collaboration much easier. Better yet, if they can turn you on to something even better, that is a huge bonus.
  8. How large is your team? Who will I be working with? Understanding the team size and who you'll be directly working with helps set expectations for the level of attention you can expect. It might be challenging to work with a one-person shop, because when they are out of the office, all work comes to grinding halt. In a similar vein, having too many cooks in the kitchen might end up being confusing if you don't know the right person to reach out to. 
  9. What does your onboarding process look like? A structured onboarding process indicates that the accountant has a systematic approach and can smoothly transition your business onto their service.
  10. What can I expect from you on a weekly and monthly basis? Regular updates and reports are essential for keeping you informed about your business's financial health. Ensure the accountant's deliverables align with your expectations.
  11. How do you handle mistakes? Everyone makes mistakes. An accountant who owns up to them and has a plan for rectifying errors shows a high level of professionalism and integrity.
  12. Where does your service offering end? Knowing the boundaries of an accountant's services can help you plan for any additional resources or services you might need.
  13. Will you work with my CPA at the end of the year? If you already have a Certified Public Accountant (CPA), your new accountant should be able to collaborate with them, especially during key periods such as year-end tax planning.
  14. How do you stay informed about changes to accounting technology? The accounting field is continually evolving with new technology. An accountant who stays abreast of these changes can offer you the most modern and efficient services.
  15. What happens when my accountant is out sick - who will manage my work? Ensure the firm has a contingency plan in place so that your work doesn't come to a standstill in case your primary contact is unavailable.
  16. How do you document my processes and procedures? Documenting your unique processes and procedures ensures consistency in the service and makes transitions smoother, if needed.
  17. How will you help me improve my processes and procedures? An accountant who can provide insights and recommendations for improving your financial processes can add significant value to your business.
  18. What happens if I outgrow your service? As your business grows, your accounting needs will too. Understand whether the accountant can scale their services to match your growth or help transition you to a larger firm.
  19. Why should I hire you? This open-ended question allows the accountant to highlight their unique strengths, experience, and service approach. Their answer can provide valuable insights into what sets them apart from other professionals in the field.

  20. What is on your "bugaboo" list? Okay, let's talk bugaboos. Everyone has their quirks, right? By asking your potential accountant about their particular pet peeves or issues that make them want to pull their hair out, you're getting a glimpse into their work style and what might ruffle their feathers. Plus, it's an excellent way to see if you both can have a good laugh together. After all, a sense of humor can go a long way in your new accounting partnership!  😄


The interview process is your opportunity to dig deep and find an accountant who not only meets your current needs but can also support your future growth. By asking comprehensive questions, you can find a partner who will contribute to your long-term success.


Finding "The One"

So, how do you know when you've found "the one"? Here are some signs:

They understand your business: The right bookkeeping service will spend the time to understand your business before sending a proposal your way. They won't make assumptions and will make sure that fit goes both ways, because they know how important the accounting relationship is.  

They're proactive: They don't just crunch numbers; they provide insights, identify opportunities, and flag potential issues. Rather than being transactional or commoditized, they take a partnership approach. 

You trust them: You feel comfortable sharing your financial information with them and rely on their expertise. They back this trust up with strong security policies and practices and are willing to share them with you. 

They're responsive: They answer your queries promptly and keep you updated on your financial status. If they can't answer your question right away, they give you a reasonable timeline of when they will follow up. 

You see the value: Their service helps you save time, make informed decisions, and contributes to your business growth. 


Remember, take your time and do your due diligence. The right bookkeeping service won't just be a service provider, but a financial partner in your business journey. 



Tips for Keeping Your Books Organized

Ah, bookkeeping. It's like the "eat your vegetables" of the business world. We know it's good for us, but sometimes it can feel like a chore. But, just like a balanced diet keeps your body running smoothly, organized books keep your business healthy and prepared for the future. So, let's roll up our sleeves and dive into some practical tips to help you keep your books tidy and efficient.

Maintain Consistent Record-Keeping Habits

Consistency is the secret sauce to organized bookkeeping. Make it a habit to record transactions as they occur. This way, you're not left with a mountain of receipts and invoices to sort through at the end of the month (or worse, the end of the year). Regular record keeping also helps you catch any accounting errors quickly and can provide a real-time snapshot of your financial health.

Separate Personal and Business Expenses

This one is non-negotiable. Mixing personal and business expenses can create a tangled web that's tough to untangle come tax time. Save yourself the headache and set up separate bank accounts for your personal and business expenses. Trust us, your future self (and your accountant) will thank you.

Categorize Expenses Correctly

Accurate categorization is the lifeblood of useful financial reporting. By correctly categorizing your expenses — from office supplies to rent — you'll have a clearer picture of where your money is going. Plus, it can help identify tax deductions and ensure you're compliant with tax regulations.

Use a Cloud-Based Accounting Software

Welcome to the 21st century, where shoeboxes of receipts are as outdated as flip phones. Cloud-based accounting software automates much of the bookkeeping process, reducing errors and saving time. Plus, your financial data is accessible anytime, anywhere – all you need is an internet connection.

Regularly Review Your Accounts

Set a regular schedule (weekly, bi-weekly, monthly) to review your books. This habit helps you stay on top of unpaid invoices, catch discrepancies, and understand your cash flow better. Regular reconciliation of your accounts is also crucial to ensure your books match your bank statements.

Keep Good Records

Hold onto those receipts! You'll need them if the taxman cometh calling. Plus, good records provide a paper trail (or digital trail) for every transaction, which can be invaluable if you need to look back at an expense or payment.

Stay Informed About Tax Obligations

Tax laws and regulations can change like the wind. Stay informed about your tax obligations to avoid fines or penalties. If this feels overwhelming, consider working with a tax professional who can guide you through the labyrinth.

Consider Hiring a Professional

If bookkeeping is becoming too time-consuming or complex, it might be time to hire a professional. An accountant or bookkeeper can manage your financial records, leaving you with more time to focus on growing your business.


Remember, bookkeeping isn't just a necessary evil – it's a powerful tool to understand your business's financial health and make informed decisions. By keeping your books organized, you'll have a clear view of your business's financial landscape, and you'll be ready for whatever comes your way. So, eat those vegetables, keep those books tidy, and watch your business thrive!



Frequently Asked Questions

Here are the questions that we hear most often... Have a question of your own? Reach out and we're happy to set you on the right path. 


How to Do Bookkeeping for Small Businesses Manually?

When you're just starting your small business journey, you can handle bookkeeping manually with structured organization and regular upkeep. Begin by establishing a ledger, which could be a physical notebook or a digital spreadsheet, where you'll record all transactions – income and expenses. Make it a priority to document every transaction, noting date, amount, category, and any pertinent details. Regularly review and update your ledger to ensure all transactions are logged and categorized accurately. Keep in mind, it's crucial to reconcile this ledger with your bank statements every month to catch any discrepancies. Remember, while manual bookkeeping is cost-effective and straightforward for small businesses, as your operations grow, you might find it beneficial to transition to accounting software or hire a professional for more efficient bookkeeping.


What is Keeping the Books for a Business?

Keeping the books for a business, more formally known as bookkeeping, involves the systematic recording, organizing, and maintaining of financial transactions related to a business's operations. This includes tracking sales, expenses, payroll, and other financial transactions. The goal of bookkeeping is to provide a clear, accurate, and up-to-date picture of a business's financial health. It's an essential function that aids in decision making, planning, and tax preparation. Whether done manually or through accounting software, effective bookkeeping is fundamental to successful business management and legal compliance.


How is Bookkeeping Used in Small Business?

In the small business arena, bookkeeping is the star player. It's used to track revenue and expenses, which aids in making informed financial decisions. It helps with tax preparation by keeping all necessary documentation in order. It also helps you evaluate your business performance, plan for the future, and manage cash flow. So, bookkeeping is not just an administrative task; it's a tool for steering your small business towards success.


What is the Simplest Form of Bookkeeping?

The simplest form of bookkeeping is called single-entry bookkeeping. This system is akin to maintaining a checkbook: there's a record of funds coming in and going out, with the balance of your business bank account at any particular point. Single-entry bookkeeping involves recording each transaction only once (either as income or expense) and does not require maintaining information about your business's assets and liabilities. While this system is easy to understand and manage, it's typically only suitable for very small businesses with simple financial transactions. As your business grows and transactions become more complex, you might need to transition to a double-entry bookkeeping system for a more comprehensive financial perspective. 



Is It Possible to Do Your Own Bookkeeping?

Absolutely, it is possible to handle your own bookkeeping, especially when you're running a small business or just starting out. With the right tools and a solid understanding of basic accounting principles, you can manage recording transactions, reconciling bank statements, categorizing expenses, and preparing basic financial statements. While manual methods like using spreadsheets work for some, others might find accounting software helpful for automating and simplifying the process. However, as your business grows, the complexity of your finances might too, and you may consider hiring a professional bookkeeper or accountant to ensure accuracy, compliance, and to free up your time to focus more on your business operations.



Bookkeeping doesn't have to suck | Accountingprose


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