What Is Small Business Bookkeeping?

Small business bookkeeping is the process of systematically recording, organizing, classifying and maintaining the financial transactions of a business. It creates an organized financial record of what money is coming into the business, what money is going out, what the business owns, what it owes and how the business is performing financially.

Bookkeeping is more than simply entering transactions into QuickBooks. A properly maintained bookkeeping system helps ensure that business transactions are recorded in the appropriate accounts, supporting documentation is maintained, bank and credit-card accounts are reconciled, and financial information can be used to prepare meaningful financial reports.  For a small-business owner, good bookkeeping provides the financial foundation needed to understand the business and make informed decisions.

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Who Can Benefit From Our Bookkeeping Services?

• Startups
• Small businesses
• Contractors
• Real estate businesses
• Professional-service businesses
• Retail businesses
• Service businesses
• Established businesses
• Businesses preparing for financing
• Businesses that need to clean up or organize their books

 

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What Does Bookkeeping Track?

A business generates financial activity every day. Bookkeeping organizes that activity into a system that can be reviewed and understood.  Depending on the type of business, bookkeeping may include recording and organizing:

• Sales and other business income
• Customer payments and deposits
• Business expenses
• Vendor payments
• Purchases
• Credit-card transactions
• Bank transactions
• Payroll-related transactions
• Loans and debt payments
• Equipment and other business assets
• Owner contributions
• Owner draws or distributions
• Accounts receivable
• Accounts payable
• Other financial transactions

 

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Bookkeeping Creates An Organized Financial Record

Think of bookkeeping as creating a financial history of your business.  Every time your business makes a sale, pays a bill, purchases equipment, receives a customer payment, makes a loan payment or incurs another business expense, that activity creates a financial transaction.  Bookkeeping organizes those transactions into appropriate accounts so that the business owner can answer important questions such as:

How much money did my business make?

How much did my business spend?

What are my largest expenses?

Which products or services are generating revenue?

How much money do I have available?

What does my business owe?

What does my business own?

Is my business profitable?

Is my business growing?

Without organized bookkeeping, answering these questions can be difficult.

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Bookkeeping Helps Produce Financial Statements

One of the most important purposes of bookkeeping is to provide the financial information needed to prepare financial statements.  Two commonly used financial statements are the:

1. Profit & Loss Statement

A Profit & Loss Statement, also called an income statement, summarizes the business's revenue and expenses over a specific period and shows the resulting profit or loss.  It can help a business owner evaluate:

• Revenue
• Cost of goods sold
• Operating expenses
• Gross profit
• Net profit or loss

2. Balance Sheet

A Balance Sheet provides a snapshot of the business's financial position at a specific point in time.  It generally shows:

• Assets
• Liabilities
• Owner's equity

 

Together, these reports can give a business owner a much clearer picture of the company's financial condition.

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Bookkeeping Helps Separate Business & Personal Finances

Maintaining organized business records is particularly important for business owners who operate through an LLC, corporation or other business entity.  Business owners should generally maintain appropriate separation between business and personal financial activity.

A dedicated business bank account and organized bookkeeping system can make it easier to identify business income and expenses and maintain accurate financial records.  The IRS recommends keeping business and personal financial activity appropriately separated and notes that the business checking account is often a primary source of information for entries in a business's books.

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Bookkeeping Supports Tax Preparation

Bookkeeping is not the same thing as preparing a tax return.  However, organized bookkeeping provides the financial records and supporting documentation that a tax professional may need when preparing business tax returns.  Good records can help identify business income, expenses and other information that may be relevant to tax reporting. The IRS notes that business records should support amounts reported on tax returns.

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Bookkeeping Supports Financing & Business Planning

Accurate financial records can also be valuable when a business is preparing for growth or seeking financing.  A lender or other funding source may request financial information such as:

• Profit & Loss statements
• Balance Sheets
• Revenue history
• Expense information
• Cash-flow information
• Accounts receivable
• Accounts payable
• Existing debt
• Other financial documentation

 

Organized financial records can help the business owner understand its financial position and provide more reliable information when preparing a financing package.  The U.S. Small Business Administration recommends that businesses seeking financing prepare financial statements and financial projections as part of their financing materials.

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Bookkeeping Helps Business Owners Make Better Decisions

Perhaps the greatest benefit of bookkeeping is that it gives the business owner better information for making decisions.  With organized financial records, an owner can better evaluate questions such as:

• Should I increase or reduce an expense?
• Is my pricing sufficient?
• Which products or services are most profitable?
• Can I afford to hire another employee?
• Can the business support a new vehicle or equipment purchase?
• Is the business generating enough cash to support expansion?
• Should I pursue financing?
• Are expenses increasing faster than revenue?
• Is the business actually profitable?

 

The SBA emphasizes that maintaining proper bookkeeping and understanding business finances can help businesses manage their finances and make informed decisions.

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Why Is Bookkeeping Important?

Know Where Your Business Stands

Organized financial records help you understand whether your business is generating a profit and where money is going.

Make Better Business Decisions

Accurate financial information can help you evaluate pricing, expenses, staffing, investments and growth opportunities.

Prepare for Tax Filing

Organized records can make it easier to provide information to your tax professional when preparing business tax returns.

Support Financing Requests

Lenders and other funding sources may request financial statements and other financial information when evaluating a business.

Monitor Cash Flow

Bookkeeping helps you track money coming into and leaving the business.

Identify Problems Earlier

Regular bookkeeping can help identify unusual expenses, declining revenue, bookkeeping errors or other financial issues before they become larger problems.