Bookkeeping is keeping an accurate record of a business’s finances. If you keep accurate books, you’re more likely to make good business decisions and run a company that makes money. This article discusses why keeping books is important and how you can do it for your small business.
Why is it important to keep accurate books?
Bookkeeping helps you keep track of transactions. For instance, when you buy something from another business, sell something you make, or get a receipt. Keeping accurate books can help you make good business decisions and plan for the future of your business.
Here are some things you can do to make sure your bookkeeping is accurate and works well.
Keep all receipts
Keep the receipts for everything you buy so you can keep track of where the money goes. The receipt should say when you bought something, what you bought, and where the seller is. All of this information needs to be in your financial report. That wat you can look back and see how much you spent each day, week, or month.
Choose a way to keep track of money
Next, you’ll need to decide what kind of bookkeeping system you want to use.
Here are the main two choices:
Accounting for cash:
This system keeps track of the money that comes into and goes out of your business. Accounts payable and accounts receivable, however, are not kept track of because they are expenses that will happen in the future. You’ll use cash flow statements to figure out how well your business is doing every three months or every year.
Accounting via accrual:
Accrual accounting focuses on how much money your business makes and loses. A profit and loss statement shows how much money you made and how much it cost to make that money.
Know how a balance sheet works and what it means
Use a balance sheet to figure out how much money your business is worth. To figure out a company’s net worth, add up all of its assets and then take away all of its debts.
The two most important words to know are:
Assets: Assets are things that your company owns. They can be either current or fixed. Cash, accounts receivable, and expenses paid in advance are all examples of current assets. Fixed assets are things like cars, office space, and other property.
Liabilities: Your debts are your liabilities. Liabilities can be either short-term or long-term. Current liabilities are debts you have to pay off within a year. Business transactions and sales taxes are examples of current liabilities. Long-term liabilities are debts that can take more than a year to pay off, like a company-owned property.
Equity is the total amount of money your business has, or how much it is worth. This is the number you get when you subtract your assets from your debts. It also tells you how much money you need to keep your business going.
Keep a ledger
The best way to keep all of your financial information in one place is to use a ledger. Think about these things before you write in a ledger:
Send out receipts often. Set up a way to record your receipts regularly in your ledger. This will help keep receipts from going missing or totals from being wrong. At least once a month, you should keep track of your receipts. You might also want to post once a day or once a week, depending on how big your business is and how many things you buy.
Plan your posts based on your sales. If your business is getting a lot more clients and customers, you should schedule a time to write down the sales numbers in your ledger. If you want your business to run smoothly, you should try to match how often you post receipts with how often you post sales.
Consider using bookkeeping software
When you enter information into bookkeeping software, it can automatically make ledgers. This is a popular choice for small business owners who would rather spend their time planning ways to grow their business than keeping track of their finances by hand.