Small-Business Bookkeeping Basics: Definition, Concepts, Tips

Updated May 28, 2021.
Small-Business Bookkeeping Basics Definition, Concepts, Tips_

Every business owner, either running a small and medium-sized business (SMB) or a large enterprise needs to learn the art of bookkeeping. You do not need to acquire an accounting degree to do so.

Bookkeeping can be overwhelming and difficult to learn if you are not passionate about it. The vast majority of small business owners consider bookkeeping as the most difficult part of operating a business.

However, what you need to learn are the basics, you can leave out those complex areas for your accountants to handle. If you are wondering why you must learn bookkeeping basics, especially for small businesses, it is that it can revolutionize your business.

In this article, you will learn the basics of bookkeeping and accounting tips for small businesses, and the best small business accounting software

With the basics of bookkeeping for small businesses learned,  you will make better financial decisions and most importantly understand your profitability. 

Let’s get started.

What is Bookkeeping?

Bookkeeping is the process of recording and organizing a business’s financial transactions from the opening of the organization to the closing of the organization. The person responsible for the bookkeeping process is called a bookkeeper.

Bookkeepers are responsible for recording and organizing every financial transaction that a business makes from the start to the end of its business operations. As long as the business engages in financial transactions, the bookkeeper will always have to record this information.

Many business owners use bookkeeping and accounting interchangeably. This practice is wrong, there is a clear distinction between bookkeeping and accounting. 

Difference Between Bookkeeping and Accounting
Source: Caxpert

Bookkeeping records the financial transactions of a business on a day-to-day basis whereas accounting records interpret, classify, analyze, and summarize the business’s financial data collected by the bookkeeper. Accountants use the books prepared by the bookkeeper to prepare their financial reports.

Some small businesses may opt to use a simple bookkeeping system to record every financial transaction it does. Others with more complex financial transactions may use the widely popular double-entry accounting process.

As a small business, bookkeeping can tell you if your business is profitable or not. It is a handy practice for identifying financial issues at the early stage before they blossom into a full-fledged problem. Small businesses can use bookkeeping to improve their profitability by identifying areas of their business operations with massive profit potentials. 

With proper bookkeeping, businesses can track all information on their books. This information is essential for making key operating, financing, and investing decisions. 

Without bookkeeping, businesses will not know their current financial position and have a record of their financial transactions. Accountants will have no financial data to work with to prepare financial statements and other reports for businesses.

External parties such as investors, financial institutions, or governments require a business to commit to accurate bookkeeping. Investors and financial institutions can use the business financial information to make better investment or lending decisions. 

Traditionally bookkeeping was all about the physical recording of a business transaction in a journal. Thanks to technology, the scope of bookkeeping has expanded to involve working with CPAs. Many businesses employ spreadsheets and accounting software to make their bookkeeping more effective and efficient.

Bookkeeping for Small Business: Understanding the Basics

The majority of business owners know how to create great products and services, and drive their business operations, and win over customers. However, when it comes to the subject of bookkeeping, they suddenly develop goosebumps. 

As a business owner, if you do not understand the basic bookkeeping used by your bookkeeper to organize your finance, you will struggle to get a clear picture of your business’ finances.

But let’s face it, no one is passionate about bookkeeping, except maybe bookkeepers and accountants. Bookkeeping may seem hard and daunting to do, but the more you keep at it, the easier it will get. 

Bookkeeping is no doubt an integral part of the success of any company. It is impossible to make your business profitable and generally better without bookkeeping. 

You need to know the basics about your business finance as a small business owner if you want to make sound financial decisions for your business. Here are some of the bookkeeping basics for small businesses.

1. Understand Business Accounts

An account in the bookkeeping world is nothing like a bank record. It refers to a record of all the financial transactions of a particular type such as payroll or sales.

There are five types of accounts used by bookkeepers, they are assets, liabilities, revenue or income, expenses or expenditure, and equity.

Assets

Assets refer to cash and resources that a business owns. It is anything that creates revenue or that a business derives benefits from owing. Examples of assets include inventory and accounts receivable, cash, equipment, inventory, real estate, and supplies.

Liabilities

Liabilities refer to the debts and obligations that a business owes. It is the opposite of an asset. If your business took a bank loan, it is considered a liability. Examples of liabilities include accounts payable, loans, interest payable, and unearned service revenue.

Revenue or Income

Revenue or income refers to money that a business earns. The chief source of revenue or income for the product or service-based companies is through sales of their products and services. Examples of revenue or income for businesses include interest income, rental income, and sales income.

Expenses or Expenditure

Expenses or expenditure refers to money that flows out of the business towards the settlement of the business bills such as utilities and salaries. It is money that the business has to spend for it to function properly. 

For many businesses, payroll including payroll tax and paying vendors take a large chunk of their total expenditure. Examples of business expenses or expenditures include insurance expense, interest expense, salaries and wages, and utilities.

Equity

Equity is the value remaining after subtracting your liabilities from your assets. The leftover (equity) represents the owner’s interest in the business. It refers to the value of ownership. Examples of equity are retained earnings, stock, dividends, and owner’s capital.

Proper bookkeeping activities are not possible without setting up these five necessary accounts. Under the accounts, you record the business tractions in the appropriate categories. 

The structure of your accounts may not be similar to another, but one thing your accounts will have in common is the use of the five necessary accounts.

2. Set Up Your Business Accounts

After knowing the five main accounts you need to track to catch the full picture of your business finances, the next step is to set it up. Knowing the account and setting it up are two entirely different things.

Traditionally, bookkeepers recorded the business transactions in a physical book called the general ledger. The general ledger is a bookkeeping ledger where the business accounting data from journals and sub-ledgers are posted. Another name for the general ledger is the nominal ledger.

Nowadays, many businesses favor the use of computer software such as spreadsheets and small business accounting software to record their accounts. You should too. Computer software makes bookkeeping easier and faster. You should also favor a virtual record rather than a hard copy. 

There are three methods for creating a general ledger.

  • Spreadsheet Software is one of the cheapest options for creating a general ledger. Examples of spreadsheets software include Microsoft Excel and Google Sheets. They do not attract monthly costs. However, spreadsheets are simple software that can only handle a minimal amount of bookkeeping. Creating your general ledger in a spreadsheet software can quickly turn into an unproductive venture if the figures are more than what they can handle.
  • Desktop Accounting Bookkeeping Software is one of the more expensive options for creating a general ledger.  You have to pay an up-front monthly fee for access, but the software is generally free for download and the owners keep it. The distinction between the desktop accounting bookkeeping software and the cloud-based bookkeeping software is location. Desktop bookkeeping software is less mobile with information stored on the system. An example of desktop accounting bookkeeping software is QuickBooks Desktop.
  • Cloud-based Accounting Bookkeeping Software requires you to pay a monthly fee to maintain your access to the software features. The cost of cloud-based accounting bookkeeping software is cheaper than desktop software but more expensive than spreadsheet software. Examples of cloud-based bookkeeping software include QuickBooks Online, FreshBooks, Xero, Wave, and other QuickBooks alternatives

You can choose to hire an accountant or bookkeeper either as an in-house employee or outsource your bookkeeping activities to an accounting company. However, knowing accounting basics and how to use the general ledger helps you understand your business finances better and make better decisions. You do not always have to wait for someone to interpret your business general ledger for you!

3. Develop a System for Storing Records

Having an organization for storing your business financial records will make it easier for you to do your financial reports on a monthly, quarterly, or annual basis. Developing a system for storing records makes bookkeeping easy including the filing of your taxes.

Here is a list of items that should be taken into consideration when developing your system for storing financial information. 

  • All Written Checks
  • Bank Statements
  • Bills
  • Canceled Checks
  • Credit Card Statements
  • Customer Invoices
  • Customer Payments
  • Deposit Slips
  • Payroll Documentation
  • Receipts
  • Sales Receipts
  • Tax returns
  • 1099 forms

There are three things you need to do to develop a system for storing your business records. 

Validate Its Accuracy

Every item you record for your financial transactions has to be accurate. It is important to take out time to validate the accuracy of the data you have. A little mistake can cause huge damage to your finances and cause you to work on the wrong assumptions. 

Validating the accuracy of your financial data will prevent confusion and any legal issues down the road.

Record the Information

Now that you have validated your financial data, the next step is to record the information. There are different ways you can record your financial information, you can use bookkeeping software or hire a bookkeeper to do it for you.

Create Reports

The whole essence of developing a system for storing information is to consolidate the information you are gathering and collecting. You are not just keeping records of your business finances for tax purposes, you are doing it to understand your business expenses and revenue. 

Create reports every month to grow your business over time and maintain long-term success. The advantage of having monthly reports is that it helps you track your business performance. A monthly report will help you identify what is working, what is not working, and opportunities you can utilize to improve your business.

4. Decide on a Bookkeeping Method

You have the option of either doing your books in-house or outsourcing them to a bookkeeping or accounting firm. While outsourcing saves you the headache of having to do your books yourself or hire employees for it, it is by no way cheap. 

As a small business, you may not find it comfortable to pay the fees charged by accounting or bookkeeping firms. Even if you can pay, it may eat up into your profit margins if you do not have the large market to handle it.

If you plan to go the in-house route (do your books yourself or have an employee do it for you), you need to make one crucial choice before you even start recording anything. The choice is simple. Which type of bookkeeping method are you using, the single-entry bookkeeping or the double-entry bookkeeping?

Single-Entry Bookkeeping

With this bookkeeping method, you only enter every transaction once. For example, if your clients pay for one of your products, you enter the sum paid in your asset column only. Likewise, if you pay for supplies from your supplier, you enter the sum paid in your liability column only. 

The single-entry bookkeeping method is the simpler of the two bookkeeping methods. It is best suited for very simple small businesses. By simple small businesses, it refers to businesses that do not have inventory or equipment to offer and not many cash transactions frequently. 

If your accounting or business model is far from simple, using the single-entry bookkeeping method is a recipe for disaster.

Double-Entry Bookkeeping

This bookkeeping method is popular among small and medium-sized businesses (SMB) and large enterprises. Most bookkeeping activities make use of the double-entry bookkeeping method. 

The single-entry bookkeeping method is too limited to carry out many of the complex financial activities that businesses carry out in their day-to-day operations.

You can compare the double-entry bookkeeping for finances to Newton’s Third Law of Motion for sciences. You may not know it as Newton’s Third Law of Motion, but somewhere you must have heard this sentence “for every action (in nature), there is an equal and opposite reaction.”  That simple sentence is what Newton’s Third Law of Motion states.

In double-entry accounting, when you record any transaction in one account, you must balance it by recording an equal and opposite entry in another account. 

The structure of the double-entry bookkeeping system consists of two entries, the debit (Dr) and a credit (Cr). Every transaction you want to record has to fall into two entries. 

Debits and credits are recorded as journal entries in the ledger. Usually, on the left side of the general ledger is the debit, while on the right side of the general left side of the general ledger is the credit. 

Debit to the layman means cash flowing out of the business while credit means the money you earn. It works just like the credits and debits you receive from your bank for transactions done? Not quite, that’s just a smaller part of the picture. 

A debit does not always mean the flow of cash out of the business, likewise, a credit does not only refer to money earned. The account type determines whether a transaction credits or debits that account.

Double-entry bookkeeping is harder to learn and do than single-entry bookkeeping. However, the difficulty should not make you abandon learning it. You cannot claim to know anything about bookkeeping without understanding the double-entry bookkeeping system.

With this system, your books are always balanced. You can use it to spot when your profits start dropping and take immediate actions or troubleshoot the problem to arrest the situation. 

All accounting software makes use of a double-entry bookkeeping system to record your business transactions. 

5. Decide on an Accounting Method

There are two accounting methods that businesses use, they are accrual accounting and cash-based accounting.

Cash Accounting Vs Accrual Accounting
Source: Enkel

Cash-basis Accounting

Cash-basis accounting is a simple method of accounting used by small businesses. This method records the business expenses when the cash has been received and not when the order has been created.

The disadvantage of cash-basis accounting is that your expenses and revenue aren’t matched monthly. Expenses that you incur in the current and past months are not recognized until you receive cash for them. Cash-basis accounting could be a problem if you are seeking finance from investors or banks.  

Accrual Accounting

Accrual accounting is a more complicated accounting method than cash-basis accounting. Large businesses use this method for their bookkeeping. This method records revenue when the customer commits to making a payment and not when it is paid yet.

Businesses use the accrual accounting method to get a clear picture of how much they are making and spending. It helps in analyzing cash flow and business adjustments. 

The downside of accrual accounting is that it makes it hard for businesses to know what cash is currently available to spend.

6. Record Every Financial Transaction

After you have set up your business accounts and picked a bookkeeping system, the next step is to record your financial transactions. You want to record what exactly is happening with your cash so you can have an overview of your financial records.

When using the double-entry accounting or bookkeeping system, ensure that you record debit and credit transactions in the appropriate accounts and you do not mix up the figures. A single error in data input will result in inaccurate data.

Luckily, the double-entry system ensures that businesses get their figures right. By recording transactions in two columns, the records must match for you to close the books. A mismatch in the debit and credit entry means that your account is inaccurate and you cannot close your books until you rectify it.

Recording transactions is easy if you can determine the amount that will go into the credit and debit entries. For example, let's assume you purchased a new inventory management software for your manufacturing business. You paid cash for the software, which costs $299.

This transaction will affect two accounts, the cash account, and the equipment account. You will increase your cash account by $299 and decrease your equipment account by $299. On the left side of the ledger, you will record a $299 debit for the cash account and a $299 credit for the equipment account on the right side of the ledger.

When recording journal entries, you do not put specific details about the biller, item, or vendor. Your preoccupation is tracking the debits and credits on each account.

7. Balance the Books

Balancing and closing the books is a crucial step in bookkeeping. The period to close a financial period varies from one business to another (often at the end of the year or the quarter). When you get to the stage of balancing the books, what you do is tally up your account’s debits and credits. 

The totals must match for you to close your book successfully. When your accounts debits and credits tally, it means your books are balanced. If it doesn’t, you have to balance the books by going through the ledger for any omissions or mistakes.

All this while you have simply been recording journal entries to your business accounts as debits and credits. At the end of the financial period, you will have to record these entries to the appropriate accounts in the general ledger and adjust the account balances as needed.

Here is an example of the above scenario. If in May, your cash account had $2,000 in debits (increases) and $10,000 in credit (decreases), you would have to adjust the cash account balance by a total of $8,000 (as a decrease).

Use this method for each account in your ledger to adjust the balances. When you are done with this exercise, you will have what is called the “adjusted trial balance.” When you add your account types, the adjusted balance should conform to the accounting equation.

The formula for calculating the accounting equation is Assets = Liabilities + Equity

The Basic Accounting Equation
Source: BooksTime

If the accounting equation does not prove true for your accounts, that is, the two sides do not match, there are errors in your calculations. You need to go back to the ledger and journal entries and check through them for errors.

When you find the errors, follow the same process used in the example above to adjust the balances for each account in your ledger. 

Post the corrected entries in the journal and ledger, and test them with the accounting equation until both sides are balanced. It is only after this is done that you can close the books and prepare the financial statements.

8. Prepare Financial Reports

The next step after balancing your books is to prepare financial reports. These financial reports or statements give you a closer look at what your closed books mean. They summarize the flow of money in and out of the business and provide a clear picture of your company's financial health. 

Businesses can use these financial reports to get clear visibility about their businesses’ performance and make decisions about their finances. 

Financial reports help you spot problems at the early phase. Investors, auditors, and other stakeholders also rely on these financial reports to get a picture of the company’s finances. 

You cannot do your bookkeeping right if you have not mastered the three common financial reports used in bookkeeping. They are the balance sheet, profit and loss (P&L) statement, and the cash flow statement.

Balance Sheet

The balance sheet is a financial document used by bookkeepers and accountants to summarize your business’s assets, liabilities, and equity at a given period. In the balance sheet, your total assets must be equal to the sum of all liabilities and equity accounts else the balance sheet is not balanced.

This financial statement reveals the current health of your business. It shows you how much value your business has by measuring what you owe against what you earn. Small business owners can use the balance sheet to determine how best to manage their assets, liabilities, and equity.

The Balance Sheet Formula
Source: Investopedia

Profit and Loss (P&L) Statement 

The profit and loss (P&L) financial statement is a document that breaks down the business costs, expenses, and revenues over a fixed period, usually every quarter. Another name for the profit and loss statement is the income statement.

Businesses use the profit and loss statement to compare their sales and expenses and use the information gotten to make forecasts. It shows you how profitable your business is performing, whether it is generating income, losing money, or staying stagnant.

If you want to figure out profit and loss, use this simple formula.

Revenue (-) Expenses = Profit or Loss 

Cash Flow Statement

The cash flow statement is similar to the profit and loss (P&L) statement. Unlike the P&L statement, the cash flow statement excludes any non-cash items such as depreciation. A business cannot operate effectively without cash flow. The cash flow statement is arguably the most important financial statement. 

Businesses use cash flow statements to pinpoint the areas where the business is earning and spending money. Cash flow statements also show the current ability of a business to pay its bills. 

Cash Flow Formula
Source: Educba

You can use bookkeeping software to prepare these financial reports (balance sheet, profit and loss statement, and cash flow statement) in real-time. 

Using bookkeeping software such as QuickBooks, Waves, FreshBooks, and Xero helps small business owners make quick financial decisions based on these three crucial financial reports. The software also automates the preparation of these financial reports, reducing the likelihood of errors associated with human efforts.

9. Stick to a Schedule

Your bookkeeping tasks will drain you if you do not follow a schedule. If you cannot record financial transactions as they come in, at least once a week, schedule time to record all your financial transactions. Some of the financial transactions you will likely record include an incoming invoice, sales, bill payments, and purchases.

Prioritize closing your books regularly to prevent a backlog of unfinished bookkeeping tasks from piling up. You can choose to close your books monthly, but if you can’t do that at least close it every quarter. 

When handling your bookkeeping tasks, approach them with a fresh and engaged mind. Usually, the time of the day when we are most productive is at the start of the day. It is the best time to do your bookkeeping tasks. 

If you elect to postpone it till the end of the day when you are closing the shop, there is a tendency for you to make mistakes and dread the tasks.

You should be at your best when you are doing your bookkeeping tasks, whether it is keeping financial records or analyzing them.

A massive advantage of doing your bookkeeping tasks early in the day is that it minimizes the risk of you postponing them. If you schedule it for the end of the day after doing your normal business activities and your energy levels are low, you can easily postpone it to the next day, and then the next. 

10. Store Financial Records Securely

Another small-business bookkeeping basic to know is to properly keep records in a safe and secure location, preferably on a secure cloud. Storing financial records securely makes the process easier, and ensures you stay compliant with the laws and regulations.

Before you start performing your bookkeeping task, have a clear plan for storing the financial records gathered securely. You want to avoid looking for important financial records, such as invoices or balance sheets.

11. Use Accountants and Bookkeepers

Accountants and bookkeepers are experts in handling bookkeeping and accounting tasks. Business owners benefit immensely from learning bookkeeping basics for small businesses 

Bookkeeping vs Accounting
Source: Synderapp

However, doing bookkeeping on a small or large scale can be challenging for small business owners unless they understand the accounting principles. You can always consider hiring a bookkeeper, use accounting software or even outsource your bookkeeping to an accounting firm.

12. Invest in Small Business Bookkeeping and Accounting Software

Small businesses have the old habit of running their bookkeeping by using manual processes such as storing receipts in drawers. In today’s world, these old bookkeeping habits won’t cut it. When you use these manual methods, you can easily make mistakes, spend lots of time and worse lose your records to fire outbreak, flood, and other factors.

There is a rich range of incredible accounting and bookkeeping software in the market. Investing in accounting and bookkeeping software will help you automate the bulk of your bookkeeping tasks, save you time, and improve the accuracy and speed of your bookkeeping.

Accounting or bookkeeping software helps businesses organize and manage their financial records so that they have access to them in real-time. It helps to protect your assets in the case of an audit or legal issues.

Filing and payment of taxes are easy when you use accounting and bookkeeping software. They act as payroll software and help you streamline the whole tax process, saving you money and time.

Choosing an accounting and bookkeeping software to invest in can be overwhelming at first because of the many options readily available in the market. Before selecting software to invest in, consider your business goals. Choose an accounting or bookkeeping software that can help you meet your business goals.

Ideally, you want to choose a flexible accounting and bookkeeping software that can offer you more functionalities as your business grows. Cost is another factor you should take into consideration. Your software should not command more than a quarter of your bookkeeping and accounting budget.

Some of the best small business accounting and bookkeeping software include Xero, Wave, Quickbooks, and Freshbooks.

13. Organize Your Banking

Organizing your banking is crucial for businesses to ensure they always stay on top of their finances. As a small business owner, there is that tendency to use your account for your business transactions. This practice is bad for bookkeeping and accounting.

You will easily run into financial problems this way. Bookkeeping is more difficult when you merge your business and personal funds into one account. There is that tendency to overspend on personal things, and take money out of your business. 

The best way to organize your banking is to keep two separate accounts, one for your funds and the other for your business funds. This distinction helps you file your taxes easier, know what is available in your business accounts at any time, minimize liabilities, and protect your assets in case of an audit or other legal issues.

 If your business is a Limited Liability Company (LLC), you need to have separate accounts because the company’s expenses go through your taxes. Having separate accounts makes your bookkeeping easier. It will save you time and money, make it easier to track your expenses, and avoid errors or costly mistakes.

Best Small Business Accounting Software

1. FreshBooks

Best Small Business Accounting Software for Service-based Businesses

FreshBooks is the Best Small Business Accounting Software for Service based Businesses

FreshBooks is one of the best accounting software for small and medium-sized businesses. It was founded in 2003 by 2ndSite Inc. There are over 24 million people worldwide from 160+ countries that have used FreshBooks. Self-employed individuals including freelancers use this software for its unlimited invoices, unlimited estimates, and affordable pricing.

The cloud-based accounting software has intuitive features that make it easy for you to create invoices, track time and receive payment. 

FreshBooks started as an invoicing software but quickly grew to become a full-blown bookkeeping and accounting software solution for start-ups, solopreneurs, small and medium-sized businesses. 

The software has gone through numerous updates throughout its history to offer more functionality to users. Recent updates added new functionalities like double-entry accounting, and redesigns of the chart of accounts, cost of goods sold (COGS), bank reconciliations, trial balance, balance sheet, and general ledger accounts.

With this software, small business owners get a more detailed analysis of their business performance. It automates all the company’s accounts and financial records and provides live reports when needed.

Tracking and managing inventory is one of the biggest problems that small business owners face. You do not have to use a separate inventory management software for this purpose, FreshBooks has an all-in-one inventory tracker you can use. 

FreshBooks is available as a mobile app for both Android and iOS devices, making it easily accessible for users. However, the app has limited features compared to the main site.

2. QuickBooks

Best Small Business Accounting Software for Small Businesses and Freelancers

QuickBooks is the Best Small Business Accounting Software for Small Businesses and Freelancers

QuickBooks is one of the top and popular names in the accounting software industry. The accounting software by Intuit offers several accounting software products for any business, be it a freelancer, small business, and medium-sized businesses.

With QuickBooks, businesses get payroll software, invoice generators, inventory management software, billing software, and other accounting solutions all in one platform. Considering its amazing and comprehensive features, it is the go-to accounting solution for small and medium-sized businesses.

The cloud-based accounting software has a free mobile app that users can download and use to access their accounts from any location. The only thing you need to use the QuickBooks mobile app is an internet connection. 

QuickBooks helps businesses track their cash flow, make bill payments, and generate receipts. You can file your taxes and keep track of your business financial status at any point in time from the accounting software.

With its Live Bookkeeping Service, QuickBooks helps businesses automate their bookkeeping tasks. It ensures that your records are accurate, up-to-date, and properly closed. You get a virtual bookkeeping expert to help you set up your books and perform other bookkeeping tasks such as bank reconciliations and mid-month checks. 

QuickBooks integrates with other applications such as PayPal, Square, Shopify, and other Shopify alternatives. Small business owners use it to track employee or client time. The software serves as a project management software by helping you manage your projects and providing clear visuals on your expenses, income, and reports.

3. Wave

Best Small Business Accounting Software for Emerging Businesses with Small Budgets

Wave is the Best Small Business Accounting Software for Emerging Businesses with Small Budgets

Wave is free accounting software that is perfect for small businesses with a small budget. Although its features are limited (which is the unwritten rule of free software), it still provides lots of amazing bookkeeping features such as invoice and expense tracking. Freelancers and small businesses on a budget will find this tool handy.

You can easily remove its feature limitation by subscribing to its lone monthly plan. One amazing feature of Wave is its unlimited credit card and bank account connections for users. It helps users track their expenses as well as their revenue.

The accounting software for small businesses has an intuitive interface and an easy learning curve. You can perform double-entry accounts on its dashboards. 

Wave integrates with numerous third-party applications such as Google Sheets and Etsy. You can integrate more than 1,500 applications on your Wave account through Zapier. 

The software has an advanced transaction tool that classifies all your transactions according to category, date, description, and amount. Through its checkmark tool, you can verify the accuracy or completeness of your transactions. 

Wave however lacks inventory management or dedicated time-tracking features. With its integrated payroll feature, the software automatically calculates your taxes for you. However, you have to do the filing and payment manually.

The software helps users create invoices to send to customers. You can adjust the time zones to match with that of your customers to ensure your invoices get sent and delivered on time. Wave has a mobile app that is available on both Android and iOS devices.

4. NetSuite

Best Cloud ERP Software Solution for Businesses

NetSuite is the Best Cloud ERP Software Solution for Businesses

NetSuite is more than just accounting software, it is an enterprise resource planning (ERP) software that offers financial management, bookkeeping and accounting, inventory management, project management, eCommerce, and CRM software tools. The software was established in 1999, and was bought by Oracle in 2016, hence the name Oracle Netsuite.  

Although it is popular or best suited for medium to large enterprises, small businesses that need more functionality than the average accounting software can provide can use it.

The software gives you a system of integrated applications which make it easier and faster to manage your business and automate their business process. 

NetSuite covers all the major bases of accounts payable and accounts receivable. It covers fixed asset management, cash management, expense tracking, tax compliance and management, payroll management, invoicing, fraud detection, recurring billing, and payment processing. 

The cloud-based ERP software allows users to create customizable workflows that fit your organization’s workflow needs. NetSuite offers plans that are scalable according to your growth rate.

NetSuite accounting tools have essential features such as global accounting, product data, pricing and discounts, revenue recognition, sales orders and returns, payroll management, and risk and compliance. The ERP software has small business packages which allow users to manage their business processes in a single system.

5. Kashoo

Best Small Business Accounting Software for Small Businesses, Contractors, and Freelancers

Kashoo is the Best Small Business Accounting Software for Small Businesses, Contractors, and Freelancers

Kashoo is beginner-friendly accounting software for small businesses that helps them automate their finances. Although there is no setup wizard for the launching of your account, Kashoo is easy to use. You only need your company information, customers’ and suppliers’ contact, your financial institution, and your product to use this service.

The accounting software provides amazing customer support for users. You can reach customer support via email, phone calls, and live chats. 

With Kashoo, you get an intuitive dashboard that acts as a working screen and provides real-time updates about your company’s incomes, expenses, and balances.

Kashoo provides a simplified accounting software solution for users with no accounting experience. The software is friendly to use and utilizes a simple and more personalized onboarding process for its users. 

You can link your bank accounts to Kashoo to enable you to directly import your banking transactions into the accounting software. The cloud-based accounting software integrates with payment processors such as Stripe and Square. You have the option of using Kashee's native payment processor at setup.

Kashoo offers a double-entry accounting system and uses a smart tool that automatically arranges your data into the right category. There are numerous controls set up to help prevent the risk of making duplicate entries or overwriting official bank data. 

The software helps track income and expenses, invoicing, and creates financial reports for your business.

6. Bonsai

Best Small Business Accounting Software for Freelancers and Self-Employed Businesses

Bonsai is the Best Small Business Accounting Software for Freelancers and Self Employed Businesses

Bonsai is one of the best accounting software that helps businesses and individuals manage their time and their finances better. 

The software streamlines invoicing and contracting processes, making it suitable for freelancers and self-employed businesses. Through automated invoices and the creation of legally binding contracts, freelancers do not have to worry about drafting contracts and invoices. You can get your important bookkeeping information on the platform.

Setting up an account with Bonsai is easy, all you need to do is to answer a short quiz about your business and the software will open an account for you. Bonsai also acts as a project management software by showing your progress on projects. 

With the mobile application, users can access their Bonsai account from any mobile phone. You get notifications when your customers view your proposal. You can also link the accounting software to your payment processors such as  Stripe or PayPal. 

Bonsai allows you to connect your bank account to the platform. The software will collect your financial information such as your credits and debits.

Accounting Tips for Small Business Owners

Accounting is a vital role in all business models. Small business owners usually make the mistake of viewing accounting as a low priority, because they are fascinated with their day-to-day operations. For your business’s financial success, accounting should never be an afterthought. 

Maintaining balanced books is a recipe for financial success. The right accounting insight helps you financially forecast months into the future, show you potential financial gaps, and helps you save your business from possible challenges.

For small business owners, accounting can be tedious and intimidating, especially when you do the accounting and bookkeeping yourself. 

Here are some of the best accounting tips to small business owners which you should utilize to avoid those common accounting mistakes that can affect your business negatively.

1. Pay Close Attention to Receivables

The favorite activity of every business is getting paid for their products and services. What else is more important? 

However, managing your receivable is not an easy and fun ride. When a business receives an order, it issues out an invoice and records it as a receivable in its books, which means that the customer that made the order owes you money. 

When the customer pays, apply the amount to their invoice and mark it as paid. However, when you receive a large volume of orders, this simple method of recording account receivables is not easy to accomplish. When customer deposits are large, small businesses leave it for later to reconcile their records due to lack of time.

Failing to pay attention to accounts receivables can prove detrimental especially during the tax season. At this point, you have a lot of customer deposits in your revenue account and receivables that do not tally. Now you have to spend hours updating your listing, and if not done well, you can easily overpay on your task returns and incur debts.

To avoid these mistakes, you have to track your transactions, especially accounts receivables, as they happen. Record your customers’ payments monthly and it will save you time and money.

2. Keep a Pulse on Your Cash Flow

Small business owners should know about the various numbers that provide insights into your business finances. While you are producing weekly and monthly financial reviews, you should also produce a cash flow statement.

The advantage of producing cash flow statements for your business is that it gives you a comprehensive understanding of the flow of cash in and out of your company. The function of the cash flow statement is to monitor the income direction.

Cash flow statements provide insights that help small business owners anticipate expenses and appropriately allocate income.

3. Log Expense Receipts

Small business owners have the habit of making the all-too-common and reckless mistake of not saving copies of their expense reports. Failure to save it appropriately can result in the loss of that information and lead to a range of accounting, tax, and cash flow issues.

Poor record-keeping has huge repercussions for the financial health of a business. In the first instance, you cannot get an accurate picture of your expenses. How can you expect to reduce your expenses? 

If you have seen a bank statement and cannot recognize an expense no matter how hard you try to think and look at your books, you are doing a poor job at tracking and recording your expenses.

The best way to solve this problem is to save every expense receipt your business makes immediately. It can feel overwhelming but compared to losing those records permanently, it is a better solution.

You can make logging your expense receipt easy and less of a hassle when you use these two methods. The first is to pay all your expenses with your credit card so that it can generate automatic receipts for you. Keep track of these expense receipts and ensure they are saved properly.

Another way is to use your phone to take a picture of your receipts immediately when you receive them! These little tricks help you keep your house in order so the filing of your taxes is easy and done on time.

Keeping proper expense reports is vital during tax time. If you have employees working with your small business, let them know how important it is to save receipts and itemize them. Create a centralized system through which they have to record all receipts and itemize all expenses.

4. Know the Difference Between Invoices and Receipts

Small business owners tend to make the mistake of mixing up invoices and receipts. The first reason for this is that they can hardly tell the difference between them. If you take receipts as invoices or vice versa, you will mess up your books.

An invoice is a bill you send to customers after you have rendered services to them. Picture the invoice as a detailed bill that contains everything your customer gets from your business that they haven’t paid for. It is a friendly reminder to your customers that they are owing your business money. 

A receipt on the other hand is the document that proves that a transaction happened. It is the document you give to customers after they complete a transaction with your business (after they have paid). 

You can see why mixing receipts and invoices is a nightmare. If you do not know the status of your business transactions with customers or suppliers (what is completed and what is in progress), you run the risk of running into difficulties when balancing your books.

5. Have Separate Accounts for Personal and Business Purposes

Many small business owners use their funds to run their businesses. There is absolutely nothing wrong with that approach, however, using your account to run your business can bring about lots of issues.

Some of these issues include overspending on your business budget and issues with differentiating what is your income and what is your business income at tax season. Some suppliers and customers will not work with you because you do not use a business bank account. 

Keeping personal and business accounts distinct is essential. It makes it easier for you, your bookkeeper, or your accountant to track your business expenses and incomes. Your business account should not be used for personal costs, but only for business-related costs. The same applies to your account.

6. Hire a Professional to Handle Your Taxes

Another common mistake small business owners make in an attempt to save money is that they handle their tasks themselves. Except you have accounting expertise, you will lose a lot of money from the tax knowledge that tax professionals put on the table. 

Tax professionals can help you take advantage of the various tax concessions to reduce your tax burden. Regularly, the IRS (Internal Revenue Service) adjusts tax requirements. 

Hiring a professional will keep your business tax compliant, and prevent you from missing out on deductions you qualify for, and overpaying or underpaying your tax bills. Underpaying your tax bills can lead to penalties. If you cannot afford a tax expert, you can always have an accountant on your team.

7. Maintain Clear Communication with Your Accountant

When working with bookkeepers or accountants to manage your books, you need to keep clear communication with them. They may use some accounting jargon to communicate with you. 

As a business owner, you have no business learning about the latest accounting terminology or crapping 100s of accounting terms in your head. Let your accountant or bookkeeper know you do not understand. It is better than wanting to be perceived as knowledgeable when you are not.

8. Chart Your Accounts

You need to use multiple accounts to properly record all your business transactions and get a clear picture of your business. Some of the top accounts you need to track include 

  • Account Receivable
  • Account Payable
  • Sales
  • Purchases
  • Payroll Expenses
  • Owners’ Equity
  • Sales (your revenue)
  • Purchases (supplies)
  • Payroll Expenses
  • Retained Earnings

You can further split these accounts into as many sub-accounts as you can manage.

Types of Bookkeeping Accounts
Source: Finance Pal

9. Look to the Future

Accounting and bookkeeping should not just be about the now, it should also help small businesses to anticipate future business’s financial trajectory. Compiling a monthly financial report is not very useful if you cannot use it to make informed decisions about the future. Some of these future outlooks include tax payments, projected income, and others.

Your financial reports should help you prepare your budget. Forecasting can help you effectively utilize your business assets and make more nuanced plans for company expansion.

10. Leverage Technology

Keeping accurate accounts is a tasking and complex process. As your small business expands, so do your accounting needs. With so many transactions you are now getting thanks to growth, keeping up with them can be overwhelming.

Use technology to automate many of your bookkeeping and accounting tasks so you have more time to carry out your day-to-day business operations. An accounting system makes it easier to record all your transactions. 

Ensure you keep copies of your receipts, invoices, and financial reports either physically or digitally (best kept digitally), so you can easily go back to verify in case of problems with closing your books or other discrepancies.

Small Business Bookkeeping FAQ

Why Is Small-Business Bookkeeping Important?

Bookkeeping is crucial for the short-term and long-term success of any business. By keeping accurate records of all the flow of money in and out of your business, you have a better understanding of your business finances. 

You also gain insights on how to manage your business assets, liabilities, and equity. Small businesses use this information to plan for their future.

Accurate bookkeeping helps protect your business in the event of a dispute with vendors, or when under audit by the government. Bookkeeping helps you pay the right amount for your taxes and prevents you from incurring tax penalties due to errors you can avoid.

Another importance of small business bookkeeping usually overlooked is that it can help you prevent and spot frauds from employees, vendors, and customers. It also saves small businesses time as it makes all their accounting processes (payroll taxes, invoice management, and others) more efficient and faster.

When Do I Need Extra Bookkeeping Help?

As a small business owner, you probably have the habit of doing the bulk of your business activities by yourself, with minimal help from your small number of employees. While you excel at entrepreneurial activities such as production and attracting customers, you suck at keeping records of your financial activities. 

Many small business owners want to avoid spending money as much as possible. However, for bookkeeping, it is beneficial for businesses to spend on it than not to. Bookkeeping mistakes are costly and can negatively impact your business success. 

If you have a problem calculating how much money you make or spend, then it is time to seek extra bookkeeping help. 

There are three main cost-effective bookkeeping solutions you can employ as a small business owner. They include investing in bookkeeping or accounting software, hiring an in-house accountant or bookkeeper, and outsourcing your bookkeeping to a third-party company.

Hiring in-house or outsourced bookkeepers is not cheap but they have you handle your bookkeeping tasks, saving you time and contributing to the financial success of your business. 

A cheaper solution is to use bookkeeping or accounting software. They automate all your bookkeeping tasks without requiring too much manual input from you. Some of the services they provide include reconciling bank transactions, generating financial statements, and adjusting account balances.

What Is the Best Small Business Bookkeeping Software?

There is numerous small business bookkeeping software that small businesses can use to handle their bookkeeping tasks. While they all perform bookkeeping tasks, they differ in terms of functionality, with some more fitted for one category of small businesses than for others.

The best small business bookkeeping software includes FreshBooks, QuickBooks, Wave, NetSuite, Kashoo, and Bonsai.

FreshBooks is the best small business accounting software for service-based businesses including the self-employed and freelancers.

QuickBooks is the best small business accounting software for businesses of all sizes because of its comprehensive accounting and bookkeeping solutions. 

Wave is the best small business accounting software with a free plan for emerging businesses with small budgets.

NetSuite is the best cloud ERP software solution for small businesses who want more functionality than what full-scale accounting software can offer. Bonsai is one of the best accounting software for freelancers.

How Much Time Do Small Business Owners Spend on Bookkeeping?

According to Score, 40% of small business owners spend 80+ hours per year on taxes, payroll, working with accountants, and other obligations. 18% of small business owners spend 41 to 80 hours every year on bookkeeping. 15% of small business owners spend 21 to 40 hours every year, and 28% spend less than 21 hours every year on bookkeeping.

According to the 2017 Small Business Taxation Survey conducted by the National Small Business Association, 17% of small business owners spend 1 to 10 hours every year dealing with federal taxes such as calculating payroll, self-employment, or any other business-related tax.

16% of small business owners spend 11 to 20 hours every year dealing with taxes, 18% of small business owners spend 21 to 40 hours every year dealing with taxes, and 16% of small business owners spend 41 to 80 hours every year dealing with taxes.

13% of small business owners spend 81 to 120 hours per year and 20% of small business owners spend 120+ hours per year sorting, filing, and paying their taxes.

What Does a Bookkeeper Do for a Small Business?

A bookkeeper helps small businesses keep their finances intact by tracking and recording their financial transactions and producing financial reports. They organize, collect, and store the business financial records. 

Bookkeepers make it possible for small businesses to set their budget, keep tabs on their inventory, and identify when you need to restock. They help businesses keep track of their accounts receivable and account payable.

Another responsibility that a bookkeeper does for a small business is to complete data entry, collect all transaction details, and track debits and credits for each account. Bookkeepers use bookkeeping and accounting software, and other tools to handle their financial transactions. 

The bookkeeper generates financial reports such as cash flow statements, balance sheets, and income statements, and reconciles or reports any discrepancies. He or she also produces invoices, handles payroll, and files tax returns on behalf of the small business.

Do I Need a Bookkeeper If I Use QuickBooks?

Yes, you still need a bookkeeper if you use QuickBooks or any QuickBooks alternatives. QuickBooks is one of the leading accounting software in the industry and performs many of the bookkeeping roles that a small business needs. 

They include tracking invoices and payments, paying and tracking business bills, tracking employee time, creating sophisticated financial reports, filing of taxes, and others.

Although QuickBooks helps in storing and analyzing your financial data, you still need the services of a bookkeeper to provide financial advice and keep you compliant with the latest tax legislation. 

Hiring a bookkeeper will prevent you from making mistakes. If you want to get the best out of your small business finances, you should combine bookkeeping software such as QuickBooks with the services of a bookkeeper.

Getting Started with Proper Bookkeeping Processes

Every small business owner needs to be knowledgeable about the bookkeeping processes, particularly when they are handling the processes themselves. 

You have to understand business accounts and how to set them up, decide on the bookkeeping method you want to adopt, record every financial transaction, balance the books, prepare financial reports, stick to a schedule, and use accountants and bookkeepers.

Small businesses can use accounting and bookkeeping software such as FreshBooks, QuickBooks, Wave, NetSuite, Kashoo, and Bonsai to process their books. You can also hire a bookkeeping or accounting expert to handle your bookkeeping tasks.

Whether you are handling the bookkeeping yourself, using accounting or bookkeeping software, or hiring a professional accountant or bookkeeper, you still need to understand the basics of small business bookkeeping. It will help you interpret your financial records better, gain more insights into your business prospect, and protect you from making costly errors.