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How to Set Up a Bookkeeping System for a Small Business

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Setting up a bookkeeping system for your small business is essential to complying with IRS regulations. You need to maintain essential financial records to accurately monitor your gross receipts, expenses, purchases, and other transactions.

The type of record-keeping system you choose is entirely up to you. However, it’s crucial to design a well-organized system that can efficiently manage your financial data, generate reports, and adapt to the growth of your business.

select cash or accrual accounting

Small businesses with yearly revenues of less than $5 million can use either cash or accrual accounting to keep track of their money inflow and outflow.

  • Cash Accounting records revenue when the business receives money and expenses when the business pays for them. This is similar to how individuals balance their checkbooks.
  • Accrual Accounting records revenue when it is earned, even if the customer still needs to pay the business. Similarly, expenses are recorded when incurred, even if the payment has not been made yet.

New businesses use accrual accounting for two reasons.

Firstly, it records transactions at the earliest possible time, enabling businesses to track accounts payable and receivable. This provides a more realistic picture of the business’s profitability.

Secondly, once a business reaches $5 million in yearly revenue, it is required to use accrual accounting. If the business uses cash accounting at that point, it will have to switch to accrual accounting, which can be a significant inconvenience.

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set up a bank account for your business.

Separate bank accounts for their operations. All business transactions should be made through this account, not your bank accounts. It’s also essential to avoid making personal transactions using your business bank account. Mixing business and personal accounts can lead to issues, as we have previously discussed.

Having a dedicated business bank account can help solve many problems:

  • Firstly, every transaction made through this account will be business-related.
  • Secondly, you can easily import transaction information from your business bank account into your bookkeeping software. Separating your business and personal accounts can save you time by eliminating the need to separate business and non-business expenses.
  • Thirdly, keeping your business funds separate from your personal funds shows that you are committed to maintaining your financial records professionally, which is vital to the IRS and other authorities.

choose a bookkeeping software package for small businesses

Although it is technically possible for a business to manage its books using Excel or even pen and paper, it is not practical. Manually inputting transactions every day is time-consuming and error-prone.

Therefore, using bookkeeping software is a must for all businesses. Even a basic bookkeeping software solution can be affordable and can save you a lot of time and energy.

When selecting a bookkeeping software package, consider factors such as the features you need, your budget, and the software’s scalability. At Countick, we use QuickBooks Online, which is one of the best bookkeeping software platforms available, albeit slightly higher in price than its competitors.

related: how to choose the right bookkeeping software for your business

make a chart of accounts

The chart of accounts is a crucial list of accounts that you create in your bookkeeping system to keep track of all financial activities. This chart acts as the backbone of your entire bookkeeping system.

While most bookkeeping software packages come with a basic chart of accounts based on your entity type, you may need to adjust it to match your business’s specific requirements. Each account should have a name, a type (such as an asset, liability, or expense), a description, and a number.

set up a way to keep track of our expenses.

Keeping accurate records of your business expenses is crucial. Transaction receipts can be in paper or electronic form. It’s best to organize paper receipts by date, alphabetical order, or some other system. Electronic receipts can be stored on your computer or an online storage system like Expensify. To simplify your expense tracking, you can take photos of paper receipts using your smartphone and store them with your electronic receipts.

QuickBooks also has a feature for this. This eliminates the need to keep paper receipts. Choose an expense tracking system that allows you to record receipts as soon as you get them.

Delaying the entry of receipts can make it hard to categorize transactions correctly later on or during an audit. For setting up a low-lift expense tracking system, Countick has some good advice.

get ready for your bank reconciliation process

Automatically importing your transactions from your bank is a fantastic way to save time. However, it doesn’t completely eliminate the need for bank reconciliation.

This process involves comparing your monthly bank statement with your business’s Cash account in the chart of accounts to ensure that both are correct.

Here’s a typical reconciliation process:

  • Please ensure that all outstanding items, such as uncashed checks, are added to the bank statement before writing down the new total at the bottom.
  • It’s important to review the statement’s transactions for any errors. If any errors are found, please get in touch with the bank immediately.
  • To accurately reflect bank-generated transactions like service charges and interest payments, make sure to adjust the Cash account in your bookkeeping software.
  • Ideally, the corrected balances of both the bank statement and the Cash account should match. However, if they don’t match, you should investigate both the bookkeeping account transactions and the bank statement to identify the cause of the discrepancy.

If you notice a discrepancy between your bank statement total and Cash account balance, it can be challenging to pinpoint the problem. However, regularly reconciling your accounts can narrow the search to past month’s transactions.

If you have not been keeping up with reconciling, it may be necessary to seek assistance from an accountant to locate the problem(s).

related: how to automate the bank reconciliation for your business

set up your financial reporting system

Analyzing reports can help you evaluate your business’s financial well-being as a whole. Even though bookkeeping systems offer numerous reporting choices, not all may be relevant to your business. However, there are three fundamental reports that you should regularly generate and examine.

balance sheet

As a business owner, keeping track of your company’s financial status is important. The balance sheet is a document that provides a snapshot of what your business owns and owes at a specific point in time.

It lists all of your business’s assets, liabilities, and equity. By analyzing the balance sheet, you can determine your company’s net worth and compare your assets to your liabilities. This will help you calculate your business’s solvency and liquidity ratios, which are helpful in evaluating your financial health.

income statement

The income statement, also known as the profit and loss (P&L) statement, shows how profitable your business was during a particular time frame. It compares the revenues earned from selling your products or services to the expenses incurred by your business.

If your business generated more revenues than expenses, it was profitable.

On the other hand, it incurred a loss if it had more expenses than revenues. By examining your income statement, you can identify which of your activities are most and least profitable. This can help you determine which areas to expand and which products or services to restructure or eliminate.

cash flow statement

The cash flow statement provides details on the actual cash that your company received over a specific period of time. This differs from the income statement, which typically uses accrual accounting, meaning that listed revenues may not yet have been paid. It is possible for your business to have significant income but still face cash shortages that prevent you from paying your bills.

By examining your cash flow statement, you can identify whether you had a positive or negative cash flow during a particular period. You can also compare this statement to your income statement for the same time frame. If you find that your cash inflows are consistently lower than your income, it’s crucial to identify the root cause of your difficulties in collecting payments.

getting help with bookkeeping

If you’re not an experienced bookkeeper, setting up a reliable small-business bookkeeping system can be a complex task requiring a lot of time and effort.

Fortunately, Countick can help you out. We can set up your bookkeeping system for you to ensure that your business gets off to a great start, and we’ll also save you a lot of stress.

Consider giving us a try if you need assistance in organizing your bookkeeping system. Alternatively, you can also check out Countick.

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