You cannot run a healthy, growing business without keeping your books in order. It’s like to driving a car without an energy hand or a map sooner or later, you’ll get lost or run out of petrol.
In this companion, we’ll go over the fundamentals of secretarying, including what it is, why it’s important, and how to get started.
Why is bookkeeping matter?
Secretary is the process of keeping track of all of your company’s financial transactions, typically by entering them into accounting software or a physical set of “books.” It shows you exactly where your company is spending plutocrat, where your profit is coming from, and which duty deductions you’ll be able to claim.
Let’s start with our five favorite reasons.
1. You’ll need it to do your taxes
To handle your taxes, you must first determine your net profit, which requires an understanding of your overall revenue and expenses. The only way to know for certain is to have correct, up-to-date books.
2. It explains where your money is going
Getting your books together and creating financial statements is the only method to assess the financial health of your small business.
Are sales up? Are your shipping expenses excessively high? Will you have enough cash next month to cover payroll? Is the cash flow increasing or decreasing? The only way to know for certain is to begin bookkeeping.
3. It prevents you from missing out on tax deductions
Keeping precise, up-to-date books is the most effective approach to keep track of tax deductions.
The more information (and supporting documentation) you can provide to your CPA at tax time, the more deductions you can properly claim, and the larger your tax return will be.
The IRS also has quite strict recordkeeping requirements for any deductions you claim, so keeping your books in order can alleviate a significant amount of stress if you are ever audited.
4. You’ll need it to borrow money
If you need to borrow money from someone other than friends and family, you must have your books organized. This allows you to create financial statements, which are sometimes required to obtain a business loan, a bank line of credit, or a seed investment.
Before lending or investing money, lenders and investors want to know how your business is doing financially. They can’t do it without looking at revenue, cash flow, assets, and liabilities, all of which will be seen on your balance sheet, income statement, and statement of cash flows.
5. It allows you to catch faults immediately
If you wait until the end of the year to reconcile or organize your financial transactions, you won’t know if you or your bank made a mistake until you’re buried in paperwork come tax season. Regularly organizing and updating your books can help you notice an erroneous overdraft cost immediately, rather than six months later, when it’s too late to appeal.
The first 7 steps of the bookkeeping procedure
We make things sound easier than it is. When you’re bogged down in the details of reconciling your transactions, “seven easy steps” won’t seem so simple.
But, for the sake of demonstrating the fundamentals of bookkeeping, here are the first seven actions you’ll need to take to get your bookkeeping machine running.
Step 1: Separate your commercial and personal costs
The first step in mastering your business finances is rather straightforward: open a corporate bank account and segregate your business and personal costs.
Why? Liability is one major reason. If you own a corporation or an LLC and there isn’t enough separation between your personal and corporate funds, you may be held personally accountable for any debts made by your company.
Mixing personal and commercial expenses in the same account might also cause additional stress when you comes to filing taxes or doing bookkeeping. It’s possible that a company spend gets misplaced in your personal account, causing you to miss out on a crucial deduction. It’s also possible that your CPA spends more time on your taxes. Either way,
Step 2: Select a bookkeeping system
There are two primary bookkeeping methods: single-entry and double-entry bookkeeping.
Single-entry journal entries are recorded only once, as a cost or revenue. Assets and liabilities (including inventory, equipment, and loans) are tracked separately. If you’re just getting started, doing your own books, and are still in the hobby stage, single-entry is definitely the best option for you. It’s simple, fast, and suitable for very basic bookkeeping.
Double-entry is more sophisticated, but also more solid, and better suited to established businesses that have progressed beyond the hobby stage.
Under double-entry bookkeeping, all transactions are recorded in a journal before being entered twice into the general ledger, as a debit and a credit.
Most accounting software nowadays is based on double-entry accounting, and if you ever hire a bookkeeper or accountant to assist you with your finances, they will utilize double-entry.
Step 3: Select an accounting technique. Cash or Accrual
When setting up your bookkeeping, you must also decide whether your accounting method will be cash or accrual based.
Cash accounting records transactions only after money has exchanged hands. If you bill a customer today, the money does not enter your ledger until it reaches your bank account.
Many small firms choose the cash foundation of accounting because it is simple to manage, eliminates the need to track receivables and payables, and shows you exactly how much cash you have on hand at any given time.
The accrual accounting system records income when you bill your clients in the form of accounts receivable (even if they do not pay you for a few months). The same is true for expenses, which you record when you are billed in the form of accounts payable.
In general, accrual accounting benefits larger, more established organizations. It provides a more realistic picture of your company’s profits and expenses over time, as well as a long-term perspective that cash accounting cannot provide.
Step 4: Select the correct tools
When you input a transaction into your books, you must categorize it. This allows your bookkeeper to catch more deductions and will make life easier if you are audited.
Six months later, an unsigned lunch receipt from a restaurant may not signify much to you. Was it a client luncheon? Did you reward your employees following a great quarter?
Your business and industry will determine how you categorize transactions. Your transactions are often classified into five sorts of accounts: assets, liabilities, equity, revenue, and expenses. Individual line items are then divided into subcategories called accounts. In our ice cream business example, some accounts in your ledger could be “revenue-ice cream sales”, “expenses-ice cream ingredients”, and so on.
Nowadays, you have three options for bookkeeping tools.
You might use one of dozens of popular cloud accounting solutions, such as QuickBooks, Xero, or Wave. When used correctly, these instruments can be extremely effective. However, if you lack bookkeeping skills (or do not have the time to learn), they may cause more worry than benefit. Especially if your accountant informs you that you’ve been using them incorrectly for the past year.
You could also complete everything using a spreadsheet, such as our free Excel Income Statement Template.
Consider employing a pall-grounded secretary service, such as Bench, if you prefer a different approach to your secretarial needs.
We’ll do your bookkeeping, generate monthly financial statements, provide expense reports with actionable financial insights, and file your taxes for you when the time comes. This is a one-stop shop.
Step 5: Ensure your transactions are categorized.
Every transaction must be categorized and recorded in your books. This allows your bookkeeper to catch more deductions and will make life easier if you are audited.
Remember that an unsigned receipt for lunch at a restaurant may mean little to you six months later. Was it a client luncheon? Did you reward your employees following a great quarter? Properly classifying and reporting your transactions can spare you from having to do all of this extra investigative work later.
If you plan on conducting your own bookkeeping, it’s a good idea to consult with a professional before setting up your system to ensure that the accounts you create meet industry standards and CPA requirements.
Step 6: Select a system to store your documents
At tax time, you must prove the authenticity of all of your costs, therefore keeping supporting documentation for your financial data, such as receipts and records, is critical.
Diamonds may last forever, but the ink on your expenditure invoices does not. Since the IRS accepts digital records, it’s a good idea to utilize a cloud-based system like Dropbox, Evernote, or Google Drive to avoid dealing with smeared receipts. You may also use apps like Shoeboxed, which are designed expressly for receipt tracking.
If Bench handles your bookkeeping, you may upload and save as many digital receipts and documents as you want on the Bench app.
Step 7: Organize your deductions
The IRS’ golden rule for deductions is that they must be both conventional (a typical expense in your industry) and required to your firm. Pens, for example, are a common expense for writers, but a $900 pen may not be considered “necessary.”
However, even if a cost is routine and essential, you may not be allowed to deduct the entire amount on your taxes. Just because you conduct the most of your work at your dining room table does not imply you may deduct the entire monthly rent. Fortunately, the IRS has created a detailed guide on company deductions that you can review if you are ever unsure about a deduction.
Step 8: Make bookkeeping a habit
As a busy small business owner, it’s easy to ignore bookkeeping. One method to avoid this is to make it a habit.
Set aside and schedule a ‘bookkeeping day’ once a month to keep track of your finances. Use that day to input any missing transactions, reconcile bank statements, check your previous month’s financial accounts, and make any significant modifications to your accounting or bookkeeping procedures.
If you’re months or years behind, consider hiring a bookkeeper to help you catch up.
DIY vs. professional bookkeeping
The majority of small firms will either perform their own bookkeeping or hire a professional. Here’s how to decide which strategy is best for you.
The DIY approach
If your business is a side project with a low budget, you may most likely get away with doing it yourself. You might still want to talk with a CPA or bookkeeper at the start to ensure you’re doing everything correctly. However, most hobbyist enterprises can get by with a simple spreadsheet (such as our free Income Statement Template) or one of the various accounting or bookkeeping software solutions available.
Outsourcing to a professional
If bookkeeping keeps being pushed aside as your business grows and you simply don’t have the time to get your books in order every month, you may consider hiring a professional to assist you.
