Bookkeeping for Small Businesses: A Practical Guide

Bookkeeping is the habit of recording every dollar that moves through your business, putting it in the right category, and checking it against your bank and card statements. Done monthly, it gives you reports you can run the business on and a tax return that takes days instead of weeks. Done once a year, it is a scramble that usually misses deductions.

This guide covers what small business bookkeeping involves, the setup that makes it easy, and the monthly routine that keeps it current.

What bookkeeping actually includes

• Recording transactions. Sales, expenses, payroll, loan payments, owner draws and transfers.
• Categorizing them. Each transaction goes to an account in your chart of accounts: advertising, rent, cost of goods sold, and so on.
• Reconciling accounts. Your books are compared with each bank, card and loan statement so nothing is missing or doubled.
• Tracking who owes whom. Unpaid customer invoices (receivables) and unpaid bills (payables), if you work that way.
• Producing reports. A Profit & Loss statement and a Balance Sheet each month.

Set up the foundation first

Separate accounts. Open a business checking account and use a business card. Mixing personal and business spending is the single biggest source of messy books, and for an LLC or corporation it weakens the separation between you and the company.

Pick accounting software. QuickBooks Online and Xero are the most common for small businesses. A spreadsheet can work at very low volume, but it doesn't reconcile itself or connect to your bank.

Build a sensible chart of accounts. Match it to the lines of your tax return so year-end is a handoff. Too few accounts and your reports say nothing; too many and nobody uses them consistently. Our QuickBooks setup service starts here.

Decide cash or accrual. Most small businesses keep books on the cash basis. If you carry inventory, extend credit or need lender-grade statements, accrual may be the better fit. See cash vs. accrual.

The monthly routine

1. Download or confirm every bank and card statement for the month.
2. Categorize every transaction; leave nothing in Uncategorized.
3. Reconcile each account to its statement.
4. Record entries the bank feed misses: payroll, loan interest, depreciation if you track it.
5. Review the P&L and Balance Sheet and question anything unusual.
6. Lock the month.

Our free monthly bookkeeping checklist turns this into a printable list.

Keep the records behind the numbers

The IRS expects you to keep records that support the income, deductions and credits on your return: receipts, invoices, bank statements, payroll records and documents for assets you buy. A photo of each receipt attached to the transaction in your software is enough for most expenses. How long to keep records depends on the record and your situation; many businesses keep core records at least seven years to be safe.

When to get help

If the monthly routine takes more than a few hours, if you are months behind, or if you don't trust what your reports say, it's time to hand it off. Monthly bookkeeping starts at $290 a month, and a cleanup or catch-up project gets you current first.