Bookkeeping Basics for Small Business Owners

Summary

This video serves as a comprehensive guide for small business owners looking to manage their own bookkeeping. It outlines the importance of bookkeeping for tax deductions, securing loans, and financial oversight. The script covers the seven essential steps, including separating business and personal finances, choosing between single and double entry accounting, and selecting an accounting method. It also advises on using bookkeeping systems, categorizing transactions, organizing documents, and making bookkeeping a regular habit. The video offers a free income statement template and discusses the pros and cons of self-bookkeeping versus hiring a professional service.

Takeaways

• 📚 Bookkeeping is the process of tracking all financial transactions of a company to understand spending, revenue, and potential tax deductions.
• 💰 Keeping accurate records helps in identifying tax deductions and ensuring that no expenses fall through the cracks during tax time.
• 🏦 Bookkeeping is crucial for securing business loans as banks require detailed financial statements to assess the financial health of a business.
• 🔍 Regular bookkeeping allows for the detection of financial errors, such as bank mistakes or duplicate payments, which can be costly if unnoticed.
• 💼 A clear picture of financial transactions helps in budgeting, understanding cash flow, and tracking business growth over time.
• 🤔 It's important to separate business and personal expenses to maintain clarity in financial records, especially for legal and tax purposes.
• 📝 The choice between single-entry and double-entry accounting depends on the complexity of the business, with double-entry offering more robust financial tracking.
• 📈 Selecting between cash and accrual accounting methods impacts when revenue is recognized; cash for simplicity, accrual for more complex operations.
• 🛠 Choosing a bookkeeping system, whether manual or software-based, should align with the business's needs and capabilities.
• 🗂 Categorizing transactions is essential for understanding spending patterns and identifying tax-deductible expenses.
• 📁 Organizing and storing financial documents digitally is recommended for easy access and compliance with IRS requirements.
• 🔑 Developing a consistent bookkeeping habit is key to maintaining financial health and reducing stress during tax season.

Q & A

What is the main purpose of bookkeeping for a small business?

The main purpose of bookkeeping is to track all of a company's financial transactions, providing insights into where the business is spending money, where revenue is coming from, and which tax deductions can be claimed.

Why is bookkeeping important for catching tax deductions?

Bookkeeping is important for catching tax deductions because it involves recording and categorizing every transaction, which helps identify tax-deductible expenses and ensures that no deductions are missed.

How can bookkeeping assist in obtaining a business loan?

Bookkeeping assists in obtaining a business loan by providing financial statements that show expenses and revenue, also known as an income statement, which banks require to assess the financial health of the business.

What role does bookkeeping play in identifying financial mistakes?

Bookkeeping helps in identifying financial mistakes by closely monitoring transactions, allowing the business owner to catch bank errors, invoicing mistakes, and unexpected subscription fees.

How does bookkeeping help in understanding the financial health of a business?

Bookkeeping helps in understanding the financial health of a business by providing a clear picture of where money is going, enabling better budgeting, cash flow management, and tracking business growth over time.

What is the first step in doing your own bookkeeping according to the script?

The first step in doing your own bookkeeping is separating your business and personal expenses to ensure clarity for tax purposes and to avoid legal complications, especially for C corporations.

What is the difference between single entry and double entry accounting?

Single entry accounting involves recording transactions once as they happen, while double entry accounting tracks both the source and destination of funds, recording every transaction twice as debits and credits to maintain balance.

Why might a small business choose the cash basis over the accrual basis for accounting?

A small business might choose the cash basis for accounting because it is simpler and only recognizes revenue when it is received, which is suitable for businesses just starting out or with straightforward transactions.

What are the options for a bookkeeping system as mentioned in the script?

The options for a bookkeeping system include doing it manually using tools like Excel or paper, or using accounting software such as QuickBooks, Xero, or Wave, which may require a monthly fee.

Why is categorizing transactions important in bookkeeping?

Categorizing transactions is important because it helps in understanding spending patterns and identifying tax deductions, as not all transactions are equally tax deductible.

What are the two important rules for record-keeping mentioned in the script?

The two important rules for record-keeping are: 1) If the expense is over $75, a record should be kept to prove the expense, and 2) Every receipt and financial record should be kept for three years.

Why is making bookkeeping a habit beneficial for a business?

Making bookkeeping a habit is beneficial because it provides consistent financial insights into the business, saving time and reducing stress during tax season, and ensuring that all transactions are accurately recorded.

What are the pros and cons of doing your own bookkeeping versus hiring a professional?

Doing your own bookkeeping is free and gives you direct control over financial records, but it can be complicated, time-consuming, and may distract from running the business. Hiring a professional saves time, ensures accuracy, and simplifies tax preparation, but comes at a cost.

Outlines

00:00

📚 Bookkeeping 101 for Small Business Owners

This paragraph introduces the importance of bookkeeping for small business owners who wish to manage their finances independently. It outlines that bookkeeping involves tracking all financial transactions to understand spending, revenue, and potential tax deductions. The paragraph emphasizes the significance of bookkeeping in capturing tax deductions, securing business loans, detecting financial errors, and providing clarity on cash flow and business growth. It also mentions a guide titled 'Bookkeeping Basics for Entrepreneurs' available for further reading.

05:03

🛠 Steps to Effective Bookkeeping for Your Business

The second paragraph delves into the practical steps for conducting bookkeeping. It advises on separating business and personal finances, choosing between single-entry and double-entry accounting methods, and selecting between cash and accrual accounting based on the business's complexity and needs. The paragraph also discusses the decision between manual bookkeeping using tools like Excel or opting for accounting software like QuickBooks or Xero. It covers the necessity of categorizing transactions for tax deduction purposes and the importance of organizing and storing financial documents digitally. Lastly, it stresses the habit of regular bookkeeping to simplify tax season and offers a free income statement template for those venturing into self-bookkeeping.

Keywords

💡Bookkeeping

Bookkeeping is the process of recording and tracking all financial transactions of a business. In the video, it is the central theme, emphasizing its importance for small business owners to manage their finances effectively. The script explains that bookkeeping helps in identifying where the business is spending money, where revenue is coming from, and which tax deductions can be claimed.

💡Tax Deductions

Tax deductions refer to expenses that can be subtracted from a business's taxable income, reducing the amount of tax owed. The script highlights the importance of bookkeeping in capturing tax deductions by recording and categorizing every transaction, ensuring that no deductible expenses are overlooked.

💡Business Loan

A business loan is a type of loan specifically designed for business purposes. The script mentions that having proper bookkeeping in place can facilitate the application process for a business loan, as banks require financial statements to assess the business's financial health.

💡Financial Statements

Financial statements are formal records of a business's financial activities, including income statements, balance sheets, and cash flow statements. In the context of the video, bookkeeping enables the creation of an income statement, which is essential for loan applications and understanding the business's financial performance.

💡Errors

Errors in the context of bookkeeping refer to mistakes in financial transactions or record-keeping, such as bank errors or invoicing mistakes. The video emphasizes the role of bookkeeping in identifying and correcting these errors to maintain accurate financial records.

💡Cash Flow

Cash flow represents the movement of money into and out of a business. The script explains that bookkeeping helps business owners understand their cash flow, distinguishing between expenses, payments to loans or credit cards, and tracking business growth over time.

💡Single Entry Accounting

Single entry accounting is a simplified method of recording financial transactions where each transaction is recorded once. The video script describes it as less robust but suitable for simple sole proprietorships without inventory or employees.

💡Double Entry Accounting

Double entry accounting is a system where every financial transaction is recorded twice, once as a debit and once as a credit, ensuring that the books are balanced. The script illustrates this concept by giving an example of purchasing a laptop, where the cash account is debited and the assets account is credited.

💡Cash Basis

The cash basis of accounting recognizes revenue when it is received and expenses when they are paid. The script suggests that small businesses or those just starting out can use the cash method, as it is simpler than the accrual method.

💡Accrual Basis

The accrual basis of accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when payment is made or received. The video mentions that more complex businesses, such as those with significant revenue or assets, should use the accrual method.

💡Accounting Software

Accounting software refers to programs designed to assist in bookkeeping and financial management. The script discusses options like QuickBooks and Xero, which can produce financial reports and help in managing bookkeeping more efficiently, though they may require a monthly fee and professional assistance to use effectively.

💡Receipts

Receipts are written proof of a transaction, essential for record-keeping and tax purposes. The video script advises keeping receipts for all expenses, especially those over $75, and for a period of three years, recommending digital storage for convenience and compliance with IRS regulations.

💡Bookkeeping Habit

A bookkeeping habit refers to the regular and consistent practice of managing and recording financial transactions. The script encourages developing this habit to gain financial insights into the business and to simplify the tax season process, suggesting setting aside a recurring time for bookkeeping.

Highlights

Bookkeeping is essential for small business owners to track financial transactions and manage tax deductions.

Bookkeeping helps catch tax deductions by recording and categorizing every transaction.

Maintaining year-round bookkeeping prevents forgetting one-off deductions.

Bookkeeping is crucial for obtaining business loans as banks require financial statements.

Regular bookkeeping helps catch financial mistakes such as bank errors and invoicing discrepancies.

Bookkeeping provides clarity on business expenses and aids in better budgeting and cash flow management.

Bookkeeping insights help plan for the future by understanding business growth and seasonal trends.

Separating business and personal expenses is the first step in bookkeeping to maintain clarity for tax purposes.

Choosing between single entry and double entry accounting depends on the complexity of the business.

Double entry accounting involves recording transactions with debits and credits for balance.

Single entry accounting is suitable for simple sole proprietorships without inventory or employees.

Deciding between cash and accrual accounting methods depends on business revenue and asset management.

Choosing a bookkeeping system involves manual methods like Excel or using specialized accounting software.

Categorizing transactions is vital for understanding spending and identifying tax deductions.

Proper documentation and storage of financial records are necessary for compliance and potential audits.

Digital storage of receipts and financial documents is recommended for ease and accessibility.

Making bookkeeping a habit ensures consistent financial insights and reduces stress during tax season.

The decision to do bookkeeping in-house or hire a professional service depends on time, complexity, and expertise.

Bench offers a free income statement template and bookkeeping services for small businesses.

Transcripts

if you're a small business owner and you want to do your own bookkeeping but

don't know how this video is for you consider this your bookkeeping 101 crash

course here at bench we've done the books for thousands of small businesses

bookkeeping may not be the most exciting thing ever

but we've got it down to the science in this video we'll teach you what

bookkeeping is why bookkeeping really matters and the seven steps to doing

your own bookkeeping bookkeeping is defined as the process of tracking all

of your company's financial transactions so you can see exactly where your

business is spending money where your revenue is coming from and which tax

deductions you'll be able to claim that's a lot of words but why does

bookkeeping matter for your small business number one bookkeeping

matters because it helps you catch more tax deductions when you record and

categorize every transaction in your business you'll be able to see which

expenses are tax deductible so that nothing falls through the cracks without

year-round bookkeeping you'll forget about one-off deductions like lunch with

a client eight months ago that you could have deducted even with the best of

intentions deductions will always all through the cracks at tax time unless

you have bookkeeping in place number two bookkeeping matters because it can help

you get a business loan if you're applying for a small business loan banks

are going to need to see financial statements and I don't just mean the

type that you can download from your online banking you're going to need to

have something that shows your expenses and revenue otherwise known as an income

statement this is something you're going to be able to get through bookkeeping

number three bookkeeping matters because it can help you catch financial mistakes

when your bookkeeping you're keeping a close eye on the transactions in your

business which means you'll be able to catch things like Bank errors invoicing

mistakes like paying somebody twice and sneaky subscription fees for services

that you forgot to cancel number four bookkeeping matters because it gives you

a clear picture of where your money is going when you have bookkeeping in place

you'll be able to keep track of your expenses so you can budget better you'll

also be able to understand your cash flow so you can see what's an expense

versus a payment to a loan or a credit card you'll also be able to track how

your businesses grow and improving over time and what months

are busy and slow this will help you plan for the future don't worry about

taking notes everything we're about to say is in our guide bookkeeping basics

for entrepreneurs you'll find the link in the description below now the first

step to doing your own bookkeeping is separating your business and personal

expenses you'll want to make sure that your business and personal transactions

are not intertwined so it's clear to the IRS what your business is earning

spending and then what your bottom line net profit is this is especially

important for C corporations to have separate bank accounts for business and

personal finances see Corpse open themselves up to legal problems when

their finances aren't separate from personal transactions the second step is

to choose between single entry or double entry accounting double entry is a

system of accounting that tracks where your money comes from and where it's

going to essentially you record every transaction twice taking assets from

somewhere called a credit and putting it somewhere else called a debit your

debits and credits should always equal each other that's how you know that your

books are balanced for example say you buy a new laptop for your business and

it costs $1000 you'd subtract $1000 in cash from your credit account and add

$1,000 in assets to your debit account you may have lost $1,000 in cash but you

gained $1000 in the form of a new asset double entry accounting is kind of like

double checking your homework and helps you create financial statements which

you'll need to make smart financial decisions so what is a single entry

method it's essentially just recording your transactions once as they happen

it's less robust but if your business is a simple sole proprietorship with no

inventory and no employees you can probably use the single entry method if

your business is any more complex than that your accountant will probably

recommend the double entry method the third step is choosing between the cash

versus accrual method of accounting on a cash basis you only recognize revenue

when you receive it for example when you deposit the check into your account on

an accrual basis you recognize revenue when it's earned for example once you

complete a project and write the invoice if you're a small business or just

getting started you can probably use the cash method it's easy to switch from

cash to accrual if you need to if your business is more complex for example if

your business more than five million per year in revenue or if you manage large

assets or investments you'll probably need to use the accrual method either

way you should talk to your accountant to figure out which method will be best

for your business step four is to choose a bookkeeping system your options are to

do it manually using something like Excel or just paper or use an accounting

software if you do it in Excel you can use something like our free income

statement template for a simple bookkeeping setup all you have to do is

enter each transaction as it happens if your bookkeeping means are

straightforward this is the easiest cheapest way to go you can download this

excel template by clicking the link in the description below if you choose to

use accounting software there are a few options for small businesses such as

QuickBooks Xero or wait you'll pay a monthly fee

for the software which you can use to produce simple financial reports keep in

mind though you may need to have an accountants help to learn how to

properly use the software step 5 is to categorize your transactions categories

are essentially classifications for your transactions to understand what you're

spending on these types of categories can help you understand what your tax

deductions are not all transactions are equally tax deductible so you'll want to

know what you're spending on office supplies versus what you're spending on

meals for example if you buy a box and pens for the office you'll categorize it

as office supplies at the end of the year you'll be able to see the total

amount you spent on office supplies and you'll be able to deduct that cost on

your taxes step 6 is to organize and store your documents you need to keep

records for your bookkeeping but there's a bit more to it than just storing all

of your receipts in a shoebox there are two important rules for your

record-keeping rule one if the expense is over $75 you should keep a record to

prove the expense rule two you should keep every receipt and financial record

for three years as for actually keeping the records we recommend storing them

digitally the IRS is totally fine with that and it's an easy

away for you you won't need the receipts to actually file your taxes but you will

need them if you get audited some tools you can use to keep your records

digitally include receipt banks Evernote and shoebox

finally the last step is to make it a habit what keeping isn't the most

exciting thing but if you do it consistently you'll have smart financial

insight into your business every month of the year and you'll save yourself a

lot of time and headaches come tax season at minimum we recommend entering

in all your transactions at least once a month

block out a recurring time in your calendar and do it somewhere fun like a

coffee shop or do something relaxing like putting on netflix while you do the

work the more automatic your bookkeeping habit the easier your tax season will be

nobody likes a stressful bookkeeping binge now should you do your own

bookkeeping or hire someone else to do it for you

doing your own books is free that's the biggest draw but it can be complicated

time-consuming and can take you away from running your business if you're

interested in doing your own bookkeeping click the link in the description for a

free income statement template created by our expert in-house bookkeepers here

at bench if you decide to hire someone to do your bookkeeping it helps save you

time gives you confidence your books are being done properly and makes tax time a

whole lot easier if you aren't sure who to hire check out bench or the largest

bookkeeping service in north america and we'd love to do your books for you and

that's it from us here at bench good luck on your entrepreneurial journey and

happy bookkeeping