Running a small business involves wearing many different hats, and one that you need to get comfortable wearing if you want your business to succeed is the accounting hat. Having a good small business bookkeeping process is necessary to understand where your revenue is coming from, what you're spending money on, and what areas of your business are most profitable. Knowing the ins and outs of your cash flow can help you make more informed decisions that can help you grow your business.

Additionally, staying on top of your bookkeeping will come in handy during tax season when you need to provide detailed information about your profits and spending.

Keep reading for more insight into the basics of small business bookkeeping.

Step 1. Choose the Right Bookkeeping Method

One way to make your bookkeeping process easier is to choose the method that works for you. There are two popular methods that most small businesses turn to:

  • Single-entry: With this method, you will record every single financial transaction a singletime in your overall bookkeeping record. The single-entry process is a good fit for sole-proprietors or freelancers who only have one to two business transactions a month.
  • Double-entry: The double-entry method is more work but will help you avoid bookkeeping mistakes, which is why it's usually the better bet if you have to manage many different transactions a month. With the double-entry method, you make two entries for every transaction in two different accounts for example, your cash and equipment account if you purchased a piece of equipment. Making double entries gives you a second opportunity to catch any mistakes.

Speaking of accounts, you need to set up the right small business accounts to properly manage your business ledger. When dealing with bookkeeping, accounts don't refer to bank accounts; they're simply categories that organize certain financial transactions.

Here are some popular account examples:

  • Cash
  • Dividends
  • Equipment
  • Retained earnings
  • Salaries and wages
  • Accounts payable
  • Accounts receivable
  • Insurance expense
  • Interest expense
  • Interest income
  • Interest payable
  • Real estate
  • Rent expense
  • Rental income
  • Supplies expense
  • Unearned service revenue
  • Utility expense
  • Inventory
  • Owner's capital
  • Sales income
  • Supplies

Step 2. Have a Reliable Record Keeping Process

The key to making bookkeeping a seamless process is to keep up with it. The less rigorous you are about your record keeping, the harder it will be to manage it, and it will be easier to let income and expenses slip through the cracks.

Make it a habit to record any of the following events at least once a week (or ideally, the same day they occur):

  • Bill payments
  • Purchases
  • Incoming invoices
  • Sales

Step 3. Create Financial Reports

Understanding how money flows in and out of your different accounts can help you gain valuable insight into the health of your business and will lead to making more informed decisions regarding how you operate your business.

To better understand your business's financial health, you can create various financial reports.

These are three helpful reports to start with:

  • Balance sheet: The balance sheet is a document that summarizes a business's assets, liabilities, equity at a single point in time and showing the current health of the business andits ability to expand or reserve cash.
  • Profit and loss (P&L) statement: The profit and loss (P&L) statement, also known as an income statement, illustrates the business's revenues, costs, and expenses over a certain period of time, and is used to compare sales and expenses, as well as make forecasts.
  • Cash flow statement: The cash flow statement is similar to the P&L statement, but it excludes non-cash items such as depreciation. It also shows what the business's earnings and spending is, as well as how much cash is immediately available to pay bills.

The Takeaway

These three steps are a great place to start but as your business grows, you'll want to further flesh out your bookkeeping process. Ideally, you'll reach a point where you can hire an accountant to help you manage your business finances. In the meantime it's worth researching different bookkeeping softwares that can help you streamline your bookkeeping process and prepare financial reports.