Bookkeeping Basics for Small Business

Running a business is no easy task. Small business management requires oversight of every aspect of the business. Getting an accurate overview of a business’s financial health is a vital part of decision-making, and that is precisely where bookkeeping comes into play.

Bookkeeping is the process of recording all the financial transactions involved in a company. This includes everything from sales, profits, bills, loans, invoices, payroll, and any other financial information you may need.

Bookkeeping can be hard to understand as a small business owner in Australia, but having knowledge on the processes and terminology is valuable, even if you outsource your bookkeeping. 

Here are important bookkeeping basics that can help you decide between double-entry vs. single-entry bookkeeping, understand the benefits of bookkeeping, and learn key bookkeeping steps to keep your finances in order.

Why Does a Small Business Need Bookkeeping?

1. Financial Tracking: Bookkeeping keeps track of how much money goes in and out of a business. This way, once you add up the total numbers of payments and total revenue, you can see your business’s cash flow management and how much cash on hand you have. A proper Bookkeeping system also helps small businesses track  income, expenses, and overall financial transactions in an organized way. If you have a dispute with a supplier or customer, having a clear trail of transactions can make it much easier to see who’s at fault. You can also double check any data entry or accounting errors.

2. Compliance: Accurate, consistent bookkeeping is essential for governmental compliance, audits, disputes, fraud detection, and more. Small businesses must adhere to tax laws and regulations. Proper bookkeeping ensures accurate financial records, making it easier to file taxes correctly and avoid penalties or audits. No business wants to hand over messy books to the Australian Taxation Office (ATO) for audit. BAS compliance is important, so stay on top of your books to get the most out of your tax returns.

3. Budgeting & Decision Making: Bookkeeping enables businesses to create realistic budgets, set financial goals, and make informed decisions about investments and expenditures. Timely access to financial data allows small business owners to make informed decisions about pricing, inventory management, and resource allocation. Not only this, but the insights gained from bookkeeping can lead to strategic decisions, which help businesses adapt to changing market conditions and seize opportunities.

4. Business Growth: As a small business grows, its financial complexities increase. Effective bookkeeping helps manage this growth by providing data to secure loans, attract investors, and make expansion decisions. If you have any investors, they will want data reflecting business continuity and progress, which starts with bookkeeping. Lenders and creditors often request financial statements before extending credit. Accurate bookkeeping increases a small business's creditworthiness and ability to secure financing.

To summarize, your business may need bookkeeping for:

• Making management decisions [including sound planning and budgeting]

• Providing financing to the business [e.g. through bank loans or private investors]

• Filing Tax Returns and ensuring BAS compliance

• Identifying errors, wrong payments or potential fraud

Basic Considerations for Small Business Bookkeeping

So you’ve decided to get serious about bookkeeping for your small business. Now you just have to determine how to keep your books. You need to make many decisions, such as what entry system you’ll use, how you’ll keep track of invoices and bills, how to keep your financial information straight, and more.

1. Bookkeeping Method: Single vs. Double Entry

Single-entry bookkeeping is where you record the financial transaction once. This method is straightforward and you should only use it if you have very few uncomplicated business transactions. Since you record the transaction only once, a mistake in the data entry can be tough to catch, so this method is not recommended for most businesses.

On the other hand, double-entry bookkeeping transcribes financial transactions twice. Since most financial entries in businesses affect at least two accounts, this accounting method is ideal.

You record the transactions in two different accounts that balance each other out. For example, if you buy $2,000 worth of inventory, you debit your inventory account and credit your accounts payable or cash account. Since you record the transaction twice, it is easy to spot errors, as the number of credits should always match the number of debits.

It’s recommended to use double-entry accounting for most businesses, so take your time to learn the ins and outs. It’s more complicated than single-entry bookkeeping, but it's a far more accurate method of accounting that gives you a better look at your business’s finances.

2. Accounting Method: Cash Accounting vs. Accruals Accounting

Now you need to decide on your accounting method. 

Cash accounting is simple — too simple for most businesses. You record financial transactions as they happen which gives you a picture of the cash you have in your till but does not reflect the money that is owed to you or you have to pay others.

When a client pays you, you enter it in, regardless of the date the invoice was sent. When you pay your bills, you log into your ledger, regardless of when the bill’s due. However, this accounting method is far too basic for businesses that need to separate income that is due vs that which is received and bills that have been paid vs those that have been incurred but need paying in the future.

This is where accrual accounting comes in. Accrual accounting makes sure to record revenues as they are earned, and expenses as they are incurred. It lists invoices, future payments to me made or received, and other important information for the future and does not simply depend on cash flows. 

The accrual method of accounting takes into consideration the accounts receivable and the accounts payable, so when a transaction occurs, but no money is involved, you instead either debit the transaction to accounts receivable or credit to accounts payable. These entries are then reversed when you finally pay or receive the actual payment.

3. Separating Business and Personal Accounts

A business needs a business bank account; that should be the first thing you do after trademarking your business name. You then take your business information to the bank to open your business account and receive an Australian Business Number (ABN).

So why is a business account necessary? 

You must keep your business’s financial information separate from your personal financial information. You don’t want to sift through months of transactions filled with coffee receipts and gas station fill-ups.

Plus, separate accounts help prevent liability if something goes wrong with your business e.g. a lawsuit, bankruptcy or liability claims. Legal entities like corporations need their separate accounts to do business transactions legally. Depending on your business type, a business account might be lawfully necessary, if not a choice.

4. Digital vs. Manual Bookkeeping

Bookkeeping is a leftover term from when people kept business financial records in books, known as ledgers. In the pre-digital age, these hard copy general ledgers kept all of a business’s information and financials in one place for the owner's inconvenience.

While you can keep doing this, there has no doubt been a massive shift towards digital bookkeeping that allows for automated recording of transactions and other accounting calculations. You’re likely wasting time and money if you aren't using technology to improve your bookkeeping practices.

It is recommended to store the information digitally, like with Microsoft Excel, even if you choose to keep your own books and not go for advanced bookkeeping tools that can depend strictly on the budget available. Store the information in a secure place that only you can access, like on a secure cloud or with secure passwords in place.

5. Accounting Systems Software & Programs

Digital and cloud-based accounting is the way to go, especially if you’re opening a business today. However, you can go further and get technology geared explicitly towards bookkeeping.

Bookkeeping software automatically fills out balance sheets, creates financial statements, and performs routine tasks. It’s usually equipped with double-entry accounting and compliant with organization standards suitable for BAS statements and for the ATO.

Accounting softwares and tools like MYOB, Xero, and Quickbooks, all have options for small business owners. They are easy to use, save time, and keep accurate financial records.

How To Do Bookkeeping for Small Business?

For successful and regular bookkeeping, you need to take crucial steps to set up your books and keep them updated and accurate well into the future.

1. Account for Each Transaction

Transactions happen in businesses daily, and you need to record each one. This can help you determine your profit, and carefully recording transactions prevents potential disputes with customers.

You need to understand your business’s cash flows and revenue, so keep careful track of every transaction in a physical ledger, an excel spreadsheet, or bookkeeping software.

By additionally using a POS (point-of-sale) system, you can set up transactions to record automatically with bookkeeping software. POS systems usually include registers or bank accounts that update when you get paid. Bookkeeping systems have access to these and automatically record any transactions.

Getting an accurate end-of-day picture of your business’s cash inflows and outflows is convenient, while additionally categorizing your transactions as personal and business expenses will help you when tax season rolls around and also support in making inaccurate EOFY financial reports.

2. Reconcile Transactions

An important part of bookkeeping is reconciling transactions between books and bank accounts. Reconciling is to match transactions and numbers recorded in your books in comparison to what is recorded in your bank statements.

Bank reconciliation is integral to bookkeeping, so you should reconcile the bank accounts and books as often as you need to. At the minimum, you must reconcile your books at least once a year for tax season, but you can do it monthly, weekly, or daily depending on how many transactions you do.

It is typical for the bank accounts to not perfectly match the books due to delayed reflection of deposits, payments, interest due to other banking procedures. You can then adjust the books by reviewing bank statements and credit card transactions to see if the transactions match your books. 

3. Update Accounts Receivable

Accounts receivable means open invoices and other sources of income that you expect to come in but haven’t yet. Understanding earned and received income is essential to your business’s financial health.

Accounts receivable are the heart of your business’s revenue and cash flows, so keeping them accurate and updated is one of the more critical tasks of bookkeeping. Moreover, timely invoicing and reminding customers about unpaid invoices is also an essential role of bookkeeping. This includes dating invoices, keeping track of due dates, and taking action after a certain deadline for payments has crossed.

4. Update Accounts Payable

No less critical than accounts receivable, accounts payable is the money going out of your business to suppliers, bills, and whatever else your business needs to pay to run.

Much like accounts receivable, accounts payable is future payments for a transaction that has already occurred [i.e. raw materials received but not paid for]. The money hasn’t left your business yet, but it will need to be paid eventually. Again, updating and keeping your accounts payable accurate is important for a clear picture of your costs, revenues and cash flows.

Another vital role of accounts payable is to stay on top of purchase orders and maintain good relationships with suppliers and vendors. After all, clients that don’t pay on time develop a bad reputation and can lose out on key suppliers.

5. Manage Payroll

Employees are the beating heart of any business, but come at a cost and don’t just work for a pat on the back. Managing payroll is another essential part of bookkeeping that helps keep the business running smoothly.

Payroll means paying employees on time and handling any onboarding or offboarding settlements. Updating employee information, providing payslips, calculating and withholding tax, meeting payroll superannuation obligations and other employee benefits are all handled through the payroll. This also includes updating payroll reports and checking to see if your payroll software is in working order which is especially important for making tax payments to the ATO.

6. Prepare for Financial Reporting

One of the best benefits of rigorous bookkeeping is that it's much easier to prepare for financial reporting — you have all the required data at your fingertips.

Annual financial statements should include balance sheets, income statements, and cash flow statements. Balance sheets report all company assets, income statements list all of your income and its sources as well as the expenses incurred, and cash flow statements state the amount of cash and cash equivalents going in and out of a company,

Doing your taxes requires gathering financial reports and information. Accurate financial reporting will guarantee accurate BAS & GST calculations, getting you the most back in your tax return. Tax season which also marks the end of the fiscal year, isn’t just when you report your income to the government. It’s also an excellent time to review your growth over the last year and set new goals for your business.

Final Word

Bookkeeping is integral to any small business as recording financial information is essential for making decisions. So whether you choose single or double-entry, cash or accrual accounting, or even if you decide to go old-school with manual bookkeeping, ensure you’re following the correct bookkeeping process and account for all financial transactions. Keep your accounts updated, reconcile your bills, and pay your employees on time to keep your business up and running. 

As your business grows, you may find you’re unable to keep up with the bookkeeping all by yourself, and may need to outsource to a bookkeeping service. Hiring a bookkeeping service will free up your time for other essential business considerations while providing you with seamless service to keep your books in order as your business continues to flourish.