January 21

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How to Set Up a Small Business Bookkeeping System

Amanda Jakle

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Bookkeeping is the process by which your business will either excel or flop. Seriously. It's that important.

But let's face it: it's not the most glamorous thing in the world.

If you’re an entrepreneur or small business owner, the last thing you want is to get bogged down in details like bookkeeping and accounting, but applying a reliable bookkeeping system can actually save you time, money, and energy.

With this blog post, I'm going to show you how easy setting up your own system can be so that you can put more of your focus back on growing your business.

Let's run through all of the steps needed so that by the end, having your most up-to-date books will no longer be such a tedious (or intimidating!) task.

Do you need a bookkeeping system?

Absolutely. Every business and entrepreneur needs one.

Bookkeeping is an essential record-keeping function that involves keeping a daily journal, maintaining a general ledger and sub-ledgers, managing bank statement reconciliations, and making sure that your accounts receivable (record of people who owe you money) and accounts payable (record of people you owe money to) stay up-to-date, so that you can pay and get paid on time!

Sound intimidating? Trust me, I know. It can be overwhelming at first, especially if you're just starting out or have no experience in double-entry bookkeeping. I even took a class on the subject, and I still felt intimidated the first time I set up a chart of accounts.

But the good news is, the bookkeeping process doesn't have to be scary, and you can customize your accounts to meet your business needs. There are also a lot of different accounting software out there that can help automate the process so that the toughest part of your day is the time it takes to record transactions, an easy step that you can do as you go or in batches to make it even easier on yourself.

Now, without further ado, here are 9 steps for setting up your business's bookkeeping system.

9 Steps for Setting Up Your Small Business Bookkeeping System

Step 1: Decide How to Record Your Transactions

Will you be doing all the accounting yourself, or do you want to free up your time to focus on other things?

If you're just starting out and aren't making that great a profit, yet, you may need to manage your business income and expenses yourself. If you take advantage of one of the many accounting or bookkeeping products or services on the market, you'll be able to control the accounting process from nose to figurative tail.

If you want to free up time and you have the revenue to spare, you could consider hiring a bookkeeper or accountant to outsource that task and take it off your hands.

After all, as my grandfather always said, "Only two people will pay for themselves in business: A good lawyer and a good accountant."

(The same applies to bookkeeping services, too!)

Many accounting services count as business expenses and can be written off as tax deductions come tax time, so that's a double bonus!

Regardless of which accounting method you decide to use, I recommend learning at least the basics of bookkeeping so you can be more effective.

Step 2: Decide What Kind of Bookkeeping System You Need

What kind of business do you have? Are you a retail business? A service-based business? Are you a consultant, or an affiliate marketer? Will you use cash accounting or accrual accounting? What kind of depreciation do you need to take into account?

(See what I did there? Ba-dum-tsss. Yeah, go ahead and say it. That was terrible.)

Depending on your type of business, you're going to have different accounting and bookkeeping needs. Luckily, there are many different types of bookkeeping software out there to help you with this, with different specializations and features to help you run and automate your business more efficiently.

And if you're not so into the automation aspect of bookkeeping software and want to go old-school? The best way to do that is by using spreadsheets.

Step 3: Choose Your Small Business Bookkeeping System

Accounting Software:

Intuit QuickBooks is the industry standard, and lets you manage everything from payroll to invoices to financial statements. It's versatile enough that you can use it in almost any industry, yet user-friendly enough that you can use it even if you're a complete novice.

You can use QuickBooks Pro if you want a desktop version. They also have QuickBooks Online if you are comfortable with cloud-based software. It also has international versions for PC (the Mac version is only available in the United States) that allow you to streamline and simplify any business you do with the U.K., Canada, and Australia.

Quickbooks bookkeeping software

Intuit Quickbooks

Note: There is a bit of a learning curve, but it's a program that's well worth the time it takes to familiarize yourself with it.

Xero is another popular accounting program with features you can use to manage business finances, reconcile accounts, calculate depreciation, keep tabs on revenues and expenses, enter expense receipts and other business transactions, and more, so that come tax time your financial records are your financial health - not a financial headache.

Spreadsheets:

Microsoft Excel is the best program for keeping a double-entry bookkeeping system that you manage by hand. It makes it easy to create and maintain a simple bookkeeping system, from your basic chart of accounts to your general ledger and your subsidiary ledgers for your Accounts Payable and Accounts Receivable.

The only drawback to this is the time it takes to use, and the fact that you need a thorough knowledge of double-entry accounting to make sure that your books are clean.

Paper and Pencil:

The final, and most tedious, most bulky, and most time-intensive bookkeeping method is manual bookkeeping, where you actually keep a real, paper book or books to record all of your transactions. Seriously, the data entry here is a real serial killer.

While there is a certain old-world, single-entry sort of charm to the manual accounting method, do you really want to have dozens of ledgers taking up space that could be used for other things? And do you really want to brave the hand cramps that come with this?

Plus, you need to have a super-keen eye for detail, because flipping back and forth between pages is the best way to lose a transaction in the mix. You practically need an accounting degree for this.

(Speaking from experience: 1 out of 10, do not recommend.)

Step 4: Set Up Your Chart of Accounts

A Chart of Accounts is basically your general ledger's table of contents. It tells you what's in the ledger and where.

In bookkeeping, your transactions get categorized into 5 basic types of accounts:

  • Assets,
  • Liabilities,
  • Equity,
  • Revenue,
  • and Expenses.

Each transaction you make or balance you have gets recorded in an account under one of these headings, and for each transaction, you'll have two entries: one debit entry and one credit entry.

(If you want the digs on the basics of double-entry accounting, you can check out my blog for more info.)

Every account you have will be recorded in your General Ledger. If you have 5 accounts, that's one thing; if you have 500 accounts, that's a whole new ballgame. To make it easy on yourself (and your accounting system), you need a Chart of Accounts to help you find the correct account quickly.

Most bookkeeping software will do this for you automatically, but if you're using simple spreadsheets or a manual ledger, you'll have to create the Chart yourself.

small business owner bookkeeping

Sticking to a system makes bookkeeping stress-free.

Step 5: Get a Separate Bank Account for Your Business

It's essential that you keep your business and personal funds and financial transactions separate, not only to help you build your business credit, but also to simplify your financial data and keep it accurate.

You see, unless you operate a Sole Proprietorship, your business is registered as its own individual entity.

As your business grows and your expenses become more complex, it'll be easier for you to keep your financial activities separated so that you can easily find the information you need, when you need it.

This is important when it comes to things like analyzing cash flow, managing payroll, and handling difficult financial situations such as fraud on an account, getting audited, or having to calculate tax deductions.

And if that isn't enough to convince you, just imagine: If somebody hacks your business bank account, you don't want them to be able to access your personal funds as well! Keeping them separate is just better overall.

Step 6: Decide on Payment Terms

Whether you're paying or getting paid, it's important to know what payment terms you're dealing with.

Have you ever heard of Net30? Net15? What about cash payments? Credit on account? There are a lot of different terms that you'll see thrown around, and understanding these different payment terms (and the terms for the payment terms) will help blow away a lot of the fog there and help you keep accurate records.

First are your purchases on credit, which would go into your Accounts Payable account as Liabilities. (Meaning that you owe other people money that you have to pay off.)

Any time you place an order, get invoiced, and then pay it off later, you're going to be paying off a credit on account.

  • Net30: You order something from a vendor. They send you the item, and then send you an invoice. You have to pay the net amount of that invoice within 30 days of receiving it.
  • Net15: You place that same order, but instead of having 30 days to pay for your order, you have to pay the invoice within 15 days.
  • Note: These terms may vary depending upon the business and the terms you negotiate with them. Some businesses even offer discounts if you pay early!

But not all businesses accept credit. 

If you have to pay up front, then those are considered "cash" purchases. These are handled either through Asset accounts or Expense accounts.

(This would happen any time you pay out of pocket from your "cash" Asset account. Whether they're categorized as an Asset or an Expense depends on the nature of the transaction.)

A purchase is considered a "cash" purchase whenever you pay using one of these methods:

  • Cash: Cold, hard cash is still king in many places. Dollars and cents just make sense!
  • Check: A written check is your guarantee that, when the other company goes to cash that check, the money will be debited from your business bank account accordingly. Even though the paper itself has no monetary value, it's considered a cash payment because it takes cash straight from your account and puts it in your vendor's hands.
  • Credit card: A credit card is considered a cash payment method because it gets the payment to the vendor immediately. No invoice necessary, cash-in-hand.

This is just how you would pay a vendor. The same applies whenever you have someone pay you- they can make a cash payment so you have cash-in-hand, or you can offer terms on account so they can buy now, pay later.

Step 7: Maintain Your Accounting Records

No matter what you do, there's always going to be some maintenance required to keep your books straight. Whether you maintain your records on a daily or weekly basis, the best bookkeeping is done when you do it regularly and don't have a huge list of things to record.

Be prompt and accurate when you're entering your data, and you'll reduce your risk of errors, you'll have less hassle with expense tracking, and you can make sure that you get accurate reports when it comes time to analyze your income statement and balance sheet.

I mean, dude, who really wants to have the IRS breathing down their neck just because they forgot to account for a $1,000 computer purchase? I know I don't! And I bet you don't want that, either.

If you record every transaction on a regular basis (using paper receipts, an expense tracking system, or whatever you have), then it'll turn that mountain into a molehill and make it much easier to deal with in the end.

Step 8: Evaluate and Adapt

No bookkeeping system is perfect for every person or every business, and to be honest, it may take a few tries before you find the best system for your business.

For example, if you have a retail business, you might use either QuickBooks or Xero to track your financial information, but if those turn out not to have the features you need, you might try a program like FreshBooks, which is customized for retail. 

If you have a real-estate agency, you might want to shift from QuickBooks to something like Zoho Books, which is created specifically with real-estate in mind.

You may need to create accounts from time to time, or you may have to figure out other ways to streamline your process and make it more efficient. Once you have your system in place, everything will get much easier.

You just have to figure out what your system is.

Step 9: File, File, File!

The IRS is notorious for making outrageous demands of the businesses they decide to audit. As a result, most businesses need to keep financial records going back 7 years; perhaps even more, depending on your industry.

But aside from the dreaded IRS audit, there are several more beneficial reasons to keep good files.

Keeping accurate records allows you to track your cash flow, which will help you make informed and beneficial decisions for your business. You can also use your records to track how your business has grown and performed over the course of several years, and that can be really heartening and a big motivator to see- especially if you see that trending upward!

Wrapping It Up

Bookkeeping is a thing that every small business needs, whether you're a gamer, a retailer, or you run a cookie business from your kitchen. As an entrepreneur or small business owner, you need an accurate bookkeeping system to keep everything in line and minimize your financial headaches.

What will you use? Accounting software, spreadsheets, pen and paper? Do you know what you need, or are you still figuring it all out by trial and error?

Regardless of what you do, make sure you keep a good chart of accounts, accurate records, a great filing system (whether digital or hardcopy), and- most importantly- an open mind and the flexibility to adapt as needed!

From one bookkeeper to another, I truly hope you've enjoyed this and found it useful, puns and all.

Interested in more? Check out my blog for more articles about entrepreneurship, bookkeeping, and more!

About the Author

Amanda Jakle is an entrepreneur, bookkeeper, and travel enthusiast who founded AmandaJakle.com. She writes her own books and does copywriting and SEO optimization on the side. Her dream is to travel at will while earning a living from her blog and bookkeeping business. She has a bossy Siberian Husky named Sakari who is a big red ball of lovable fluff. Amanda lives in Montana. She hopes to make it to Scotland in 2023.

Amanda Jakle


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