Your business is growing, and you want to handle the financials better. You may be starting a new business and want enough cash to make ends meet. The answer to many financial concerns for small business owners lies in a sound bookkeeping system. Luckily, bookkeeping for a small business is similar to bookkeeping for other businesses. There are steps known as the accounting cycle to help you along. 

How to Do Bookkeeping for a Small Business

While the term “bookkeeping” may call to mind large binders filled with columns to add up, most of today’s bookkeeping is done on a digital spreadsheet or in a computerized bookkeeping system. Large businesses have been using computers for decades but have the advantage of accounting departments, usually managed by a Controller

Small businesses don’t often have that luxury; if they don’t hire an accountant, the task of accounting usually falls to the business’s owner. 

However, they can still use accounting software and other tools to support their bookkeeping.

Regardless of the company’s size or the method used to keep the books, bookkeeping always follows basic principles tailored to the needs of the business. 

These principles involve:

  1. Identifying business transactions
  2. Recording the transactions in a journal
  3. Summarizing the journal and recording the totals in a general ledger
  4. Preparing a trial balance
  5. Making adjustments
  6. Preparing an adjusted trial balance
  7. Preparing financial statements
  8. Closing the books
  9. Repeating the steps for the next accounting period (usually monthly)

The Principles of Bookkeeping Applied

Identify Business Transactions

Most businesses operate to make sales. To make a sale, the business must purchase inventory and assets and pay people to do the work. Additional considerations include overhead, such as rent, utilities, wear and tear on machinery, and potentially advertising or commissions.

All business activities involve some kind of transaction, and some sort of documentation must support every transaction. An invoice or sales receipt should support a sale, and a receipt or vendor invoice should support a purchase. Timecards or salary information supports payroll.

The first step in bookkeeping is to identify transactions using these supporting documents. Procedures for handling these documents vary, but at a minimum, they should show the transaction date, the amount, the people or business involved, and the business’s purpose if it is not readily apparent. 

Once recorded, as discussed below, store or file the supporting documents so they can be referred to, if necessary, in the future.

Record the Transactions in a Journal

Once you identify transactions, you’ll need to record them in a journal. A journal (sometimes called a “book of original entry”) summarizes all the transactions identified in one location by date. 

Journals are simply lines of information that show the details of the transaction, especially the date and amount, along with a description of the transaction in the form of a code (also known as a “general ledger account number”). There are several types of journals:

  • Cash Disbursements Journal – shows all transactions paid by cash or check, although some companies will keep a separate check register.
  • Cash Receipts Journal – shows all transactions received by cash, check, or credit card.
  • Sales Journal – shows all sales made by invoice in which the customer has time to pay (accounts receivable). The customer may also keep a separate record.
  • Purchase Journal – shows the purchases of goods and services on account (accounts payable). The vendor may also keep a separate record.
  • Payroll Journal – shows the wages or salaries and deductions for taxes and benefits made by the employee for a pay period, as well as the amount of the check or direct deposit.
  • General Journal – shows any other transactions not included above, especially non-cash transactions such as depreciation (described below).

Summarize the Journal and Record the Totals

At the end of an accounting period (usually monthly), you total the journals and transfer the amounts to the “General Ledger.” (A General Ledger summarizes all transactions by category or account).

Cash, sales, inventory, rent, labor, repairs, etc., each have their own page in the ledger to record only those transactions. The General Ledger keeps a running record of the transactions by category and their totals (balances).

Prepare a Trial Balance

The next step is to summarize the totals for each category in a columnar format known as a Trial Balance. The Trial Balance shows the totals as debits or credits (pluses and minuses, if you will). The totals of each must be the same for the books to be in balance. 

Make Adjustments

Accounting principles normally require you to adjust for certain types of transactions. 

These are typically “non-cash” transactions. Examples include: 

1. Salaries incurred but not yet paid at the end of the accounting period, which must be recorded to give a more accurate comparison of income and expense

2. Depreciation is a non-cash transaction that reflects wear and tear on machinery or buildings used over a long period.

Prepare an Adjusted Trial Balance

An Adjusted Trial Balance is a new Trial Balance (record of credits and debts) after making the adjustments.

Prepare Financial Statements

You prepare financial statements based on the amounts on the Adjusted Trial Balance. A standard set of financial statements would include:

  • A Balance Sheet –  a snapshot of what the business owns, what it owes, and what is left over for the owner at a specific time.
  • An Income Statement or Profit and Loss Statement – shows the results (profit or loss) of operations over a specific period (monthly, annually, year-to-date, etc.). 

You prepare financial statements for management and external users (banks, investors) and usually conform to Generally Accepted Accounting Principles. However, management may also require special reports on a timelier basis to help make business decisions external users would never see. (These reports still come from the same bookkeeping process described).

Close the Books

Closing the books is preparing them for the next accounting period. You typically record the adjustments in the General Journal and the General Ledger. 

In addition, depending on management’s needs, but at least annually, the income and expense accounts are reset to zero so businesses can track the operations’ results for the new period. Include the closed amounts in the owner’s accounts on the balance sheet since income or loss affects the value of their ownership.

Small Business Bookkeeping

Bookkeeping is crucial for any business but doesn’t need to be complicated. While the specific method of performing bookkeeping tasks can vary – manually calculating, computer software, etc. – the steps rarely change.At a minimum, the business owner should have some way of summarizing their business’s financial information so they can prepare a tax return. However, there are many other reasons to “get the numbers” right, and a small business financial manager, such as a CPA, can help with these tasks.