{"id":3673,"date":"2024-03-29T14:28:00","date_gmt":"2024-03-29T21:28:00","guid":{"rendered":"https:\/\/www.jreddallcpa.com\/?p=3673"},"modified":"2024-04-02T14:34:38","modified_gmt":"2024-04-02T21:34:38","slug":"the-importance-of-bookkeeping-for-a-small-business","status":"publish","type":"post","link":"https:\/\/www.jreddallcpa.com\/the-importance-of-bookkeeping-for-a-small-business\/","title":{"rendered":"The Importance of Bookkeeping for a Small Business"},"content":{"rendered":"\n<p>Few things are more important for a small business than bookkeeping. You want your business to be profitable and will likely want to expand eventually. When that time comes, you want to know that your business has a solid financial foundation and sound bookkeeping practices.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h1 class=\"wp-block-heading\">The Importance of Bookkeeping for a Small Business<\/h1>\n\n\n\n<p>A sound bookkeeping system is crucial to the success of any small business. Small businesses can rarely afford the luxury of an accountant, especially when just starting, so bookkeeping often falls to the business owner.&nbsp;<\/p>\n\n\n\n<p>The question of \u201cWhat is the best way to do the bookkeeping?\u201d is frequently on their mind. A shoebox, a manual set of ledgers, or an accounting software program may all seem like viable options.<\/p>\n\n\n\n<p>The numbers in the books must accurately reflect the business if the business is going to make sound financial decisions. You must do the <a href=\"https:\/\/www.jreddallcpa.com\/how-to-do-bookkeeping-for-a-small-business\/\">bookkeeping on a timely basis<\/a> and in a format that the owner and relevant parties outside the business (investors, the IRS, etc.) can understand.<\/p>\n\n\n\n<p>In this article, we\u2019ll discuss:<\/p>\n\n\n\n<ul>\n<li>What a proper set of books is (and what they include)<\/li>\n\n\n\n<li>Why businesses need to keep a set of books<\/li>\n\n\n\n<li>How a small business can handle its bookkeeping<\/li>\n<\/ul>\n\n\n\n<p>Please note <a href=\"https:\/\/www.jreddallcpa.com\/\">bookkeeping<\/a> and accounting are two different things, though they strive to reach the same goal.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Is a Proper Set of Books?<\/h2>\n\n\n\n<p>Small businesses\u2019 bookkeeping begins with a proper set of books. A proper set of books is only as good as the time spent initially setting them up. You should always consult with a professional, such as a Certified Public Accountant, to accomplish this; it\u2019s not costly and can save a business a significant amount of money in the long run.&nbsp;<\/p>\n\n\n\n<p>A proper set of books includes the following:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Chart of Accounts<\/h3>\n\n\n\n<p>A chart of accounts is the starting point for any business\u2019s bookkeeping system. A chart of accounts simply lists the potential types of transactions a business may encounter. It is helpful to categorize transaction types, especially for tax purposes.<\/p>\n\n\n\n<p>The most common types of accounts (depending on the type of business) include:<\/p>\n\n\n\n<ul>\n<li><strong>Assets<\/strong> &#8211; items used to produce income or have some value to the business, such as cash, accounts receivable (amounts billed to customers), inventory (items held for resale or manufacturing of product to sell), property and equipment (large assets that help with business operations and the production of income).<\/li>\n\n\n\n<li><strong>Liabilities<\/strong> &#8211; obligations of the business. These include accounts payable (amounts owed to vendors for goods and services) and debt (amounts borrowed to help finance the business\u2019s operations).<\/li>\n\n\n\n<li><strong>Ownership Equity<\/strong> &#8211; the difference between assets and liabilities (which represents the claims of ownership of the business).<\/li>\n\n\n\n<li><strong>Sales<\/strong> &#8211; likely the business\u2019s most direct source of revenue.<\/li>\n\n\n\n<li><strong>Cost of Sales<\/strong> &#8211; the direct cost of producing sales.<\/li>\n\n\n\n<li><strong>Operating Expenses<\/strong> &#8211; administrative costs of operating the business.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">2. Source Documents<\/h3>\n\n\n\n<p>You should save and organize source documents for each transaction, including receipts, bills, and paid invoices. This is especially important for tax purposes.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. Journals<\/h3>\n\n\n\n<p>Once you identify and properly categorize transactions, you must record them daily or weekly in an orderly, consistent manner. These records are a series of books known as journals. Five main journals are the most common and useful, though there can be more:<\/p>\n\n\n\n<ul>\n<li><strong>Cash Receipts Journal<\/strong> &#8211; the money a business collects from its customers.<\/li>\n\n\n\n<li><strong>Cash Disbursements Journal <\/strong>&#8211; the money a business uses to pay its bills.<\/li>\n\n\n\n<li><strong>Sales Journal<\/strong> &#8211; the bills a business sends to customers for the work done for them by the business.<\/li>\n\n\n\n<li><strong>Purchases Journal<\/strong> &#8211; the bills a business must pay for the goods and services it needs to operate.<\/li>\n\n\n\n<li><strong>General Journal<\/strong> &#8211; to record unusual items or adjustments an outside accountant recommends to make sure the business records all financial transactions.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">4. General Ledger<\/h3>\n\n\n\n<p>Total the amounts in the journals periodically (monthly or quarterly) and transfer them to the general ledger. Then, organize the ledger according to the Chart of Accounts.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">5. Financial Reports<\/h3>\n\n\n\n<p>Use the totals for each account in the General Ledger to create financial reports showing the financial condition of the company and its profitability. These totals also help when preparing tax returns. Financial reports vary based on the users, but the most common include:<\/p>\n\n\n\n<ul>\n<li><strong>A Balance Sheet<\/strong> &#8211; assets balanced against the sum of liabilities and equity.<\/li>\n\n\n\n<li><strong>An Income Statement<\/strong> &#8211; shows the profit or loss of the business.<\/li>\n\n\n\n<li><strong>A Statement of Cash Flows<\/strong> &#8211; shows the relationship between profit and cash flow.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Why Keep a Set of Books?<\/h2>\n\n\n\n<p>There are three primary reasons it is crucial for a business to keep a set of books:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Comply with tax laws<\/h3>\n\n\n\n<p>Every business must comply with federal, state, and local tax laws. The easiest way to legally minimize business tax liability and comply with all tax laws is to maintain a proper set of books.<\/p>\n\n\n\n<p>The easiest way to run afoul of taxing agencies and risk losing your business is not to have a proper set of books. A structured, consistent, and timely method of tracking income and expenses ensures you can plan for taxes in advance and comply with all tax laws.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. Reporting to outside entities<\/h3>\n\n\n\n<p>Outside entities may have an interest in your business\u2019s financial standing. The business may be looking to acquire capital or expand. Sources of this capital may be banks or investors, both of which are diligent in evaluating a business\u2019s finances.<\/p>\n\n\n\n<p>Contractors and the federal government are other examples of entities that may have an interest in your business. Up-to-date books can quickly allow the disclosure of relevant financial information.&nbsp;<\/p>\n\n\n\n<p>Without a proper set of books, gathering important information can be time-consuming and costly, which may result in missed deadlines and lost opportunities.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. Understanding the numbers<\/h3>\n\n\n\n<p>Many savvy business owners use the financials to manage their business affairs in consultation with a small business financial expert such as a Certified Public Accountant. For a business to fulfill its purpose, the business must constantly be aware of:<\/p>\n\n\n\n<ul>\n<li>Devising and implementing procedures to <strong>acquire enough capital<\/strong> to purchase assets that will contribute to the production of income.<\/li>\n\n\n\n<li>Devising and implementing a solid system of <strong>internal financial controls<\/strong> to help ensure the preservation of capital.<\/li>\n\n\n\n<li>Once you are generating income, devising, implementing, and monitoring strategies to <strong>maximize profit<\/strong>.<\/li>\n\n\n\n<li>Once you are generating profit, devising, implementing, and monitoring strategies to <strong>manage the cash flow<\/strong> generated from that profit. (Note: Profit and cash flow are entirely different, and you must handle them accordingly).<\/li>\n\n\n\n<li>Ensuring the small business maintains a <strong>strong financial condition<\/strong> so obligations do not consume hard-earned assets and capital. The business must remain healthy to earn a profit.<\/li>\n\n\n\n<li><strong>Legally minimizing taxes<\/strong> through proper, proactive tax planning and compliance. Not properly addressing tax agency rules and regulations can be detrimental to ongoing success.<\/li>\n\n\n\n<li><strong>Strategic business, tax, and technology planning<\/strong>. Periodic planning is invaluable to small businesses. Even if the plans become obsolete, the process of planning is essential to a successful business.<\/li>\n\n\n\n<li>Planning for the discontinuation or <strong>sale of a business<\/strong> and knowing its proper valuation.<\/li>\n<\/ul>\n\n\n\n<p>But how is all of this accomplished?<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How to Do Bookkeeping for a Small Business<\/h2>\n\n\n\n<p>To do all of the above in an easy, consistent, and cost-effective manner and properly do their bookkeeping, there are some steps a small business needs to take.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Consult an accountant to determine the business\u2019s financial needs<\/h3>\n\n\n\n<p>An accountant, ideally a Certified Public Accountant, can help design and oversee your bookkeeping system to ensure you meet objectives and the business can fulfill its purpose.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. Design a chart of accounts<\/h3>\n\n\n\n<p>An accountant should have a template to easily and quickly tailor to a business\u2019s needs.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. Determine how to record transactions<\/h3>\n\n\n\n<p>As you can probably guess, to fulfill all of the requirements above, the \u201cshoebox method\u201d for recording transactions will not cut it. That leaves you with four viable methods, but some are better than others.<\/p>\n\n\n\n<ul>\n<li><strong>Manually<\/strong> &#8211; businesses used to fill the rows of columned paper to record transactions for their bookkeeping journals and ledgers. They manually wrote and totaled all transactions. Today, there are more efficient ways to accomplish this task.<\/li>\n\n\n\n<li><strong>Spreadsheets<\/strong> &#8211; you can also use digital spreadsheets to maintain a manual system. This can give you a good set of books that work surprisingly well. A professional accountant can help you develop a system adapted to your small business.<\/li>\n\n\n\n<li><strong>Computer software<\/strong> &#8211; for businesses that require more sophistication or have lots of transactions, many software programs provide an excellent set of books. But they can be expensive, hard to learn, and difficult to tailor to the business\u2019s needs. They also may not easily expand with a rapidly growing business.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>Software is the most popular option for today, and most offer different versions specifically for businesses of different sizes and industries. The key is to train the software user properly.&nbsp;<\/p>\n\n\n\n<p><a href=\"https:\/\/www.jreddallcpa.com\/4-reasons-a-small-business-should-outsource-accounting\/\">Having an accountant set up the program properly<\/a> and consulting the accountant before changes are made is beneficial. Business owners should understand the limitations of the software.<\/p>\n\n\n\n<ul>\n<li><strong>Use a bookkeeping or accounting service<\/strong> &#8211; a business owner can turn all information over to a professional accountant or bookkeeper to perform the above tasks and provide periodic reports. The owner\u2019s only responsibility in this situation is to get the information to the accountant in an organized and timely manner (which can include using software programs provided by the professional). These services usually cost $35 to $75 an hour, though some charge a flat monthly fee.<\/li>\n<\/ul>\n\n\n\n<p>Regardless of what method you choose, your business should work with an accountant periodically to make sure the business is doing the bookkeeping properly. Timely financial reporting and planning for the future, especially from a tax standpoint, can be invaluable.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">A Bookkeeping System: A Small Business Essential<\/h2>\n\n\n\n<p>Bookkeeping can be straightforward if set up properly. Successful businesses spend time establishing their bookkeeping system. Unless a business has trained staff, it will struggle to establish its own bookkeeping.&nbsp;<\/p>\n\n\n\n<p>It is more beneficial and cost-effective in the long run for a business owner to focus on their business operations and entrust the bookkeeping system to a professional.<\/p>\n\n\n\n<p>Hiring a professional <a href=\"https:\/\/www.jreddallcpa.com\/services\/bookkeeping\/\">small business financial manager<\/a>, such as a Certified Public Accountant, will ensure proper handling of the bookkeeping at a reasonable cost so a business owner can focus on the most important thing: running a successful small business.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Few things are more important for a small business than bookkeeping. You want your business to be profitable and will likely want to expand eventually. When that time comes, you want to know that your business has a solid financial foundation and sound bookkeeping practices.<\/p>\n","protected":false},"author":4,"featured_media":3674,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"off","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[82],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Why Is Small Business Bookkeeping Important?<\/title>\n<meta name=\"description\" content=\"The importance of bookkeeping for a small business cannot be overstated. A proper bookkeeping system is essential for a small business.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.jreddallcpa.com\/the-importance-of-bookkeeping-for-a-small-business\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why Is Small Business Bookkeeping Important?\" \/>\n<meta property=\"og:description\" content=\"The importance of bookkeeping for a small business cannot be overstated. A proper bookkeeping system is essential for a small business.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.jreddallcpa.com\/the-importance-of-bookkeeping-for-a-small-business\/\" \/>\n<meta property=\"og:site_name\" content=\"John W. 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