Whether you’re starting out as a new business owner or have been running an online store for years, learning how to track your expenses and revenue can feel like a huge challenge.
You’re not alone. Nearly three-fourths of small business owners feel they are not very knowledgeable when it comes to the bookkeeping and accounting process.
On top of running your business, you also have to manage an asset account, tax returns, credit card chargeback, and more. It can be confusing and overwhelming if you’re diving in for the first time. But it doesn’t have to be.
Want to become a pro at your own bookkeeping? In this article, you’ll learn everything about how to start keeping books for a small business and how you can become more profitable today.
Table of Contents
What is bookkeeping?
Bookkeeping is the process of recording and managing all financial transactions for your business, including sales, purchases, and payments. Bookkeepers track all costs and income, to help a company make informed financial decisions.
The goal of bookkeeping is to show you your business’s bigger financial picture, balance your accounts, and improve cash flow management in a more strategic way.
Introduction to bookkeeping
In business bookkeeping, an account is a record of all debit and credit entries of a certain type, such as accounts payable or payroll.
There are five basic types of accounts:
- Assets. Resources or things of value owned by a company as the result of its financial transactions (e.g., inventory, accounts receivable).
- Liabilities. The obligations and debts owed by a company to suppliers, banks, lenders, or other providers of goods and services (e.g., loans, accounts payable).
- Revenues or income. Money earned by the company through sales or providing a service.
- Expenses. Cash that flows out of the company to pay for assets or services (e.g., utilities, salaries).
- Equity. The remaining value of an owner’s interest in a company, after all liabilities have been subtracted(e.g., stock, retained earnings).
Small business accounting begins with setting up each account so you can record transactions in the appropriate category. This makes up your general ledger. You likely won’t have the same exact bookkeeping processes as the next ecommerce store, but many different accounting methods are common depending on your business needs.
- Maintain and update financial transaction records
- Keep track of what everyone is doing (and spending)
- Use bookkeeping services to improve processes
1. Maintain and update financial transaction records
Bookkeeping involves working with numbers. Most of the work involves basic math and accounting. The details depend on the type of business you own, but it can include tasks like settling accounts receivable and bank statements, recording financial transactions, invoicing, billing, and tracking payroll.
You’ll also take care of other finance-related matters including:
- Budget planning to help the company stay on track and grow.
- Tax bookkeeping for payroll, income, employment, and even small business tax deductions to properly file with the Internal Revenue Service (IRS) come tax season.
- Getting financial statements (balance sheets, income statement, cash flow, and changes in equity) ready for stakeholders.
The bookkeeping process requires careful analysis and a little legal know-how. In the event your business is ever audited, you want to make sure your records are in order and deductions are legitimate.
2. Keep track of what everyone is doing (and spending)
Financial bookkeeping can take a great deal of time. You have to maintain your general ledger and ensure accuracy for each financial transaction, plus, you have to balance the books each day and track payments in and out from employees.
This means, to master your bookkeeping and accounting system, you should have excellent communication and organization skills. On any given day, you may need to collect receipts from employees, manage travel expenses, or reimburse people for costs. Creating a system for submissions and reimbursements helps make sure you don’t miss a transaction and that records stay up-to-date and accurate.
3. Use bookkeeping services to improve processes
Good bookkeeping or accounting software should be in your kit of small business accounting tools. With the rise in virtual bookkeeping and other types of online bookkeeping services, small businesses need to keep up with the latest technology.
With good bookkeeping services or software, you can streamline data entry, create detailed financial reports, consolidate data, and automate record keeping. It’s also an easy way to improve accuracy across your business and eliminate time spent doing repetitive tasks.
Double-entry bookkeeping versus single-entry
In the single entry bookkeeping method, business transactions are recorded as you make deposits and pay bills into your company account, like keeping a check register. A single entry system works best for smaller businesses with a small amount of financial transactions.
A double entry bookkeeping system is for businesses of any size and complexity. In a double entry system, when an entry is made to an account, a corresponding and opposite entry is made to a different one. For example, if you record a revenue of $100, you would make two entries: a debit entry of $100 to increase your cash balance sheet and a credit entry of $100 to increase the income statement account “revenue.”
How to master small business bookkeeping
Understanding and tracking your financial data is an essential part of small business finance. That’s why, when you’re running a business, it’s something you either have to learn from bookkeeping classes or outsource.
Luckily, not only is it possible to learn how to manage your own books, there are a few notable benefits to tackling it yourself.
We spoke with two experts to help you get a handle on managing your finances on your own: Charlie Ashbourne, an internal accountant here at Shopify, and Sheena Brady, a merchant success manager for Shopify Plus who also runs a successful business, Tease Tea, and has built a system to manage her business’s books.
If you’re new to keeping track of your accounts and can’t afford to pay a bookkeeping company or self-employed bookkeeper, you can still learn the basics and manage things on your own. Here’s a look specifically at ecommerce bookkeeping from a daily, monthly, quarterly, and yearly perspective.
What to do daily
On a daily basis, the one general bit of bookkeeping that needs to be on your mind is receipts.
Keep a paper trail of anything that happens in your business, which might mean holding onto routine financial statements, or keeping the receipt from your coffee meeting with a new supplier, or bookmarking the email receipt for your latest round of digital ads.
The reason it’s so important to keep these records is simple. To get the full tax benefit of claiming legitimate business expenses, you need to be able to substantiate them with supporting documentation.
“If you don’t have adequate support, you can be denied both tax credits and deductible expenses, which, if you’re actually entitled to them, can be a big hit at tax time,” says Charlie.
So your daily bookkeeping task is to make sure you’ve got a plan to keep track of receipts, invoices, and relevant emails. You want these documents to be easily accessible so working with them doesn’t require significant time or effort.
Receipts and invoices can be kept in a specified folder. If you tend to get emails from specific senders (your software providers, digital ads, and the like) you can set up a simple rule in your inbox to funnel them into a folder called “Receipts and Invoices.”
You could even create a simple to-do list item to handle this process, which is what Sheena has done for Tease Teas.
“Anytime an invoice or receipt is emailed to us—95% are these days—I upload the attachment to Google Drive, into an invoice folder broken down by month. This means I rarely ever have to print, file, or store any of this information, which in itself saves a lot of time.”
What to do weekly
Bookkeeping shouldn’t balloon into a huge weekly task on your to-do list. There are two key things to keep an eye on every week: your cash flow statement and your variable expenses, especially when they’re brand-new.
Pay attention to your cash flow
Do you have money in the bank, how much, and what does that money need to cover? That’s what you’re looking at when it comes to cash flow.
“Aside from revenue and expenses, the key thing is managing your cash and your cash flow. There’s usually a misconception that if you have revenue of X amount, then you have cash of that amount just sitting there, but that’s not necessarily the case,” says Charlie.
On a day-to-day basis, you might need to make decisions about when to buy something, or how much to spend on your business. Understanding how much cash you have on hand, and what else that cash needs to cover, is a key part of managing your books and your business.
Want a simple bookkeeping system to help plan and analyse your cash flow? This article about why cash flow can be even more important than profit includes a handy spreadsheet you can use.
Keep an eye on new or variable expenses
Most of the time, watching and reviewing your expenses can be a monthly task. But if you have any new expenses, or variable expenses, you’ll want to keep a closer eye on them to make sure they’re aligned with expectations.
“Take marketing expenses for example: if you’ve recently allocated a budget to run paid ads and it fluctuates day by day, you should keep a closer eye on it until you’re comfortable with the behavior,” says Charlie.
After all, if there are ways to evaluate new initiatives and expenses before the end of the month, you can make faster but still-informed decisions.
What to do monthly
If you were working with an in-house or remote bookkeeper, you’d probably be in touch with them to check on your books on a monthly basis. As a DIY-er, you should make a plan to sit down and commit some time on a monthly basis to keeping your books in order.
Get a business snapshot
On a monthly basis, you should be looking at your business as a whole to understand how things are going and to get a feel for the bigger picture.
“At the end of the month, you want to make sure you’ve got all of your expenses in and then look at your sales, your expenses, your income, and your cash position as a whole,” says Charlie. “You also want to make sure to look at any key areas of the business that you're interested in.”
Use bookkeeping services or software to track trends you’re seeing from month to month, and think about how you’ll handle the upcoming month from a financial perspective. You can also pay special attention to any new projects, campaigns, or operational changes to see if they’re impacting your sales, your expenses, or both.
Keep an eye on expenses
Your monthly review is a good time to think more strategically about how your expense account fits into your business.
“I always look at expenses deeply, even when we’re performing well in sales,” says Sheena. “A large success indicator in business is profitability, and you can often create unexpected profit by analyzing your expenses and creatively finding ways to lower them.
You can find different ways to cut costs by looking into supplier discounts based on your payment history, bulk ordering, or pre-ordering certain products.
“Last year, I looked at a popular tea accessory we sell and did some research. I asked our supplier if there was room for a discount based on our history and my knowledge of the manufacturer. He was able to lower our cost per unit, and we saved over $5,000 last year alone on this one ask.”
If there’s a tax preparation and bookkeeping cliché every entrepreneur can identify with, it’s the “shoebox full of receipts.” The dream, of course, is to hand that shoebox off to a CPA or one of the many bookkeeping services that can make sense of it all, but there are ways you can tackle the shoebox all on your own.
During your monthly review, go through all of your stored receipts in your email, your Google Drive file, or yes, your shoebox. Sort them into expense categories, both to keep yourself organized for tax season, and to get a look at how much you’re really spending on inventory orders versus advertising.
Adjust based on your needs
No two businesses are the same, and while there are fundamentals that are true for every business, your unique mix of revenue and expenses may lead to a slightly different set of bookkeeping needs from that of others.
“I used to review my books based on orders. Every order that came in, I’d ensure it was logged and tracked with bookkeeping software,” says Sheena. “It turns out, this wasn't necessary. For our business, all that mattered for our reviews were overall sales by month.”
If you’re recording everything you need for tax and bookkeeping purposes, and you’re getting the financial information you need to make strategic decisions about your business, you can opt to streamline processes that aren’t critical to either of those things.
The best bookkeeping software for small business
If you’re looking for ways to make online bookkeeping easier, there are a number of tools to consider, depending on the needs of your business:
- A2X. This app automatically posts Shopify store sales to Xero or QuickBooks and reconciles your payouts so you can see everything has been accounted for correctly. A2X is trusted by hundreds of leading ecommerce accounting firms.
- OneSaaS integrations. OneSaas connects business apps across accounting, ecommerce, fulfillment, CRM, billing and invoicing, and email marketing. You can easily build custom workflows and create a bookkeeping system that grows with your business.
- FreshBooks. This cloud bookkeeping software helps you manage Shopify orders in FreshBooks based on three objects: items, invoices and payments. It also uses your Shopify inventory as the source of truth for all inventory management, updating financial information automatically.
- QuickBooks. When you integrate Shopfiy with QuickBooks, your orders, inventory, customers, and shipping are updated and accurate automatically. You can use QuickBooks to post ecommerce order information as batch journal entries or granular order level posting, and sync with other ecommerce marketplaces, such as Etsy and Amazon.
- Bench. Bench offers affordable outsourced bookkeeping services for your Shopify store. The app syncs directly with your merchant and bank accounts. Then, a virtual bookkeeping team balances your monthly books and prepares financial reports.
“When choosing the best bookkeeping system, consider one of the lead cloud accounting systems, such as QuickBooks or Zero,” says Ellen Main of A2X Accounting.
“When doing tax bookkeeping for your Shopify business, it’s not enough just to record the sales. You need to pick up all the fees and taxes,” Ellen adds. “This is no small task without the help of an app, connector, or integration.
Choose a bookkeeping software that posts summarized financial statements and attributes all your sales and fees to your bookkeeping system. This will ensure that, as your business scales, your books will always be tidy and accurate.
Bookkeeping is key for small business growth
Whether you do all bookkeeping yourself or decide it’s best to hire a certified bookkeeper, understanding how money flows through your business is good business.
“Having proper data and knowing where you are, what seems to be driving your revenue, and where you might be able to trim some costs is critical,” says Charlie. “Having solid data when it comes to bookkeeping for startups puts you in a better spot to succeed in the future.”
Even if you have little bookkeeping experience, you now have firsthand knowledge of and access to all your financials, which puts you in a powerful place to make informed decisions about your business’ future. And while there’s value in getting expert bookkeeping help and advice, make sure you never lose the solid understanding of your numbers, no matter who you have running your financial management day to day.
What is a bookkeeper?
A bookkeeper is someone who produces your accounts and documents daily financial transactions. Bookkeeping help aims to show you where your business stands financially at the moment, and is where accountants look into the bigger picture of your business’ financial health.
What is the difference between bookkeeping and accounting?
Simple bookkeeping is the process of recording financial transactions. Accounting involves recording, plus, classifying, interpreting, analyzing, reporting, and summarizing financial data.
What’s the best bookkeeping software for small business?
- Xero. Best general bookkeeping software.
- QuickBooks. Best for inventory management and payroll bookkeeping.
- FreshBooks. Best to master bookkeeping for startups.
- Wave. Best financial bookkeeping for service-based businesses.
- Zoho Books. Best for automation.
- Sage Business Cloud Accounting. An affordable, cloud-hosted alternative.
What is the best course for bookkeeping?
If you want to take bookkeeping classes to improve your accounting skill set, look to these five courses: