Good bookkeeping practices help you stay on top of your financial situation and are essential in order to qualify for business loans, file taxes, and attract new investors. In this article, we’ll run through the best bookkeeping practices that can help you to manage your finances effectively and make your business more successful.
What is bookkeeping?
Bookkeeping is the practice of recording all of a business’s financial transactions. These transactions, which can include purchases, investments, revenue, and more, are recorded in a general ledger, which can be either a physical book or a digital spreadsheet. They may also be recorded in sub-ledgers to help organize information.
Bookkeeping has some overlap with accounting because both involve preparing financial statements and records, but an accountant’s job is much more analytical than that of a bookkeeper. Accountants often perform mathematical calculations and track trends using the data recorded by the bookkeeper. Accountants need to have a bachelor's degree or earn a license as a certified public accountant (CPA) to work, while bookkeepers only need a high school diploma.
10 bookkeeping best practices for small business owners
- Carefully consider bookkeeping and accounting systems
- Separate personal and business finances
- Set up accounts receivable and accounts payable
- Follow generally accepted accounting principles (GAAP)
- Stick with the same accounting system
- Maintain common financial reports
- Pay extra attention to cash flow management
- Conduct quarterly reviews
- Double-check your bookkeeping with credit card and bank statements
- Hire professionals when needed
These 10 effective bookkeeping practices can not only help you to stay on top of your finances but also provide valuable insights into the financial health of your business.
1. Carefully consider bookkeeping and accounting systems
When choosing your business’s bookkeeping and accounting method, think carefully, because switching can be difficult down the line. There are two main options:
- Manual bookkeeping. This is done by hand and is relatively inexpensive (as long as you budget time or have the manpower to do it), but is prone to human error.
- Digital bookkeeping. This is done on a computer, using software. It can sometimes be pricey and may take you or your employees longer to learn how to use. But once you do learn how to use it, it can save you a lot of time. If you are evaluating software, you can consult Shopify’s accounting software guide for small businesses.
2. Separate personal and business finances
Small-business owners should take extra caution when it comes to separating business finances from personal accounts. Failing to do so can result in inaccuracies in your financial data, leading lenders and potential investors to refuse to work with you. It’s recommended you establish separate bank accounts for business and personal matters. You can also establish separate credit scores for your business to prevent your personal finances from being negatively affected by the business, and vice versa.
3. Set up accounts receivable and accounts payable
Bookkeepers must keep track of a business’s short-term debts and credits. They do this by logging information into two accounts:
- Accounts receivable. This account keeps track of all money owed to the business for services provided or goods sold.
- Accounts payable. This keeps track of all the money that the business owes in the short run, such as utility bills and payments to suppliers.
A small business can set up these accounts by carefully tracking all invoices and bills. The bookkeeper should record all unpaid invoices in the accounts receivable while all unpaid bills should be recorded in accounts payable.
4. Follow generally accepted accounting principles (GAAP)
In the US, the Securities and Exchange Commission has adopted generally accepted accounting principles (GAAP) in order to standardize accounting and bookkeeping across relevant government filings. Publicly traded companies in the US are legally required to use GAAP. Private companies are not required to, but many choose to do so to minimize confusion for outside accountants.
If you are interested in expanding your business internationally, you may also want to follow International Financial Reporting Standards (IFRS), which provides a set of guiding principles for accountants all over the world. These standards are not legally binding but are convenient for businesses looking to communicate with international clients.
5. Stick with the same accounting system
Regardless of which bookkeeping system to use, you should stick with it. If you decide to use GAAP principles, stay consistent with using that system and try not to switch unless necessary. The same goes with the bookkeeping software you choose to use, or the bookkeeper you hire—choose one that works for you and try to stay with it. That will help reduce complications and keep your records accurate. If or when you do need to get a new bookkeeper or find a new accounting software, be sure to switch your records over carefully and take time to ensure errors aren’t introduced into your books.
6. Maintain common financial reports
Most businesses maintain at least three major financial reports:
- Income statement. An income statement lays out all of a business’s revenue streams, expenses, and profit over the course of a specific period of time (usually one year or one quarter).
- Balance sheet. A balance sheet is a document that provides a snapshot of a company’s assets and liabilities on any specific day.
- Cash flow statement. A cash flow statement provides information about cash coming in and out of a company over a period of time.
Together, these three statements can help give accountants and potential investors a better understanding of the financial health of your business.
7. Pay extra attention to cash flow management
Of the three financial statements above, the cash flow statement, which details all cash payments and income, is especially important. It can give you an understanding of how specific business expenses and income streams affect your company’s financial health. By analyzing cash flow, you might notice that certain customers consistently pay invoices late or that some suppliers are charging your business more than you can afford. Knowing those things can help you decide when to stop doing business with certain customers and suppliers or how to set your prices.
8. Conduct quarterly reviews
During a quarterly review, an accounting professional will go over all of your financial data recorded by the bookkeeper and use it to make recommendations about your business’s growth, expense cutting, borrowing, lending, and other financial matters. You may also want to take this time to strategize and plan for the future of the business.
9. Double-check your bookkeeping with credit card and bank statements
Double-checking all recorded transactions with bank and credit card statements each month is a good practice to minimize the risk of bookkeeping errors. It’s important, however, to remember that bank and credit card statements do not replace good bookkeeping. Banks and credit cards can also sometimes make mistakes, so it’s important to have your own record of your invoices and receipts.
10. Hire professionals when needed
Bookkeeping can be a lot of work, especially if you’re an already busy small business owner. Procrastinating and failing to document transactions could lead to bookkeeping work piling up and make your records very difficult to manage. If you find yourself falling behind or feeling overwhelmed by bookkeeping, it’s a good idea to hire a professional bookkeeper who can put in the hours needed to keep your books up to date.
Bookkeeping best practices FAQ
What are some common bookkeeping mistakes that small-business owners make?
Small-business owners sometimes fail to choose and stick with one bookkeeping system, causing their records to be prone to errors. Additionally, failing to maintain important records increases the chance of errors. These mistakes are more likely to be avoided if you hire a professional bookkeeper.
How often should I record and reconcile financial transactions?
You should record transactions as frequently as you can. This can be every day if that’s how frequently the transactions are taking place. You should reconcile transactions with bank or credit card statements at least once a month.
Why is it important to keep receipts and invoices?
Receipts and invoices can be used as evidence in the event that your bank or credit card company makes a mistake, or you undergo a tax audit. Invoices also can help predict anticipated income, even if they haven’t been paid yet.
How can financial reports help me make better business decisions?
Financial reports can give you insight into the sources of your expenses and income streams. They can also help you see trends or seasonal cycles, which can help you budget and plan for your business’s future.
Is it necessary to hire a bookkeeper or accountant?
Most businesses find it helpful to hire an accountant at least once a year for tax filing. You may also consider hiring a bookkeeper if you’re struggling to keep up with recording transactions.