The Beginner's Guide to Bookkeeping
The purpose of this article is to give business owners a full overview of what bookkeeping entails
Welcome to Bookkeeping 101, where you'll learn Everything you Should Know About Bookkeeping Basics (And Then Some)
The purpose of this article is to give business owners a full overview of what bookkeeping entails so that they can:
A. Implement proper bookkeeping practices
B. Decide which bookkeeping methodology to use (yes, there's more than one way to keep your books...)
C. Decide if it's something you have the bandwidth and skillset to handle
Since there is a lot of information on this page, we recommend you bookmark this page and refer to it often. While you may be able to handle bookkeeping today, it can quickly get out of hand.
Bookkeeping vs. Accounting
Bookkeeping and accounting are actually closely related disciplines. In fact, bookkeeping is a subset of accounting. It may seem like we are splitting hairs by making this distinction, but could we really call ourselves accountants without doing so? (there would be so many unaccounted-for hairs…) In all seriousness, though, there are important differences when it comes to defining the two.
In the general sense, bookkeeping is like keeping a detailed diary for your money. It's the process of systematically recording, organizing, and maintaining financial transactions and records of a business or individual. Bookkeeping is focused on the more mechanical tasks of keeping track and maintaining accurate and detailed records of income, expenses, assets, and liabilities.
However, bookkeeping and accounting serve different purposes and involve distinct activities. Where bookkeeping is primarily concerned with the recording and organization of financial transactions, accounting can encompass a broader range of related tasks and takes a more comprehensive view of the financial data. This can include analyzing, interpreting, and making decisions based on the recorded entries. Accountants use the recorded data to assess financial performance, evaluate profitability, and provide recommendations for improving financial management.
To continue the comparison, if bookkeeping were the diary you kept, accounting might be the psychiatrist you use to analyze the status of your mental health.
What is the Importance of Bookkeeping?
Bookkeeping is an important aspect of any well-run business. Whether you are a freelancer or part of a multi-million dollar company, proper bookkeeping practices are essential to understand your financial situation and make informed choices about your money.
Good bookkeeping practices help to keep everything organized so you know exactly where your money is coming from and where it’s going. It helps you track how much you have, how much you owe, and how much is owed to you. Accurate and up-to-date bookkeeping is also an integral tool in almost every aspect of financial analysis, from measuring profitability to evaluating cash flow, assessing liquidity, analyzing return on investment, and making informed financial forecasts.
On the other hand, poor bookkeeping can lead to a number of negative consequences. Other than inaccurate financial reporting and possible financial mismanagement, inadequate bookkeeping can lead to compliance issues with the IRS. Audits, investigations, and even potential legal actions may be taken if a company fails to maintain accurate records or report income correctly. In order to prevent the repercussions of poor bookkeeping, often times companies will have to spend additional money towards tax time to clean up previous mistakes and ensure compliance, which further adds to the cost of poor bookkeeping in the long run.
What are Good Bookkeeping Practices?
The best bookkeeping practices encompass a number of key elements. We won’t bore you with the entire system of guidance provided by the Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS), or any of the industry specific standards or regulatory requirements. To stay in compliance, we do recommend that you adhere to GAAP and IFRS guidelines as well as any of your company’s specific industry or regulatory requirements when organizing your bookkeeping records. For now, however, we’ll overview a few practices we like to see in our own books.
- Organization: First and foremost, we like to see a systematic and organized approach to bookkeeping. This includes setting up appropriate folders, files, and digital systems to store and organize financial documents and records.
- Timeliness: Record financial transactions promptly and consistently to ensure that information is up to date. Reconciling transactions at a later date can cause inaccuracies and waste precious time. Our solution: Think and act chronologically.
- Attention to detail: Ensure that financial transactions are recorded accurately, without errors or omissions. Double-check figures, verify calculations, and create internal controls throughout the bookkeeping process.
- Safeguards: Safeguards for errors and fraud may look different depending on the size or scope of your company. Smaller companies may perform regular reviews to safeguard themselves against poor bookkeeping. Larger companies may additionally consider segregating duties or implementing approval processes for financial transactions.
- Categorization and Classification: Properly categorize and classify financial transactions to ensure accurate reporting. Build and use a standardized chart of accounts or categories to consistently record income, expenses, assets, and liabilities.
- Documentation: Maintain complete documentation, including invoices, receipts, bank statements, and other supporting documents. These documents serve as evidence of financial transactions and are crucial for auditing, compliance, and reference purposes.
- Backup and Security: Regularly backup financial data and implement appropriate security measures to protect sensitive financial information from loss or unauthorized access.
- Separation of Responsibilities: The same person writing the checks should not be the person approving the expenses. To avoid issues, using multiple people throughout the process will prevent errors and unauthorized spending.
Common Bookkeeping Mistakes
In addition to showing you the dos of bookkeeping, we thought we’d also cover a few of the common bookkeeping don’ts and how to avoid them.
Do you have loan payments on your books? You may not have accounted for the principal and interest portions of the payments correctly. If you have categorized the whole payment into a single expense, your books are probably incorrect. Make sure you always account for the principle, as well as interest. By accounting for the principal and interest components separately, you can accurately track the loan balance, and monitor interest expense.
- Principal Repayment: The principal portion of a loan payment represents the reduction of the outstanding loan balance. It is not expensed but rather reduces the loan liability on the balance sheet. When recording a loan payment, the principal amount should be debited (reducing the loan liability), and the cash or bank account should be credited.
- Interest Expense: The interest portion of a loan payment represents the cost of borrowing funds. It is expensed and recorded as an interest expense on the income statement. The interest expense is calculated based on the outstanding loan balance, the interest rate, and the period for which interest is being accrued.
The Infamous “Shoe Box.”
It’s not always a shoe box. And sometimes, there’s even some semblance of order to the disorder. But if you have a box, coffee tin, junk drawer, or even a folder of unorganized receipts, the only thing we can advise is…well…start anew as soon as possible. Spend some time organizing the receipts you do have, then establish a systematic and consistent method to organize future documents. There are technology solutions that we leverage daily at Decimal that automate the following steps and save a considerable amount of time. However, the principles of organizing expenses remain the same whether it’s physical receipts or a digital collection of information. Consider these few steps:
- Create a system of organization: This can include a central database (the preferred choice), filing cabinet, a binder, or (we’re not judging) a system of ziplocs. However you decide, keep it consistent.
- Label everything clearly: Label each container with a clear and descriptive name that corresponds to the category of documents it contains. We find dates or date ranges can help as well.
- Sort and categorize: Think broad categories such as invoices, receipts, contracts, and bank statements. If you want to get a further understanding of expenses later on, layering on additional information like departments is useful.
- Establish a logical order: Whether it is alphabetical or chronological, use what works for your team or company.
- Implement a filing schedule: This is a big one for us. Give yourself a set and regular time of week or month to file your documents. The frequency can vary depending on your document volume.
Ideally, all of these activities are done in a much more efficient way with an expense management system and not a filing cabinet of physical receipts. If the time commitment to build a better process is too great, it might be a good time work with our team at Decimal.
Physical inventory can cause some issues in the books due to a variety of reasons. Usually, though, it’s due to human error or theft. It may be tedious, but the only way to stay on top of this pitfall is to stay current on your inventory. Depending on your company you may consider the two most common approaches to inventory: periodic inventory counting or perpetual inventory counting.
Periodic inventory is typically done at the end of the year and is used to adjust the inventory balance on the financial statements at the end of the counting period.
Perpetual, as it sounds, is tracked continuously or on a regular basis. This can be monthly or quarterly (and in some cases daily), and is often used with companies with high inventory turnover. Perpetual will often be used when the inventory count is tracked through software and updated automatically with each translation.
Even barring the complicated calculations involving tax withholdings and benefit deductions, payroll can be a nightmare in the bookkeeping department. There are a number of items we would advise you to do accuracy checks on, including employee classification, time tracking, tax compliance, and deductions. Beyond that, we would also make sure to check that your income statement shows the gross payroll. Without manual adjustment, your statement may not adjust for bank fees and only show your net payroll.
Accrual Basis Bookkeeping
Accrual-based accounting is not for the faint of heart. While it's not impossible to learn, it can be complex and time-consuming. Accrual accounting requires recording revenues when earned and expenses when incurred, regardless of cash flow, and there are numerous accounts that need to be manually updated at year-end. This task is often far too difficult if you do not have an accounting background or some third-party help. It’s best to discuss this process with an outsourced accounting partner like Decimal!
Can I Teach Myself Bookkeeping?
Absolutely! We believe in you! But, “can I?” is not probably the question that brought you here. (if it is, we’ll cover some of that as well a little further on.)
The real question behind your query probably is:
Should I do my Own Bookkeeping?
Handling your own books can save money and give you a hands-on understanding of your business finances. Whether you do your own bookkeeping or not can depend on a few other factors as well. Your business size, the complexity of your accounting needs, and your initial level of accounting knowledge and experience can all affect this decision. Our top two considerations are the following:
Bookkeeping is an extremely time-consuming and tedious task. If you are in the early stages of your business, you are most likely stretching yourself as it is--perhaps trying to manage your marketing, sales, PR, customer service, and inventory all at the same time.
The question you should consider is this: What is the opportunity cost of spending time on bookkeeping? Or in other words, is bookkeeping preventing you from focusing on revenue-generating activities or strategic business development?
Does your accounting experience boil down to a couple of college courses? Have you ever taken the time to get to the state and federal tax codes that apply to you? Are you familiar with the term "nexus"?
Depending on the size and scope of your business, you may very well be equipped to handle your own bookkeeping. Even so, you may find yourself overwhelmed with the complexities of financial management, potentially making costly errors or falling behind on crucial tasks that can impact your business's financial health.
No matter your experience with bookkeeping, you should evaluate the availability of resources, tools, software, or services that can help you simplify the bookkeeping process. Because, let’s face it, is bookkeeping the real reason you opened your business? Did you really want to spend 10 minutes Googling “nexus accounting definition” just to prove to yourself you could understand it and find you have more questions than you started with?
Chances are that you didn't become a business owner so you could practice bookkeeping. Hiring a bookkeeper will allow you to focus on the real reason you decided to put blood, sweat, and tears into your work.
Best Bookkeeping Classes for Beginners
Now that you’ve considered the “should i” extensively, you may still find yourself with reasons to learn bookkeeping. More than likely, it is to acquire a better understanding of how all of your finances are flowing, whether you are managing the books yourself or have allocated the task to another employee or third-party service. There are a ton of classes to choose from. Below we have outlined some of our favorite courses and some considerations in picking out the bookkeeping classes that fit your needs.
Why we like them: For the low, low price of nothing at all, you will have access to an in-depth look at all of the bookkeeping (and beyond) basics. There are premium options, but they’re all clearly marked throughout your outlines and are generally only for extra study materials or for certifications in the topics. It is self-paced, includes quizzes, and you can track your progress through the materials. If you do decide to go with the premium services, however, the fee is a relatively low, one-time cost
What we missed: This website primarily focuses on text-based learning and restricts access to video content through its paywall. Because it’s completely self-paced, there are no instructors to answer questions or clarify concepts.
What we liked: edX has a multitude of structured classes in various accounting topics, including bookkeeping. Like AccoutningCoach, it is also free and self-paced. However, edX’s video content is not behind a paywall. It also includes student discussion forums, supplemental readings, and short quizzes or exams. If you aren’t looking to get certified in any particular topic, edX is a great affordable option. And if you would like to be certified, that option is available too!
What we missed: Some courses are only offered at certain times, usually once a month. Additionally, there is no access to the teachers if needed. If you are in the need for on demand bookkeeping knowledge, this may not be the course for you
Why we like them: Skill Share offers a wealth of video-based learning topics in accounting and bookkeeping. Even software training courses are available. Like edX, Skill Share offers student forums but also includes the ability to communicate with the teacher through discussion forums.
What we missed: To access any classes on Skill Share, you must have an active paid membership to the entirety of the site. You also lose access to class materials once your membership expires.
What are Bookkeeping Templates?
Even if you are an Excel or Google Sheets wizard, building and designing a functional and accurate bookkeeping document or spreadsheet can take hours. Bookkeeping templates are pre-designed documents or spreadsheets that provide a structured format for recording your financial information. Templates are a great starting point for customizing your workflow and provide a framework to streamline your bookkeeping processes.
What are the Different Bookkeeping Services Available?
The O.G. or “Traditional” Bookkeeping Services: Accounting Firms
The most traditional method of bookkeeping is to hire an accountant or accounting firm. (We’re talking local mom-and-pop shops and freelancers.) These guys offer great benefits over the DIY self method—like the fact that you’ll barely have to lift a finger and you’ll also be privy to expert insight (pending their qualifications of course).
Of course, there are also some drawbacks to these bookkeeping services, such as higher fees and slow turnaround times. Many of these institutions charge high hourly fees for consultations which can make it difficult to set a steady course for your monthly budget, not to mention their services can often be “behind the times” in terms of integrating technology.
When it comes to the traditional method, business owners will have to consider whether or not they want to hire an in-house bookkeeper or an external accounting firm. Both methods can be expensive with hourly consulting fees and salary/benefit considerations for in-house hires. In-house accountants can be a solid option if you own a large operation and need constant oversight. Smaller businesses, however, might find that the costs don’t outweigh the rewards when it comes to hiring a full-time accountant.
The "Semi-Traditional” Bookkeeping Service: DIY Software
DIY software is an increasingly popular option, giving business owners a great UI to track their finances. Companies like Quickbooks provide robust software that can help facilitate advanced accounting functions. Not only are many of these types of tools extremely helpful, but they can also save money when it comes to hiring a traditional accountant. Although this is a great option for accountants, it may not be optimal for business owners.
Having a good piece of software doesn’t make you knowledgeable about the US tax code, regulations, or requirements. Business owners can miss out on deductions, disqualify themselves as a compliant business, and face IRS auditing through improper tax filing. Having simply taken an accounting class in college is no substitute for the wealth of knowledge an accountant brings to the table.
Even if you feel confident enough in your accounting, there is still the consideration of time. Anyone who has started a business knows that they will soon find themselves being pulled in lots of different directions. Bookkeeping is a time-consuming task—business owners need to ask if reconciling transactions is the best use of their time. A more honest labeling of "DIY" software is not a bookkeeping service, but rather a bookkeeping tool.
The "Fully Automated” Bookkeeping Service: Software+Process+Accounting Experts
This hybrid service provides the best of both worlds, giving users access to customized software as well as a dedicated bookkeeper. Instead of having to reconcile your own transactions, a bookkeeper (accountant) will do it for you. Some of these services like Decimal, offer unlimited consultation at no hourly cost. Instead, we prefer the more modern “Netflix” model of a monthly flat-rate fee. This gives business owners comfort, knowing they can reach out for advice without fear of incurring extra costs and make more accurate monthly budget predictions. Rather than a mean (tool) to an end, this option is a completely automated solution.
This option will not be for everyone, for example—extremely large and complicated corporations or accounting firms (just covering our bases). However, for the other 90% of business owners—this type of bookkeeping service is likely to be the most inclusive and cost-effective. It offers all of the good (and more) of the aforementioned methods without the bad. The hybrid mixture of cloud-based tech combined with a human element of a bookkeeper takes away the headache of navigating tax law and entering data—while still providing a high-touch high-tech solution to your bookkeeping service needs.
Before clicking the X on your browser, or the button below, remember to ask yourself two things: "Do I have the expertise to make the most of my tax returns?" and "Are my talents best spent doing my own bookkeeping?" If you find yourself unsure on either of these fronts—click the button below and we'll give you a no-hassle consultation where you can ask any questions you might have.