Bookkeeping is …
- a) Boring
- b) Essential
- c) Confusing
- d) Time-consuming
- e) All of the above
Regardless of what your actual feelings are towards it, bookkeeping is a task that every small business owner should have control over. By keeping an accurate record of all your business transactions you can ensure that your money is going where it needs to go, i.e. you’re getting paid and you’re not racking up any unwanted debt.
Whether you currently outsource to an accountant or you’re learning how to do it for the first time, we want to keep it simple. Here’s a list of bookkeeping basics for small business owners to keep in mind.
Keep Your Receipts
Since you’ll be building an accurate record of your business transactions, we need to know all of your business transactions. Therefore, we recommend keeping your receipts. In fact, we recommend keeping them for at least six years, this is just to build up good habits in case you’re audited.
In the event that you’re audited, the tax auditors will want to see a proof of purchase and proof of payment, i.e. your receipts and bank statements. So save yourself some stress and keep all of your receipts.
Pro Tip: If you’re paying with cash, you should still keep your physical receipts.
Separate Personal and Business Transactions
One of the fundamentals of bookkeeping is to keep your personal transactions separate from your business transactions. There are a few reasons for this:
The first is that there are tax implications if you file and mix your expenses. For example, you can qualify for tax deductions on certain business expenses. If you mistake those expenses as personal, you can lose out on potential savings that can be used to grow your small business. On the other hand, if you mix too many personal expenses in your books, it may warrant an audit from the CRA (if you’re in Canada) or IRS (if you’re in the US).
The second reason is that it will save you time and headaches. This is true especially if you have multiple transactions per month coming from one account. No one wants to spend hours combing through every transaction to make sure it was a business expense. Most businesses have a separate business account just to keep those expenses organized.
Lastly is legal implications. In the event of legal action to your small business, you will need to show that your business and personal finances are separate. If they are not, you may be personally liable for your business debts. This is a more complicated issue and should be discussed with a legal professional which is why encourage you to keep it simple, “separate your personal and business transactions.”
Categorize your Transactions
Categorizing your transactions in your books can help you understand two things about your small business: where you’re spending the most money in your business and applicable tax deductions.
By correctly categorizing your transactions, you will find that you may qualify for certain tax deductions for your small business. For example, if you’re working from home you can qualify for a standard deduction of $5 per square foot of your home business (maximum 300 square feet).
Pro Tip: For specifications on tax deductions, please consult your accountant.
Some common small business expense categories include:
- Work-related travel (gas, flights, tolls, etc.)
- Office (supplies, furniture, equipment, etc.)
- Utilities (Electricity, Phone, Wifi, etc.)
- Business meals
- Credit card payments
- Charitable contributions
- The list goes on…
Keep a Schedule
How often should I do bookkeeping for my small business? Ask an accountant and they’ll say, “daily.” However, we understand that there’s just not enough hours in a day to get to everything that needs attention.
Try time-blocking into your schedule a dedicated few hours, once a month to go through and ensure your books are accurate and up to date. The goal here is to turn bookkeeping into an atomic habit. With enough time and practice you’ll start to get a handle of your bookkeeping process and understand what works for you.
Building atomic habits is all about getting 1% better at every opportunity. Putting effort into the financial health of your business will help you see exponential growth.
Use Accounting Software
Bookkeeping is all about keeping your business transactions organized in one place. However, it can become heavily time-consuming when you have multiple transactions that you have to manually enter each month. That is why we recommend using accounting software to help automate your bookkeeping.
If you are a TrulySmall user already, then simply connect your bank account or import your transaction data to get started. Once your transaction data is uploaded our smart technology will automatically categorize, reconcile and post your bank feed transactions for you. Simply review the records for completeness and you’re done.