Bookkeeping Basics

The guide

What bookkeeping is, in one paragraph

Bookkeeping is four verbs. Record every transaction.

Categorize each one so the money has a name (materials, payroll, fuel, income from job 118). Reconcile the books to the bank and card statements so nothing is missing or doubled.

Report, so you can read what happened. Everything else in accounting sits on top of those four.

Cash or accrual

Cash basis records a sale when the money arrives and a cost when it leaves. Accrual records the sale when you earn it and the cost when you incur it, whether or not money moved.

Most small businesses start on cash basis because it is simpler and matches the bank. Businesses that invoice, carry inventory or want to know whether a job made money usually move to accrual, or run accrual reports off cash books.

Your preparer will tell you which basis your tax return uses; your reports should match it.

The chart of accounts

The chart of accounts is the list of names money can have. Too few names and everything is “expenses.”

Too many and nothing gets categorized consistently. A good chart for a small business has twenty to forty names, split into income, cost of sales, overhead, assets, liabilities and equity, and it stays the same month to month so the reports compare.

The monthly close

Once a month, on a fixed day, the books are closed: every account reconciled, every transaction categorized, receivables and payables reviewed, payroll posted, the profit and loss and balance sheet read. A closed month does not change afterward.

That discipline is what makes the numbers trustworthy and tax time uneventful.

Five habits that keep books clean

One business account and one business card, used for nothing else. Receipts captured the day they happen.

Invoices sent the week the work is done. The bank and card feeds looked at weekly.

The close done monthly, not yearly. Miss the fifth and the other four slowly stop mattering.

When to hand it off

If the close is not happening, if the bank balance in the books does not match the bank, if a tax deadline surprised you, or if you are the bottleneck for your own numbers, it is time. A cleanup brings the books to a clean starting point; a monthly service keeps them there and hands you a plain-English statement each month.