Bookkeeping is the process of recording and organizing your business’s financial transactions. It is not glamorous, but it is essential. Good books help you understand profitability, prepare for taxes, make decisions and avoid surprises.
This guide covers bookkeeping basics. It is general information, not accounting or tax advice. Consult a qualified accountant or bookkeeper for your situation.
Why Bookkeeping Matters
- Know your numbers: Understand income, expenses and profit
- Prepare for taxes: Organized records make tax time easier
- Make decisions: Pricing, hiring and investment decisions depend on accurate data
- Support financing: Lenders often ask for financial statements
- Reduce risk: Catch errors and fraud early
Separate Business and Personal Finances
Use a dedicated business bank account and, if appropriate, a business credit card. Mixing finances makes bookkeeping harder. See our business bank account guide.
Key Concepts
Income and Expenses
Income is money earned. Expenses are costs of running the business.
Assets, Liabilities and Equity
Assets are what the business owns. Liabilities are what it owes. Equity is the owner’s stake.
Cash vs. Accrual Accounting
- Cash basis records income when received and expenses when paid
- Accrual basis records income when earned and expenses when incurred
Many small businesses use cash basis, but requirements vary. Ask an accountant which method fits.
Single-Entry vs. Double-Entry
Double-entry bookkeeping records each transaction in two accounts, helping catch errors. Most accounting software uses double-entry behind the scenes.
Chart of Accounts
A chart of accounts lists categories for transactions, such as sales, advertising, software, rent and supplies. Accounting software provides default charts you can customize. Keep categories consistent.
Recording Transactions
Record every transaction, including:
- Sales and payments received
- Expenses and bills paid
- Transfers between accounts
- Owner contributions and draws
- Loan payments
Accounting software with bank feeds imports transactions automatically for you to categorize.
Receipts and Documentation
Keep receipts and invoices. Digital copies are often acceptable, but check guidance for your situation. Expense tracking apps can capture receipts. See our expense tracking apps guide.
Reconciliation
Reconciliation compares your books to bank and credit card statements to ensure they match. Reconcile monthly at minimum.
Accounts Receivable and Payable
- Accounts receivable is money owed to you. Track invoices and follow up. See invoicing software for freelancers.
- Accounts payable is money you owe. Track bills and due dates.
Financial Reports
Profit and Loss Statement
Shows income, expenses and profit over a period.
Balance Sheet
Shows assets, liabilities and equity at a point in time.
Cash Flow Statement
Shows how cash moves in and out.
Review reports monthly.
Bookkeeping Software
Accounting software automates many tasks. Features to look for:
- Bank feeds
- Invoicing
- Expense tracking
- Reports
- Integrations with payroll and other tools
- Accountant access
Compare current plans and features.
A Simple Bookkeeping Routine
Weekly
- Categorize transactions
- Upload receipts
- Send invoices and follow up on overdue ones
Monthly
- Reconcile accounts
- Review reports
- Pay bills
Quarterly
- Review estimated tax obligations with a professional
- Review profitability
Annually
- Prepare for tax filing
- Review the chart of accounts
DIY vs. Hiring Help
Many owners start with DIY bookkeeping. As the business grows, a bookkeeper or accountant can save time and reduce errors. Consider help when:
- You spend significant time on bookkeeping
- Transactions are complex
- You have employees. See Gusto vs. ADP.
- You are unsure about tax obligations
Common Mistakes
- Mixing personal and business finances
- Falling behind on categorizing
- Not reconciling
- Losing receipts
- Ignoring reports
Understanding Your Profit and Loss Statement
The profit and loss statement is often the report owners look at most. It typically shows:
- Revenue from sales or services
- Cost of goods sold for businesses that sell products
- Gross profit
- Operating expenses such as rent, software and marketing
- Net profit
Compare months and years to spot trends. Rising expenses in a category may signal an opportunity to cut costs, while seasonal revenue patterns can inform cash planning.
Cash Flow vs. Profit
A business can be profitable on paper but short on cash, for example when clients pay slowly. Tracking accounts receivable and planning for upcoming bills helps manage cash flow. Invoicing tools with reminders can shorten the time between finishing work and getting paid.
Working With an Accountant
Even if you do your own bookkeeping, an accountant can review your books periodically, help with tax planning and answer questions. Giving your accountant access to your accounting software can make collaboration easier. Ask what records they need and when.
Bookkeeping Checklist
- Business bank account open and connected to software
- Chart of accounts reviewed and customized
- Transactions categorized weekly
- Receipts captured and attached
- Accounts reconciled monthly
- Invoices sent promptly and overdue ones followed up
- Bills tracked and paid on time
- Reports reviewed monthly
- Tax deadlines on the calendar
- Records backed up
Catching Up on Bookkeeping
If you have fallen behind, start with the most recent month and work backward, or hire a bookkeeper to catch up. Gather bank statements, receipts and invoices, then categorize and reconcile month by month. Once caught up, a weekly routine prevents the backlog from returning. It can also help to set a recurring calendar reminder for bookkeeping time.
Keeping Bookkeeping Manageable
Bookkeeping feels overwhelming mostly when it piles up. Short, regular sessions keep the work manageable and give you an up-to-date view of the business. Treat bookkeeping time like a client appointment that you do not cancel.
Frequently Asked Questions
What is the difference between bookkeeping and accounting?
Bookkeeping records transactions; accounting interprets and reports on them.
Do I need accounting software?
It is very helpful for most businesses.
How often should I do bookkeeping?
Weekly categorizing and monthly reconciliation are common routines.
Cash or accrual?
Ask an accountant which fits your business.
When should I hire a bookkeeper?
When bookkeeping takes too much time or becomes complex.
The Bottom Line
Good bookkeeping helps you understand your business, prepare for taxes and make decisions. Separate finances, record and categorize transactions, keep receipts, reconcile monthly and review reports. Consult qualified professionals for accounting and tax questions.
Editorial note: Biz Benchly is independent and reader-supported. This guide is based on research into manufacturer documentation, published specifications and widely accepted best practices; we have not been paid to mention any product. If we add affiliate links in the future, they will be clearly disclosed per our Affiliate Disclosure.