Best Practices for Bookkeeping

Introduction

Bookkeeping is the foundation of sound financial management. Accurate, organized bookkeeping enables you to make informed business decisions, prepare for tax time with ease, and maintain healthy cash flow. This guide covers essential bookkeeping best practices that every business owner should know.

Why Good Bookkeeping Matters

Benefits of Proper Bookkeeping

• Financial Clarity: Know exactly where your money is going
• Tax Preparation: Simplify tax filing and maximize deductions
• Cash Flow Management: Track income and expenses to avoid cash crunches
• Business Insights: Identify profitable products, services, and customers
• Compliance: Meet legal and regulatory requirements
• Business Growth: Access to credit and investors requires solid financials
• Error Detection: Catch mistakes and potential fraud early

Essential Bookkeeping Concepts

Double-Entry Bookkeeping

The foundation of modern bookkeeping, where every transaction affects at least two accounts:

• Debits: Increases in assets or expenses, decreases in liabilities, equity, or income
• Credits: Decreases in assets or expenses, increases in liabilities, equity, or income
• The total of debits must always equal the total of credits

Chart of Accounts

A organized list of all accounts used to record transactions:

• Assets: What you own (cash, equipment, inventory)
• Liabilities: What you owe (loans, accounts payable)
• Equity: Owner's stake in the business
• Revenue: Income from sales and services
• Expenses: Costs of running the business

Setting Up Your Bookkeeping System

Choose Your Method

Cash Basis Accounting

• Record income when received
• Record expenses when paid
• Simple and straightforward
• Good for small businesses with no inventory
• May not give accurate picture of financial health

Accrual Basis Accounting

• Record income when earned (not when received)
• Record expenses when incurred (not when paid)
• More accurate financial picture
• Required for larger businesses
• More complex but better for growth

Select Bookkeeping Software

Choose software that fits your business needs:

• Cloud-Based Options: QuickBooks Online, Xero, FreshBooks
• Desktop Software: QuickBooks Desktop, Sage
• Consider: Cost, features, ease of use, integration with other tools, scalability

Set Up Your Chart of Accounts

Create a logical, organized structure:

• Start with standard categories provided by your software
• Customize to fit your specific business
• Don't overcomplicate – keep it simple and manageable
• Use consistent naming conventions
• Group similar accounts together

Daily Bookkeeping Tasks

Record All Transactions

Every financial transaction should be recorded promptly:

• Sales and revenue
• Purchases and expenses
• Bank deposits and withdrawals
• Credit card transactions
• Cash transactions

Organize and Store Receipts

Maintain proper documentation:

• Keep all receipts for business expenses
• Use digital tools to scan and store receipts
• Organize by date and category
• Write notes on receipts if purpose isn't clear
• Retain for required period (usually 6-7 years)

Track Payments

Monitor both incoming and outgoing payments:

• Record customer payments promptly
• Mark invoices as paid
• Track payment methods
• Follow up on overdue invoices
• Record all business expenses

Weekly Bookkeeping Tasks

Review Accounts Receivable

• Check which invoices are outstanding
• Send payment reminders for overdue accounts
• Follow up with customers on late payments
• Review aging reports

Review Accounts Payable

• Check upcoming bills and due dates
• Schedule payments to maintain good vendor relationships
• Take advantage of early payment discounts
• Avoid late payment fees

Record Bank Deposits

• Record all deposits in your books
• Match deposits to corresponding invoices or sales
• Investigate any discrepancies
• Keep deposit slips and documentation

Monthly Bookkeeping Tasks

Bank Reconciliation

One of the most important monthly tasks:

• Compare your books to bank statements
• Identify and investigate discrepancies
• Record any bank fees or interest
• Catch errors and potential fraud
• Ensure all transactions are recorded

Review Financial Statements

Generate and analyze key reports:

• Profit & Loss Statement: Shows income vs. expenses
• Balance Sheet: Snapshot of assets, liabilities, and equity
• Cash Flow Statement: Tracks movement of cash

Review Expense Categories

• Ensure expenses are categorized correctly
• Look for unusual or unexpected expenses
• Identify areas to reduce costs
• Verify all expenses are business-related

Process Payroll

If you have employees:

• Calculate wages accurately
• Withhold appropriate taxes
• Pay employer taxes on time
• File required payroll reports
• Maintain payroll records

Best Practices for Accurate Bookkeeping

Separate Business and Personal Finances

• Open separate business bank accounts
• Get a business credit card
• Never mix personal and business expenses
• Pay yourself a salary rather than taking random draws

Stay Organized

• Create a filing system for documents
• Use consistent naming conventions
• Set up folders for different categories
• Back up your data regularly
• Maintain a routine for bookkeeping tasks

Be Consistent

• Record transactions the same way every time
• Use the same categories and accounts
• Follow a regular schedule for bookkeeping
• Don't let transactions pile up

Document Everything

• Keep receipts for all expenses
• Document the business purpose of expenses
• Save invoices and statements
• Create audit trails for all transactions

Review Regularly

• Don't wait until tax time to review your books
• Check for errors monthly
• Compare actuals to budget
• Look for trends and patterns

Common Bookkeeping Mistakes

Failing to Reconcile Bank Accounts

This can lead to:

• Missed bank errors
• Undetected fraud
• Inaccurate financial statements
• Cash flow problems

Not Tracking Cash Expenses

• Cash purchases are often forgotten
• Keep receipts for all cash transactions
• Record cash expenses promptly
• Consider minimizing cash transactions

Misclassifying Expenses

• Can lead to incorrect tax deductions
• Makes financial analysis difficult
• May trigger tax audits
• Take time to categorize correctly

Not Backing Up Data

• Always maintain backups of financial data
• Use cloud-based software for automatic backups
• Keep physical copies of important documents
• Test your backup system regularly

When to Hire a Professional

Consider Professional Help If:

• You don't have time to keep accurate books
• Your business is growing rapidly
• You're dealing with complex transactions
• You have employees and payroll
• You need financial advice and planning
• You want to focus on running your business

Options for Professional Bookkeeping

• Bookkeeper: Handles day-to-day transaction recording
• Accountant: Provides financial statements and tax advice
• CPA: Offers comprehensive accounting and tax services
• Virtual Bookkeeping Services: Remote bookkeeping at lower cost

Bookkeeping Tools and Resources

Accounting Software

• QuickBooks (Online and Desktop)
• Xero
• FreshBooks
• Wave (free option)
• Sage

Receipt Management

• Receipt Bank
• Expensify
• Shoeboxed
• Built-in features in accounting software

Invoicing Tools

• Many included in accounting software
• Standalone options: Invoice2go, Zoho Invoice
• Payment processing: PayPal, Stripe, Square

Conclusion

Good bookkeeping is essential for business success. By following these best practices, staying organized, and maintaining accurate records, you'll have the financial information you need to make informed decisions, prepare taxes efficiently, and grow your business with confidence.

Remember, bookkeeping doesn't have to be overwhelming. Start with the basics, establish good habits, and don't hesitate to seek professional help when needed. Whether you handle bookkeeping yourself or work with a professional, these practices will help ensure your financial records are accurate, complete, and useful.

Our bookkeeping specialists can help you set up systems, catch up on neglected records, or take over your bookkeeping entirely. Contact us to discuss how we can help keep your books in perfect order.