Posted on: December 16th, 2022
If I could explain what bookkeeping is in a few words, its how a business knows if they are doing good or not. Good bookkeeping will tell you how you did in the past, how your doing currently and what needs to be done to continue growing.
If your a small business owner you either have to setup your own accounting system or hire someone to do it. If your a small one-person business, you might decide to do it yourself. If your anticipating some growth in your future, you might as well bring on a bookkeeper onto your team.
The bookkeeper is responsible for making sure the transaction is put in the right category for tax purposes. Remember that Charter of Accounts you set up? It’s a lot more than financial organization, a lot of those accounts are aligned with tax deductions.
So you can image how important it is to categorize the transaction correctly so that in the end you get the right deduction your business deserves.
Why would you need to know bookkeeping without software? Well, if you put wrong data in, your going to get wrong data out. The software makes things faster and easier, but if you don’t know what to put in, your going to get a whole lot of mess coming out.
I can teach you software and there is a lot of it out there. But before that, your going to need a basic understanding of accounting
Single entry is like your basic personal budget. You record bills as you pay them and deposit paychecks into the main account. This may work as you first start and is easy to handle as you only have one income and a few expenses.
The bigger you get, the more transactions you will have. Then those transactions are going to effect more than one account. Hence the double entry system.
For example, you put money into the business that is your investment. That entry effects the business asset, but it also effects the account that records how much you put in. Single entry just can’t do that, this is what is called double entry accounting.
If you want to start off right, I recommend Accrual basis, it will save you a lot of headache in the end. A lot of small businesses go to cash basis because it is very simply, money in and money. When cash exchanges hands, its recorded.
The trouble comes when you get a bid on work that needs to be done before you get paid. There may be a contract agreement that says you will get paid, but unless that money is in your hands it will not be recorded. If your systems are cash basis, you will find a lot of problems with your financial statements.
Accrual basis records everything, whether you have the money or not. Which is important when collecting money from customers, its a bit hard to collect money that hasn’t been recorded.
What you own, what you owe and what is left over. That is my interpretation of all three of those. Assets are what your business owns, like equipment, the money in your main account, what customers owe you. Liability is what you owe, like loans, credit cards and any debt the company has racked up. Equity is what is left over, kind of what you own after all is said and done.
This is what everyone calls the P&L statement, the Profit and Loss. It’s what your Tax professional wants when filing your taxes. It lists every source of revenue that is coming in, the cost of creating that revenue and all the expenses you have doing business.
Keeping things things simple would be ideal. The only reason you would want more than one source of income tracked is for projection purposes, knowing where most of your income is coming from may tell you where to invest your money.
The cost of creating revenue is usually the direct cost of service or sales. When you go out to detail a vehicle, you may buy Body Armour to make it shine, that expense is the direct cost of the service. If you get insurance so you can continue doing business, that‘s not a direct cost but the cost of doing business in general.
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