How to Do Bookkeeping for a Small Business

Every small business must keep careful track of its present and future cashflow.It is very possible for a profitable business to go under because it does not have enough cash on-hand to meet its current financial obligations. Careful tracking of future cashflow is crucial to avoid this unhappy outcome. Step 1 Create a ledger with the current balance of all of your financial accounts. Most businesses carry accounts for cash on hand, a checking account used for rolling revenue and expenditures, and ancillary accounts as necessary to properly manage their funds. Your ledgers can be in accounting software; personal finance software, which is sufficient for some small businesses; or the old school paper ledger. If you find it difficult to keep accurate and complete records on a computer, use paper as a temporary holding place until you can enter transactions into your software. Step 2 Record all payments made from these accounts in your ledger. Payments are usually listed with the following information: date, payee, category (for tax purposes), memorandum and a record of the check number if a bank check is used. Step 3 Record all money actually received by the business for any reason, with the exception of loans and investment funds. Loans and investments should be accounted in separate ledgers and not booked as revenue. Incoming revenue is typically recorded with similar columns or database categories as payments: date, payee, category and memorandum. Step 4 Create an upcoming payment schedule of all future payments anticipated by your business, such as rent, utilities, and other recurring payments. This is called your Accounts Payable, or AP. If you have upcoming one-time expenses which you would like to make, you can also use this ledger to budget for them; for example, if you would like to spend $5,000 on renovations in January, you can book that as a $1,000 set-aside for the months of August through December. Many businesses book their AP with two dates: the date it is due and the deadline which it is actually due before penalties are incurred. Step 5 Create an upcoming monies received schedule, which anticipates future receipts. This is called your Accounts Receivable, or AR. This ledger is most important for businesses that process invoices to their clients, and hence do not receive payments until their clients actually cut the checks. If you are using software, it is crucially important that AR payments do not automatically roll over into actual payments received ledger. You do not want to book a payment scheduled for 7/15 that does not actually arrive until 7/22, or you risk bouncing checks drawn against that amount. Step 6 Reconcile your ledgers with your bank statements. This is where accounting software truly shines over paper ledgers; most software will automatically download your bank records and allow you to quickly mark which payments and deposits are already recorded in your ledger, and which must be separately accounted. This is typically done on a monthly schedule, but with software and online banking, it is not onerous to do this on a weekly or even daily schedule--and this is not too often for a small business.