Ah, bookkeeping. The most tedious task in business: balancing the books, reconciling accounts and making sure every dime is accounted for. Sounds like fun? Well, it’s not! To help you avoid the pain and suffering of bookkeeping we’ve put together this handy dandy guide on how to get through it without pulling your hair out or leaving a trail of tears along your way.
Have you ever been stuck with your bookkeeping?
If you’re like most people, you probably have a bookkeeper or an accountant who handles this for you. But if they were out of town or sick one day and had to cancel on you, would anything go wrong? Would it be the end of the world if you suddenly found yourself alone in a room with no one but a stack of invoices and bills? Would anyone die?
I think we can all agree that no one would die if someone didn’t do their job right—but what about all those other things that would happen immediately after that person stopped working? Wouldn’t there be chaos, panic and confusion? If the answer is yes (and let’s be honest: it almost certainly is), then isn’t it true to say that there are lots of people who really could die because they don’t know how to do their job properly or lack the necessary skills required by their position (or lack any kind of skill whatsoever).
Bookkeeping can be daunting.
The truth is that bookkeeping can be daunting. It requires time and effort, not to mention money. Even if you have a small business, you’re still going to need books and computers and software licenses and other things that cost money — so don’t think that just because you’re small your bookkeeping will be cheap!
If you have a lot of turnover on your staff, or are constantly changing vendors or suppliers (for example if you switch from one manufacturer to another), then your Accounts Payable/Receivable may take longer than usual as well. In addition, many firms find their accounts receivable grow faster than their cash flow does — leaving them unable to pay bills when they come due unless they have sufficient funds in their bank account.
Why bookkeeping is hard?
The answer to this question is simple: bookkeeping is hard because it’s tedious, time-consuming and complicated. While there may be some people who enjoy the challenge of accounting, most people don’t want to spend their weekends doing paperwork when they could be relaxing with friends or working on a personal project. But let’s face it—most small businesses don’t have the luxury of hiring an accountant full time and having them do all your bookkeeping work for you.
If you’re serious about running your own business, then learning how to do your own bookkeeping is essential!
Every dollar spent must be accounted for
Unfortunately, there’s no magic bullet that will make bookkeeping easier. The most important thing you can do is to keep track of EVERY SINGLE DOLLAR SPENT. This means that every time you buy a pack of gum from the vending machine or pay for lunch at work with your debit card, it must be accounted for in some way—either via receipts or an electronic transaction record (e.g., your bank’s online portal). If this sounds like a lot of extra work—and it does!—consider how much worse it could be if you didn’t bother tracking all those purchases and suddenly found yourself owing money to the IRS because you forgot about something small (like buying snacks) along the way.
Each expense or income must be categorized correctly
The process of categorizing expenses and income is straightforward: You just have to make sure you’re recording each expense or income in the right place. The difficulty comes when you need to find that information later on—and it’s easy to get confused when there are so many categories and subcategories!
There are two main ways people categorize their expenses, which leads them to different systems of keeping track of their finances. One way is called “the cash method,” while the other way is called “the accrual method.” Each method has its strengths and weaknesses, but the most important thing is that your chosen method works for YOU!
Everything has a place
There are two rules to bookkeeping: everything has a place, and everything must match.
There’s no room for error when it comes to keeping your accounting organized. If you mistype a number or forget to reconcile your accounts, the IRS won’t give you the benefit of the doubt and assume it was an accident.
The chart of accounts is where all of your transactions are recorded—and if they don’t balance out in that final reconciliation, prepare yourself for some serious paperwork!
Chart of accounts
The chart of accounts is like the list-makers’ version of a box of crayons: it contains all the colors needed to complete a particular task. In this case, that task is recording financial transactions. The chart of accounts contains every account used by the company and should be created with care because once it’s set up it can’t be changed without starting over from scratch.
However, just as your go-to box of crayons didn’t magically appear in front of you as soon as you thought about doing some coloring, neither will an effective and useful chart of accounts appear out of nowhere after only a few minutes’ worth of forethought and planning—you have to spend time on both ends (color selection and creation) if what comes out at the other end is going to be something special.
Everything must match
There are only two types of people in this world: those who enjoy bookkeeping, and those who don’t. The latter group includes most small business owners, because bookkeeping is seen as an annoying chore that is best left to someone else. And while it’s true that your books don’t need to match up perfectly each month or quarter—it’s not like you’re getting a grade or anything—you do have to make sure they add up at some point in time.
If you don’t know how much money is coming in and going out of your business, then how will you ever know if what you’re doing is working? You’ll be flying by the seat of your pants every day with no idea if things are going well or not. Without knowing what profits look like on paper (or digitally), there’s no way for anyone involved with the company’s direction to make informed decisions about where it needs to go next.
It might seem like I’m being unnecessarily harsh here; after all, isn’t it just good enough if numbers are close? Well, yes and no: If we’re talking about $1 million+ businesses with lots of employees who would notice discrepancies between their paychecks and what actually appears on their W-2s (the federal tax form employers give workers), then maybe yes; but for smaller companies where there aren’t many employees earning substantial incomes from one place alone (and thus requiring accurate W-2s), no way! There has got to be some discrepancy between these two sets of numbers somewhere along the line—whether due entirely because one person made a mistake when entering data into an online program versus manually writing everything down (or vice versa).
The bottom line here is that while accounting isn’t exactly exciting work per se…
Reconcile is a big word, but what does it mean? For your purposes, it’s the process of comparing two things to make sure they match up. For example, if you want to reconcile your bank statement with your bank account and see how much money has actually been deposited into it by customers or vendors over a given period of time (usually monthly), there are several steps involved:
- Open up the spreadsheet tracking how much money has been deposited in your bank account
- Look at each column in both spreadsheets (bank statement and spreadsheet) and note whether there are differences between the amounts in each column; this will help identify any discrepancies between what’s on paper versus what’s actually happening in real life
- Compare each row of numbers between both spreadsheets and then look at individual cells within those rows that have red flags indicating something went wrong somewhere down the line (like when someone transferred funds out of their account without notifying you first). That way it’ll be obvious where things went wrong so that next time around we can fix them before they become problems!
Devil in the details
The devil is in the details. If you’re not organized and can’t keep track of your numbers, it will be difficult for you to reconcile your books or know where you stand financially. I used to have a large notebook that I would write all my transactions in, but this wasn’t an efficient way to do it. Nowadays I use Quickbooks Self-Employed because it lets me sync my bank accounts and credit cards so I can keep track of everything online as well as on my phone from anywhere without needing any paper.
Bookkeeping is a blow to the head. It’s time consuming and it can be frustrating, but it is necessary. We hope that you have found this article helpful in understanding the importance of bookkeeping and some of its pitfalls. If you do decide to handle your own books, make sure that they are up-to-date at all times so that no mistakes can be made when tax time comes around!