For a lot of small business owners, bookkeeping is a responsibility that sits somewhere between “I’ll get around to it later” and “I hope I’m doing this right,” and with good reason. Bookkeeping often feels tedious and more than a little confusing, not to mention very easy to screw up.
But none of this changes the fact that every business (even small or unconventional ones) runs on numbers. Bookkeeping is what keeps those numbers from devolving into either a mess or a total mystery.
It’s not just for accountants who understand every angle of it from a technical standpoint, either. It’s a practical, everyday habit that helps all business owners keep proper track of what’s coming in, what’s going out, and where their businesses actually stand as a result.
In this simple guide, we’ll walk you through what bookkeeping actually is, why it matters, and what’s involved without making you feel like you need an advanced financial degree to understand it.
What is bookkeeping (with examples)?
Bookkeeping describes the process of tracking and recording your business’s financial transactions. Every time money comes into your business or moves out of it, bookkeeping is what makes sure it’s all properly recorded.
Naturally, this will include:
- Income from clients, sales, etc.
- Operational expenses, like rent, supplies, marketing costs, or software
- Payments you’re owed (or that you owe somebody else)
The actual records usually come from sources like payment receipts, invoices, payment confirmations, and bank statements. Bookkeeping is what organizes it all into something useful and accurate.
Examples of bookkeeping tasks
As far as what bookkeeping looks like as a day-to-day function, most business owners are looking at small, repeatable tasks like:
- Recording daily incoming payments and sales
- Tracking expenses, which should include everything from your web hosting fees to supplies for your in-office coffee station
- Managing your invoice details and making sure you get paid on time
- Keeping track of any bills you need to pay
- Reconciling your bank statements with your actual records
Together, these tasks help you maintain a comprehensive picture of your business finances and make sure nothing accidentally slips through the cracks.
Simple real-world example
So, let’s say you run a small freelance business out of your home. During a given week, you might close a project, collect a $1,000 payment from the client, and record that as income. A couple of days later, maybe you pay $25 for a design tool subscription and log it as a business expense.
Then, at the end of the week, you check your bank account to make sure your transaction records align with what you actually recorded. Consistency is the key here, as over time, that consistency creates a clear, complete financial record for your business.
What is a bookkeeper and what do they do?
A bookkeeper is the person responsible for recording and ultimately managing a business’s financial transactions. On an everyday basis, they focus on making sure everything is properly tracked, categorized, and kept current behind the scenes.
Common bookkeeper responsibilities
Although bookkeeper roles will naturally vary from one business setting to the next, most will involve focuses like the following:
- Recording transactions and categorizing them
- Managing accounts payable (what the business owes) plus accounts receivable (what others owe the business)
- Reconciling all bank and credit card accounts with records
- Keeping financial documents (e.g., receipts and invoices) organized
- Creating basic financial reports
As routine as these tasks might sound, they’re very important collectively. Without clean, organized financial records, it’s difficult to impossible to know how a business is really doing. Bookkeepers build the foundation that everything else about a business rests on.
Importance of bookkeeping
21% of SMBs owners admit to not knowing enough about bookkeeping. Though it’s often misunderstood, it’s importance cannot be understated. Bookkeeping is about much more than simply staying organized for its own sake. It plays an essential role in how your business actually runs on multiple levels.
Keeps financial records accurate
When you properly record every transaction, big or small, you wind up with a genuinely accurate history of your business finances. That means fewer missing pieces and unpleasant surprises down the line. Thorough bookkeeping also makes it easier to catch mistakes early, before they have a chance to escalate into bigger problems.
Helps with decision-making
Sound decisions always start with solid, reality-based information. When your finances are truly organized, you can assess what’s working and what’s not. You can also easily zero in on trends and better understand the big picture when it comes to your finances.
Supports tax preparation
Great bookkeeping turns tax season into a completely different experience. No more digging through months of receipts in a desperate attempt to piece together your financial history for the past year. Instead, everything is already properly documented, saving you time and minimizing stress.
Helps track cash flow
Cash flow is the lifeblood of any small business, whether you’re just looking to start a business or expanding operations. When you truly know how money is moving in and out, you know at a glance whether you can comfortably cover what’s going out. Bookkeeping helps business owners avoid that sinking feeling that comes when expenses seem to be piling up faster than expected.
What is the difference between accounting and bookkeeping?
When talking about bookkeeping vs accounting, many people use these two terms interchangeably, but they’re actually two different things. Bookkeeping is about recording financial transactions, while accounting is about analyzing and further interpreting those records.
Think of bookkeeping as the gathering of raw data. Then picture accounting as the process of turning that data into valuable insights, reports, and strategies you can use moving forward. Bookkeepers track your numbers, while accountants help you understand what those numbers mean (and what you should do next).
Bookkeeping and accounting definitely correlate with one another and work together. But without bookkeeping, accounting doesn’t have anything reliable to work with in the first place.
Types of bookkeeping systems
Every business is going to handle bookkeeping its own way. Which system is right for your business depends on how complex your finances are.
Single-entry bookkeeping
Single-entry bookkeeping is the simplest, most straightforward approach, and it’s very popular with small business owners or solopreneurs. In single-entry bookkeeping, every transaction gets recorded just once, most often as either an income or an expense.
However, while single-entry bookkeeping keeps things simple, some business owners may find that simplicity limiting, as it doesn’t provide as much detail or opportunity for error-checking.
Double-entry bookkeeping
Double-entry bookkeeping takes the whole process a step further by recording every expense once as a debit and then again as a credit. This method helps keep everything balanced, as well as makes it easier to catch any mistakes.
Most modern accounting software uses double-entry bookkeeping because of its accuracy and keen ability to provide a full picture of your finances.
How bookkeeping works in a small business
Bookkeeping isn’t a “set it and forget it” type of thing when you run a small business. It’s an ongoing process designed to support optimal day-to-day operations and keep your business running smoothly behind the scenes.
At its most basic level, small business bookkeeping involves tasks like:
- Recording transactions as they happen
- Categorizing all income and expenses
- Reconciling accounts regularly
- Reviewing financial reports in detail
In practice, bookkeeping for your small business might look like setting aside a few minutes each day to log new transactions or double-check your accounts. (Modern software can help automate this process.)
The goal here is consistency, as opposed to absolute perfection. Even simple systems tend to work well when kept up with regularly. Things only become overwhelming when allowed to sit too long.
Can you do your own bookkeeping?
Bookkeeping is a skill you can learn, in fact, you can learn how to start a bookkeeping business, especially with the right tools and a solid understanding of how financial tracking works.
Many small business owners start as their own bookkeepers, especially during the early stages when operations are relatively simple and budgets are tight. But every small business owner should ask themselves whether it continues to make sense to handle bookkeeping themselves once their business starts growing and evolving.
When DIY bookkeeping works
Handling your own bookkeeping makes the most sense when your business is very straightforward. It’s most manageable when:
- Your business structure is simple (e.g., sole proprietorship)
- Your overall transaction volume is relatively low
- It’s easy to track all of your income streams
- You’re comfortable using spreadsheets or bookkeeping software
Doing things yourself can actually be helpful at this stage, as it keeps you connected to your finances and helps you better understand your business. It also helps you build good habits that will serve you well as your business grows.
When to consider help
The more complex your business becomes, the more time and attention bookkeeping will ultimately require of you. Consider getting help when:
- Your transaction volume goes up significantly
- You’re juggling multiple income streams or expense categories
- You’re not sure whether your records are accurate anymore
- You feel like you’re spending a lot of time on bookkeeping tasks
Bringing in a professional bookkeeper or working with an accountant can save you time and reduce the risk of errors. It also frees you up to focus on other aspects of running your business and making it successful.
Common bookkeeping mistakes to avoid
Solid bookkeeping doesn’t require you to be absolutely perfect. However, there are still habits and mistakes you’ll want to steer clear of if you’re serious about avoiding headaches. Common examples include:
- Not recording transactions properly: Improper or incomplete recording makes it easier to miss critical information or misremember important details.
- Mixing personal and business finances: Using the same accounts for both may seem convenient, but it can create serious confusion when it’s time to go over your records or do taxes.
- Losing receipts or documentation: Even small expenses eventually add up. Without complete records, it’s harder to verify transactions or claim deductions later.
- Not reconciling accounts: Skipping this step means errors could go unnoticed for a long time.
Even minor mistakes and missteps can add up over time and distort your picture of your business finances. Staying organized from the start is the best way to avoid this.
Preparing your business for bookkeeping
Bookkeeping is much easier when you set your business up properly from the start. The following are just a few examples of foundational steps you don’t want to skip:
- Choosing the right business structure (such as creating an LLC, corporation or sole proprietor)
- Obtaining an EIN (employer identification number) if needed
- Opening a separate business account right away
- Keeping all financial documents organized from day one
All of these steps work together to create a clear boundary between your business and personal finances, as well as support accurate tracking and organization.
Tools and platforms like Tailor Brands can further assist you with setting up your business and creating a functional organization system. For example, Tailor Brands can help you form your business, manage your documents, stay in compliance, create invoices, track payments, and consolidate bookkeeping in one easy place.
Naturally, such tools aren’t a replacement for professional financial advice or accountants. However, they can definitely help you support your everyday workflow.
Conclusion
At its core, it’s how smart business owners track and organize their business transactions, as well as better understand their business and make wise future decisions.
Consistency is key when it comes to giving your business firm footing from which to grow. But things don’t need to be complicated. Just start simple, stay steady, and let your process keep you on track.