Proper bookkeeping is a crucial part of running a small business. Maintaining accurate transaction records gives you a clear picture of your financial position, which empowers you to make informed business decisions. Below, we outline the key steps of DIY bookkeeping.
Before we get started, here are a few key terms that will appear frequently throughout the article:
- Transaction: A monetary exchange.
- Account: Any type of asset, liability, equity, revenue, or expense.
- Balance: The total value of an account in a given period of time.
- Journal: A book where you log information on transactions as they occur.
- General ledger: A book that summarizes the balances of all accounts the company has.
What Tasks Make Up Small Business Bookkeeping?
Bookkeeping encompasses all responsibilities related to the recording, categorizing, and reporting of business transactions. However, some bookkeepers also handle payments, such as accounts receivable, accounts payable, and payroll.
Essential Tasks
The core bookkeeping tasks cover transaction recording, organization, and reporting.
- Transaction recording: Bookkeepers are responsible for tracking expenses, income, assets, liabilities, and other financial transactions. They record transactions in journals as they occur. At the end of an accounting period, they organize journal entries by account using a general ledger.
- Reconciling accounts: To ensure recording accuracy, bookkeepers must cross-reference ledger entries against relevant documents, such as bank statements, credit card statements, and invoices.
- Reporting monthly statements: Once the business has recorded and updated its transactions, monthly reporting will follow. The bookkeeper will use existing ledger information to prepare financial statements, which summarize the business’s financial activity at a given period. The three most important financial statements are the balance sheet, income statement, and cash flow statement.
Supplementary Tasks
Additional bookkeeping tasks cover the management of incoming and outgoing payments.
- Accounts receivable: Some bookkeepers are also responsible for creating and distributing invoices to clients. They monitor incoming payments and contact clients to ensure timely processing.
- Accounts payable: Bookkeepers also track outgoing payments. They monitor all existing invoices and ensure timely payments to vendors, contractors, and other billers.
- Payroll management: Some bookkeepers might also manage employee payroll. They calculate employee wages, manage deductions from taxes and benefits, record and send pay statements, and deliver wages into staff accounts.
What Is the Difference Between Bookkeeping and Accounting?
The average person often confuses bookkeepers and accountants. While the two jobs can overlap, they perform different core functions. Bookkeeping creates the foundation for accounting: bookkeepers record and report a business’s financial performance, while accountants interpret the information to aid the business’s financial strategies.
There are a few bookkeeping tasks that accountants can also cover. These include:
- Verifying the accuracy of financial data
- Preparing and reviewing financial statements
However, the core responsibilities of an accountant include:
- Performing business audits to ensure the effectiveness of internal controls and compliance with regulatory requirements
- Producing financial forecasts by analyzing growth opportunities in the market and trends in financial performance
- Providing financial advice
- Managing tax returns
A Step-by-Step Guide to Small Business Bookkeeping
Now that you understand the core responsibilities of bookkeepers, we’ll teach you how to execute each bookkeeping task in chronological order, including preparatory steps like selecting entry systems and accounting methods.
To summarize:
- Choose between single- and double-entry bookkeeping to determine how you will record transactions.
- Choose between cash and accrual accounting to determine when you will record transactions.
- Choose between pen and paper, spreadsheets, or bookkeeping software to determine where you will record transactions.
- Record journal entries using your chosen means of bookkeeping.
- Post your recorded entries into a general ledger for a more organized view of account balances.
- If you chose double-entry bookkeeping, create a chart of accounts to provide an easy reference for the information on your ledger.
- Reconcile your ledger with your bank statements and other documents.
- Prepare your financial statements.
Step 1: Choose an Entry System
The first step in bookkeeping is determining how you will record your transactions. Transaction recording usually takes place in a journal. As mentioned, your journal is the book where you log records of your financial transactions. Each journal entry provides essential information about the transaction, such as the date, amount, and description.
There are two ways to record your journal entries. These systems are called the single-entry bookkeeping system and the double-entry bookkeeping system. The format of your journal entry differs depending on your entry system of choice.
- Single-entry bookkeeping creates one entry per transaction, recording the amount as either an income or an expense. While it is time-efficient, it cannot track the value of assets, liabilities, and equity. It generates a balance for one type of account, which is your cash balance.
- Double-entry bookkeeping records transactions in two equal and opposite parts: value flowing from a source to the business (debits) and value flowing from the business into a source (credits). Unlike single-entry bookkeeping, double-entry bookkeeping generates balances for all accounts. The system shows you the full value of the business across all assets, liabilities, equity, expenses, and revenue.
We’ll expound on the two entry systems below to help you determine what suits your business.
Single-Entry Bookkeeping
The single-entry bookkeeping system creates one journal entry per transaction. This method covers only two types of transactions: revenue and expenses. At the end of the accounting period, you subtract the sum of all expenses from the sum of all revenue to determine how much cash the business has on hand.
A single-entry bookkeeping journal entry would contain the following columns:
- Date: When the transaction occurred
- Description: What the transaction is
- Reference Number: A unique identifying number
- Income: The amount of money earned
- Expense: The amount of money spent
- Balance: Your updated balance after adding income or subtracting expenses
Below is an example of a journal with two entries. The first records income from a client payment, while the second records the rent expense.
| Date | Reference Number | Description | Income | Expense | Balance |
| XX-XX-XXXX | 01 | Client payment | $6,000 | $6,000 | |
| XX-XX-XXXX | 02 | Rent | $1,000 | $1,000 |
Single-entry bookkeeping is time-efficient and easy to learn. However, it has limitations. The system cannot track the value of your assets, liabilities, and equity. This prevents you from seeing the complete financial picture. For example:
- Because the system records loans as income, businesses with long-term debt might overestimate their value.
- Because the system records asset purchases as expenses, businesses with multiple valuable assets might underestimate their value.
Additionally, single-entry bookkeeping fails to equip you with tools for tracking fraud. While double-entry bookkeeping allows you to double-check each transaction against its equivalent debit or credit, single-entry bookkeeping only records each transaction once.
Single-entry bookkeeping is only recommended for businesses with minimal debt and assets. Otherwise, it cannot capture the complexity of your business’s financial position.
Double-Entry Bookkeeping
In contrast with single-entry bookkeeping, which only calculates the business’ profits or losses, double-entry bookkeeping calculates the business’ full value by recording transactions in all types of accounts, including revenue, expenses, assets, liabilities, and equity.
To illustrate, examples of accounts per category are:
Assets
- Cash
- Accounts receivable
- Inventory
- Equipment
Liabilities
- Accounts payable
- Loans
Equity
- Owner’s capital
- Common stock
Revenue
- Sales revenue
- Dividend income
Expenses
- Rent
- Utilities
- Cost of goods sold
- Depreciation expenses
As its name implies, double-entry bookkeeping creates two journal entries per transaction. It uses debits and credits to represent the two sides of each transaction.
- Debits represent value flowing into a business from a source. It increases assets and expenses while decreasing liabilities, equity, and revenue.
- Credits represent value flowing out of a business into a source. It increases liabilities, equity, and revenue while decreasing assets and expenses.
At the end of each accounting period, you move your journal entries to corresponding account categories in the general ledger. Then, you add up all debits and credits to determine the balance of each account. Once the ledger is complete, you’ll have an easy reference for the following:
- How asset-rich your business is
- How much your business owes in liabilities
- How much money investors and other shareholders placed into your business
- How much your business spent over a given period
- How much your business earned over a given period
A double-entry bookkeeping journal entry will contain the following information:
- Date: When the transaction occurred
- Account: What account is affected
- Reference number: A unique identifying number
- Debit: The amount of money debited
- Credit: The amount of money credited
Below is the single-entry bookkeeping example represented as a double-entry bookkeeping journal entry.
| Date | Ref | Account | Debit | Credit |
| XX-XX-XXXX | 001 | Cash (Asset) | $6,000 | |
| XX-XX-XXXX | 001 | Sales Revenue (Revenue) | $6,000 | |
| XX-XX-XXXX | 002 | Rent (Expense) | $1,000 | |
| XX-XX-XXXX | 002 | Cash (Equity) | $1,000 |
Instead of generating a single balance, double-entry bookkeeping generates totals for each account at the end of an accounting period. In this example, you’ll end with different balances for cash, sales revenue, and rent.
Double-entry bookkeeping is the best option if you want a complete picture of your business’s financial standing. It is particularly suitable for businesses that regularly work with loans and other types of liabilities.
The problem with double-entry bookkeeping is that it is significantly more time-consuming than double-entry bookkeeping. Because the system tracks multiple types of accounts, you might need to rely on tools like spreadsheets and bookkeeping software, which requires overcoming relevant learning curves.
Step 2: Choose an Accounting Method That Suits Your Business Needs
After choosing between single- vs double-entry bookkeeping, it’s time to choose between cash vs accrual accounting. If single- and double-entry bookkeeping determines how you record transactions, cash and accrual accounting determine when.
- Cash accounting involves recording transactions as cash exchanges hands. For example, if you are billed for rent at the beginning of the month but only pay your landlord at the end of the month, you only record the transaction after paying your landlord.
- Accrual accounting involves recording transactions as they are incurred, so if you are billed rent at the beginning of the month, you record the transaction immediately. You can only implement the accrual method if you use double-entry bookkeeping.
Like single-entry bookkeeping, the cash method trades detail for ease. It is straightforward and easy to execute, which makes it suitable for business owners who want to save time and effort. However, it limits your ability to track liabilities and non-cash assets.
Because the accrual method accounts for delays in cash exchange, it is suitable for businesses that sell on credit or work with loans. This method tracks outgoing and incoming payments, which reduces errors in tallying the value of each account.
Choosing cash over accrual also changes how you are taxed. Businesses using the cash method are only taxed for income they’ve already earned because pending income is not reported. Businesses using the accrual method are taxed for all income reported, even income that has yet to be received in cash.
Step 3: Choose a Means of Bookkeeping
The next step in establishing a bookkeeping system is determining what platform you will use to encode journal and ledger entries. Bookkeepers traditionally used pen and paper, then transitioned to spreadsheets once computers entered the mainstream. However, many of today’s businesses use dedicated accounting software, which automates common bookkeeping tasks.
- Spreadsheets: Programs like Excel and Google Sheets are popular among smaller businesses. They provide a high level of customizability, allowing you to input transactions and all relevant formulas. However, you’ll need to plan the layout of your journals, ledgers, and other documents yourself, which can be time-consuming. You are also responsible for encoding your own formulas. Templates are available online to simplify both processes.
- Bookkeeping Software: Platforms like QuickBooks, Xero, and Wave streamline bookkeeping by automating processes. You can input data manually, upload spreadsheets, or connect with bank or credit card feeds to transfer your transaction data to the program. From there, the software can automatically categorize transactions, generate reports, and calculate tax.
Step 4: Record Transactions
Recording transactions can be manual or automated, depending on your means of bookkeeping. Bookkeeping software usually provides automated transaction recording tools, but occasionally requires manual data entry.
Recording Transactions Manually
To record your transactions manually, you need to create a journal. You can format your own journal using a spreadsheet or download an existing template online.
Some bookkeepers divide their journals into dedicated transaction categories for easier organization. Types of journals include:
- Purchase journals
- Purchase returns journals
- Cash disbursements journal
- Cash receipts journal
- Credit sales journal
- Sales return journal
- General journal
Recording Transactions in Bookkeeping Software
There are multiple ways to record transactions on bookkeeping software. These include:
- Syncing: However, the easiest way to record transactions on a bookkeeping software is to sync your bank or credit card feed. The connection will automatically record and organize transaction data as you use your business accounts.
- Template creation: You can use software to create custom templates for invoices, sales receipts, purchase orders, bill payment stubs, statements, and estimates. The system automatically records the transaction data while allowing you to send the document to relevant clients or billers.
- Spreadsheet import: Some bookkeeping software offer custom templates for spreadsheet journals. You can manually record transactions using their template, then upload the spreadsheet to the system to transfer data quickly.
- Manual journal entry: If your transaction was not included in your synced feeds or documents, you can manually encode its journal entry into your bookkeeping software.
Step 5: Post Your Journal Entries to A Ledger
If you choose double-entry bookkeeping, you need to post your journal entries to the general ledger to keep transactions organized. The chronological order of journal entries prevents you from seeing a clear picture of financial activity per account. You’ll also have a harder time locating transactions.
Meanwhile, the general ledger categorizes transactions by account, making account activity easier to understand and transactions easier to locate. Accounts are organized according to account type. The standard order for account types in a general ledger goes as follows:
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
Note that the general ledger is not needed in single-entry bookkeeping, which only deals with the cash account.
Bookkeeping software will automatically generate ledgers based on your financial data. To manually transfer journal entries to your ledger, follow the guide below.
Ledgers assign dedicated tables per account. When creating an account on a ledger, you need to note its account name, account number, and date presented. Then, to encode transactions, you must create the following columns:
- Date: The date the transaction occurred
- Description: What the transaction covered
- Reference number: The unique identifying number
- Debit: The amount debited
- Credit: The amount credited
Below is an example of a ledger account for accounts receivable. The account balance increased as the company billed its clients for services rendered. It decreased when a client paid their bill in cash.
| Account Name: Accounts Receivable | Account No: 02 | |||
| Date | Description | Ref | Debit | Credit |
| XX-XX-XXXX | Sent invoice to Client A | 01 | $4,000 | |
| XX-XX-XXXX | Sent invoice to Client B | 02 | $3,000 | |
| XX-XX-XXXX | Client paid invoice in cash | 03 | $4,000 | |
| Total Accounts Receivable | $3,000 | |||
Step 6: Create a Chart of Accounts (CoA)
If you follow double-entry bookkeeping, you’ll need to create a chart of accounts (CoA). The CoA is an organized index of all accounts that will appear in the company’s general ledger.
Each entry on the CoA provides identifying information about the account, such as a unique identifying code, a description, its account type, and its designated financial statement. For example, an entry for a cash account would look like this:
| Number | Description | Account Type | Financial Statement |
| 1-01 | Cash | Asset | Balance sheet |
The account types in a CoA include assets, liabilities, equity, revenue, and expenses. Their corresponding financial statements are balance sheets for assets, liabilities, and equity, and income statements for revenue and expenses.
You can create a chart of accounts manually or let your bookkeeping software generate one automatically based on your ledger. You can also manually add new types of accounts to a software-generated CoA.
The CoA is a requirement for double-entry bookkeeping. It helps bookkeepers locate accounts on a ledger. Single-entry bookkeeping does not require the use of a CoA because the system only tracks your cash account balance.
Step 7: Reconcile Books with Business Accounts
To ensure accuracy, check your books against official business documents, such as credit card statements, bank statements, invoices, and receipts. If any discrepancies appear, you’ll need to make the necessary corrections. This process is known as account reconciliation.
Common causes of misalignment include:
- Errors: Data entry mistakes, such as duplicates, erroneous inputs, and missing entries.
- Omissions: Transactions reflected on an account statement that the bookkeeper failed to record. Common examples of omissions include interest on deposits and bank fees.
- Timing differences: A common cause of misalignment between bank statements and bookkeeping entries. It occurs when the bank records a transaction in a different accounting period than the bookkeeper. Examples include outstanding cheques and deposits in transit.
Businesses should conduct account reconciliation regularly to keep their books accurate and up to date. Regular bank reconciliation, in particular, is crucial because bank statements typically represent the majority of a company’s activities.
How often you conduct account reconciliation depends on your transaction volume. Companies typically reconcile accounts on a weekly, monthly, or quarterly basis. The more transactions you incur, the more often you should conduct account reconciliation. This keeps the work from piling up as time passes.
Step 8: Report the Business’s Financial Position
At the end of the accounting period, summarize the company’s transaction activity through financial statements. There are three main types of financial statements:
- Balance sheet: This report summarizes the value of your assets, liabilities, and equity in a given period. It shows you the book value of your business.
- Income statement: This reports total revenue and total expenses within a defined timeframe. It helps clarify your earning capacity and spending habits.
- Cash flow statement: This report tracks the movement of cash over a defined time frame. It shows how efficient your business is at generating cash.
Most businesses report financial statements on a monthly, quarterly, and annual basis. The more regularly you create reports, the more clearly you can see trends in financial activity.
The Challenges of DIY Bookkeeping
Although managing your own small business bookkeeping may help you save money, the benefits come with multiple drawbacks. The practice divides your time between running your business and managing financial records while forcing you to assume professional responsibilities without proper training.
There’s a Learning Curve
The learning curve in bookkeeping can be slightly steep for individuals with no experience or education. You’ll need to learn key terms, practices, and rules.
If you use spreadsheets, you’ll have to format journals, ledgers, reports, and other documents and learn formulas to automate balance calculations. Alternatively, if you opt for bookkeeping software, you’ll need to become familiar with its features and functionality. Both processes require significant time, investment, and effort.
It’s Time-Consuming
Bookkeeping is an ongoing process. You will need to execute bookkeeping tasks alongside your typical business activities. Below, we outline how often you need to handle each core bookkeeping responsibility.
- Recording transactions: Daily or weekly, depending on transaction volume
- Updating ledgers: Daily or weekly, depending on transaction volume
- Reconciling accounts: Weekly or monthly, depending on transaction volume
- Reporting financial statements: Monthly, quarterly, and annually
These processes are faster when automated through bookkeeping software. However, as mentioned, overcoming the learning curve can still take some time. The load of financial management can shift your attention from your business, reducing your capacity to engage in higher-impact business activities.
Mistakes Are Costly
Inexperience increases the risk of error. Without an expert on your team to confirm the accuracy of your books, costly mistakes might slip past you. Below are a few common examples of bookkeeping mistakes:
- Data entry or calculation errors can cause you to under or over report account balances. When these calculations carry over to financial statements, you get an erroneous picture of your financial standing. The strategies you build from misinformation will be ineffective or actively harmful.
- Because you lack bookkeeping experience, you might overlook tax-deductible expenses. The company misses out on additional savings.
- Your lack of familiarity with regulatory or industry bookkeeping standards might cause filing errors. Non-compliance can lead to legal issues, fines, or other penalties.
When to Choose Bookkeeping Services over DIY Bookkeeping
While DIY bookkeeping seems cost-effective at first glance, there are situations where the time investment and effort required offsets your savings. If you want to ensure bookkeeping accuracy without shifting your attention from your core business activities, it’s best to outsource bookkeeping.
Below are a few types of bookkeeping services you can consider:
- In-house bookkeeping: It is best to hire a professional if you want a bookkeeper with intimate understanding of your business and its financial activity. In-house bookkeepers are unlikely to have other clients, so they can readily attend to your bookkeeping needs whenever necessary. However, salaried bookkeeping can be cost-ineffective, especially since you’ll need to pay wages regardless of available work.
- Freelance bookkeeping: Hiring a contractor is best if you only need bookkeeping services a few times a month. Because freelancers charge hourly rates, their services tend to be more cost-effective than salaried bookkeeping. You only pay for what you need when you need it. However, freelancers might lack the depth that in-house bookkeepers can provide.
- Bookkeeping firms: Outsourcing bookkeeping to firms is like hiring freelancers, except you gain access to a more diverse selection of specializations. Tapping into a wide talent pool ensures that most, if not all, of your bookkeeping concerns have available solutions. While bookkeeping firms are typically more expensive than lone freelancers, they often offer package deals for cost-effectiveness.
- Virtual bookkeepers: The most cost-effective form of outsourced bookkeeping is virtual bookkeeping. The lack of transportation or other in-person logistical costs reduces the price of virtual bookkeeping services. Additionally, they lack location constraints, allowing you to access talent from anywhere, typically with more scheduling flexibility.
Reliable Small Business Bookkeeping Services in Canada
The bookkeeping process records, organizes, and reports business activities to better illuminate your company’s financial standing. You can use the information collected in bookkeeping to make smarter decisions about your business. However, because the process requires a high degree of meticulousness and time investment, it’s best to outsource bookkeeping to professionals.
Small business bookkeeping shouldn’t be a burden. If you want relief from the load of financial management, consider outsourcing bookkeeping services to EpicBooks. Our professional bookkeepers handle every step of the bookkeeping journey, including transaction recording, account reconciliation, asset tracking, and reporting.
