Bookkeeping basics and FAQ with Jessica Fox
Jessica Fox, the founder of Florida Virtual Bookkeeper, recently joined us to present a webinar on bookkeeping basics for entrepreneurs. If you’d like to watch the webinar, you can find the full recording here. If you only have a few minutes, though, read on for the highlights.
Jessica worked in corporate bookkeeping for about a decade, but always had an entrepreneurial bug. She realized that there were many new entrepreneurs who wanted to learn about managing their business finances, but didn’t know where to start. So, she carved out a niche helping them. She offers flexible services that range from training and supporting entrepreneurs who want to take a DIY approach, to full-service bookkeeping. She’s also the author of Bookkeeping Basics for Entrepreneurs, a quick primer that’s designed to give new business owners a strong understanding of the basics.
Why bookkeeping is valuable for entrepreneurs
Bookkeeping might not sound exciting, but doing it regularly will help your business become (and remain) financially healthy. Your financial records and reports will help you know when to raise or lower prices, where you need to cut costs, and what you need to do in order to increase profits. Bookkeeping is also important for compliance reasons—keeping accurate records will make it easier to pay your taxes, make the most of qualified deductions, and reduce the risk of an audit.
3 steps to keeping your books There are many different ways to do your bookkeeping: you can actually do it with a pen and paper, or you can use a simple spreadsheet, or you can use dedicated bookkeeping software. No matter which method you choose, these three basics steps will be the same.
- Keep a record of all your expenses and all your income, including any documents like receipts. You can stuff them in a shoebox, or take a photo, or scan them with a receipt-keeping app. If you do store the receipts digitally, make sure it’s backed up! It’s also a good idea to keep the physical copy, but it’s not required.
- Summarize your income and expenses on a periodic basis. For many businesses, it’s ideal to do this daily but some businesses can get away with it weekly or monthly. Don’t do it less than once a month, though—if you wait too long, it will be hard to remember exactly what each transaction was for.
- Use your transaction data to create financial reports that will tell you specific information about your business, like profitability and ongoing expenses. This will allow you to make informed decisions about your business.
Common errors to avoid
1.Not having any books. This is the most obvious error to avoid, and it’s also incredibly common. When you’re starting a business and getting it off the ground, it’s easy to prioritize other tasks over keeping your books … but good financial records will be invaluable in the future if you need to get a business loan or find investors.
2. Not keeping documentation. Many people keep a list of their business transactions, but might forget to scan and save receipts and other documents. You need to keep documents in order to take deductions off your taxes, so make sure you’re keeping those records! 3. Outdated or incomplete books. If you aren’t tracking all your financial information, or you’re not doing your books regularly, you’re going to miss important details and potentially lose money. 4. Not doing reconciliation. Reconciliation is the process of verifying that the information in your books is accurate. It’s an easy step to miss, but it’s a very important one because it will prevent occasional errors from undermining all the work you put into your bookkeeping.
One area of accounting that many business owners find especially overwhelming is payroll. What exactly is payroll, and when do you need to worry about it? When you hire an employee (even if it’s yourself), you need to collect certain taxes and send them to the government. The process of calculating these taxes and maintaining accurate records is referred to as payroll.
Payroll is only required if you have employees. If you hire someone to do work for your business, they may be considered a contractor or an employee, depending on the exact nature of their work. If they are a contractor, you just need to write them a check. If they are an employee, though, you are required to manage their payroll. Learn about the differences between contractors and employees in this handy guide from Bench. You’re also required to put yourself on payroll if your business is a corporation or an LLC that’s taxed as a corporation.
Keeping track of sales tax
If you sell products that are subject to sales tax, it’s a good idea to consider getting professional help. Tax laws can be extremely complex, especially if you are selling products in multiple areas that are all taxed differently. You might also want to consider using specialized tax compliance software like Avalara to help ensure you’re following all the proper laws and guidelines.
Bookkeeping jargon, demystified
There’s lots of terminology to bookkeeping, Jessica points out, that might sound like a foreign language to a normal person. Although a lot of these terms will be unfamiliar, the concepts are pretty straightforward. Knowing a few of the basic terms, like the ones below, will come in handy if you’re applying for a loan, pitching to investors, or working with a professional accountant or CPA.
Cash or accrual basis
This term refers to how you recognize income and expenses. Do you recognize income as soon as you invoice a client, or do you wait until their payment actually hits your account? How about bills—do you recognize the expense as soon as you receive a bill, or when you make the payment and the funds are debited from your account? The method you choose will affect how you file your taxes.
When many people think of assets, they think of cars or real estate. That’s true—those things are assets—but it’s not the whole picture. Assets also include cash, investments, unpaid invoices, inventory, and supplies.
Assets typically change in value over time. Sometimes they go up, sometimes they go down. When they go down, that change is referred to as depreciation. There are different ways to calculate depreciation for the purposes of taxes and accounting.
This word has a few different definitions. In the context of accounting, it means the company’s debts and obligations. Unpaid bills, debts, unpaid taxes, unpaid wages … all of these are liabilities.
This is how much your business is worth, and it’s calculated by subtracting your liabilities from your assets. For example, if your business has $100,000 in assets and $25,000 in liabilities, your equity would be $75,000.
Draws and distributions
When you take money from your business for personal use (whether it’s your salary or a $2 cup of coffee you purchased with your company credit card), this is generally called an owner’s draw. If your company is a corporation, money that’s taken from the business and given to the business owners is called a shareholder’s distribution.
This is essentially a comprehensive summary of your business’s books. It should include all your assets and liabilities.
Accounts receivable (A/R) and accounts payable (A/P)
Accounts receivable refers to money that you should be receiving, such as unpaid invoices that your clients will pay in the future. Accounts payable refers to money that you’ll be paying out in the future.
Hi there! This post exists to offer you (hopefully) useful information and insights, but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.
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