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Small Business Bookkeeping Essentials (+5 Tips for Newbies)

July 30, 2019

Congratulations! You’ve successfully launched your small business.

Now, it’s time to hit the books. An inevitable part of being your own boss, small business bookkeeping is not the most thrilling business activity. However, it is important that every owner keep track of their finances.

If you don’t have the time to handle your business’ finances, check out the accounting firms listed on G2’s website. They will handle everything from financial statements to money management advice, all while remaining compliant.

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If you have taken on the hefty task of handling your small business’ bookkeeping, good for you. This is not for the faint of heart.

Small business bookkeeping documents and tips

In this small business bookkeeping guide, we will go over the three most important financial statements, as well as some tips for those first time bookkeepers.

Want to skip ahead to read about something more specific? Feel free!

Small business bookkeeping documents

To keep your small business finances in order, there are three accounting documents you need to keep updated: income statement, balance sheet, and cash flow statement. Let’s take a look at how to work with each one and the concepts you need to know before diving in.

Income statement

Alright, you wrapped up your first accounting period. It’s time to hit the books, and your income statement is a good place to start.

What is an income statement?

An income statement shows the revenue and expenses your business experienced during a particular accounting period. Essentially, it lays out how much money you made and how much you spent, ultimately showing your business’s profitability.

Below is an example of what a typical income statement might look like.

income statement

As you can see, there are a lot of different parts to an income statement. Let’s quickly define what each term on the income statement means to get to a better understanding.

Total revenue: the amount of money a business makes
Cost of goods sold (COGS): direct cost of producing a product or providing a service (materials, labor, etc.)
Gross profit: revenue minus cost of goods sold
Selling and administrative expenses: costs not related directly to production (rent, utilities, etc.)
Depreciation: cost of an asset’s declining value
Operating profit: profit from core business operations
Interest on loans: interest you pay on any loans you have taken out
Earnings before taxes: the money you have before it is taxed
Small business taxes: the amount you pay in small business taxes will depend on your business structure
Earnings available to shareholders: the amount that is available to pay in the form of dividends
Dividends: payment made to shareholders
Net income: your final income

Want some more details on these concepts? Check out our resource on accounting terms to get a better understanding of their impact on a business.

It is important to note that not everyone will have the same expenses listed on their income statement. Maybe a certain small business doesn’t have investors, so they don’t have to pay dividends. Another small business might not have any loans at the moment, so there is no need for them to take interest into account. As long as you account for all of the expenses your business incurred, your income statement should be accurate.

If you were following along, you might have noticed that the income statement above subtracted a lot of expenses one at a time. That is exactly right.

Here is a simpler way to think about an income statement:

Revenue - Expenses = Net Income

I’m sure you’re asking yourself why someone would overcomplicate something to that volume. A lot of business owners will separate their expenses into different categories so they can pick out specific areas where they need to be more careful when spending. Separating expenses is not necessary, but it can be helpful when trying to better understand your business.

Quick income statement review

  • An income statement keeps track of revenue and expenses for a specific accounting period.
  • The end result is the net income, or profitability, of your business.
  • Expenses can be split into different categories to help with organization, but in the end, they are all accounted for in the same way.

Balance sheet

Now that you have the income statement under control, take a break, grab a snack, and maybe a cup of coffee. It’s time to tackle the balance sheet.

What is a balance sheet?

A balance sheet is one of the main financial statements that reports a business’s assets, liabilities, and shareholder’s equity. It shows how much a company owns, how much it owes, and the amount that has been invested by shareholders.

The word balance is not used on accident here. The balance sheet is organized into two sections: one with assets, the other with liabilities and shareholder’s equity. Those parts are put into an equation.

Assets = Liabilities + Shareholder’s Equity

When calculated correctly, both sides of the balance sheet equation will be equal to each other. Hence, the word balance.

Below is an example of what organizing the different parts of a balance sheet might look like:

balance sheet

Yikes. That’s a lot of terms. Let’s go through and define them all so you know exactly what to quantify when creating a balance sheet.

Assets: anything your business owns
Current assets: anything your business owns that can be turned into cash within a year (cash, inventory, etc.)
Non-current assets: anything your business owns that can be used for more than one year (equipment, property, etc.)
Intangible assets: a non-physical asset that can be used for more than one year (patent, trademarks, etc.)
Liabilities: anything that your business owes
Short term liabilities: debts that must be paid within one year of the balance sheet
Long term liabilities: debts that will not be paid off within one year of the balance sheet
Shareholder’s equity: all capital owned by shareholders
Equity capital: money invested in your business
Retained earnings: net income before dividends are paid to investors

So, all you have to do is find your total assets, total liabilities, and shareholder’s equity, use the equation above, and make sure both sides are equal to each other.

While it is easier to keep track of loans and how much money has been invested in your business, managing assets is a different story. Consider using asset management software to keep track of what your business owns. This will make your life a lot easier when it comes to putting together a balance sheet.

Find the best Asset Management software for your business. Learn more for FREE→

Quick balance sheet review

  • A balance sheet shows what a company owns, what they owe, and how much has been invested in their business.
  • The end results show a company’s financial position.
  • Both sides of the accounting equation on a balance sheet must be equal to one another.

Cash flow statement

Two down, one to go. It’s time to take a look at the cash flow statement.

What is a cash flow statement?

A cash flow statement is a financial document that shows how much money is moving in and out of a business. It shows how a business handles cash, meaning how well they pay off their debts and fund their operations.

Basically, preparing a cash flow statement is simply asking yourself two questions about money:

“Where did it come from?”

“Where did it go?”

There are three main components to a cash flow statement.

Cash from operating activities

Cash from operating activities is any cash related to business activities, which is any money associated with the production and selling of a company's product or service. When preparing this statement, you will account for various inflows and outflows of cash from operating activities.

Inflows:  Outflows: 
Being paid for services Paying suppliers
Being paid by customers Paying employees
Getting a tax return Paying the government
Cash from investing activities

Cash from investing activities is any cash related to buying or selling assets. This is different from operating activities because it deals more with long term investments. Here are some cash inflows and outflows from investing activities.

Inflows:  Outflows:
Selling property, plant, or equipment Buying property, plant, or equipment
Selling debt and equity Buying debt or equity
Collecting loans Lending money
Cash from financing activities

Cash from financing activities is any cash associated with borrowing or repaying money and issuing stock.

Here is a simplified version of what a cash flow statement might look like.

cash flow statement

That ending cash balance, or net cash flow, is the increase or decrease in cash your business experienced in that accounting period. Whether or not you have a positive cash flow will show outside entities how your business has grown financially.

Quick cash flow statement review

  • A cash flow statement shows how money moves in and out of a business.
  • There are three main cash activities: operating, financing, and investing.
  • The end result shows how much your business has financially grown.

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Small business bookkeeping tips

When putting together all of those financial statements, it can be easy to get lost, frustrated, and discouraged. Follow these tips to avoid a slump and stay on top of the books.

Know the lingo

There are a lot of different terms thrown around when handling finances. If you don’t understand them, throw it back to Accounting 101 and study those finance terms. Having a clear understanding of what everything means will help avoid confusion and errors in your financial statements.

Separate personal and business expenses

It doesn’t matter which one of the types of business ownership your company is structured as. When handling small business bookkeeping, it is best to completely separate your personal and professional finances. This way, you can have a clear image of exactly how your business is performing financially.

Keep everything updated

Don’t fall behind on your bookkeeping. Expenses can pile up, and it can be easy to lose track of things over time. Track every expense and update your financial statements as soon as possible. If you are struggling to keep track of your finances but don’t want to spend extra money on the advice that accountants give, check out some bookkeeping services.

Find the highest-rated Bookkeeping Service Providers ...

Nail an accounting method

The accounting method you use will affect how you prepare all of your financial statements. You have two options.

Cash basis accounting: You record your revenue and expenses when cash is collected. This is a good option for businesses that want to see their cash flow in real-time.

Accrual basis accounting: You record your revenue and expenses when they are incurred, regardless of when the cash was exchanged. This is a good option for businesses with a long accounting cycle.

Hit the books

A lot goes into small business bookkeeping. Three financial statements, a good chunk of time, and what seems like a million different terms that all sound the same. It’s overwhelming. However, nailing small business bookkeeping is a great way to be smart with money, make strategic decisions, and understand your business.

Now that you have the basics down, check out three other small business reports you will want to produce to help you make better decisions as an owner. 

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