Maybe you only know three things about bookkeeping: your business needs it, it sounds like a lot of work, and truthfully—it’s dreadful.
Whether or not the thought of starting your books for your business interests you or not, you definitely need them to run your business successfully. Think of it like owning a car—it’s a necessary evil!
But bookkeeping doesn’t have to be the bane of your existence. In this small business owner’s guide to DIY bookkeeping, we’ll cover everything you need to know to get your books off the ground and keep your company’s financial goals on track.
What is Bookkeeping?
Bookkeeping refers to the process of tracking all of your company’s financial transactions. Typically these transactions are recorded in an accounting software or set of “books” (think Excel spreadsheets or even an old-school physical ledger).
The purpose of bookkeeping is to allow you to see exactly where your business is spending money, where your revenue is coming from, and what tax deductions you can claim.
Why You Need Bookkeeping
1. You need it to do your taxes.
Bookkeeping will tell you what your net profit is (because it records income and expenses) so you can file your taxes. Accurate books will give you all the information you need for tax season.
2. It tells you where your money is going.
Producing financial statements is the only reliable way to tell the financial health of your small business. You’ll be able to see if sales are up, how much production costs are, if you have enough money for payroll, and monitor your cash flow all thanks to your books.
3. You need it so you don’t miss out on tax deductions.
An up-to-date set of books is the best way to keep track of tax deductions (aka, expenses you can deduct from your taxable income). If you’re able to give your CPA a wealth of information because you had it in your books, the more deductions you’ll be able to claim the bigger your tax return will be.
4. You need bookkeeping in order to borrow money.
The ability to produce accurate financial statements is a prerequisite for getting a business loan, a line of credit from the bank, and investments. Lenders are looking for a clear picture of your business’s financial state before they decide to give you money.
They’ll want to look at cash flow, assets and liabilities, balance sheets, and income statements—all of which you will have a perfect record of thanks to your books.
5. It helps you catch errors quickly.
Sitting down at the end of the year to catch up on all of your financial transactions is overwhelming and quite frankly, an open-arm invitation for mistakes. If you regularly organize and update your books, you are significantly more likely to catch mistakes before they become costly.
7 DIY Bookkeeping Steps to Create Your Business Books
For the sake of explaining the basics of bookkeeping, we are going to break down the process of DIYing your books into 7 easy steps. You might start to think to yourself, “This isn’t as easy as I wanted it to be.” When you’re in the minutia of setting up your books for the first time, it’s overwhelming.
But once you’ve established your process it becomes an easy (and necessary) part of your business routine. If these steps sound like too much, you probably want to just hire a bookkeeper. Ready? Let’s learn how to DIY your business books!
Step #1: Separate your business and personal expenses.
If you haven’t done so already, you need to open a business bank account and separate your business and personal expenses.
Why? Liability! If you’re running an LLC and there isn’t enough distinction between personal and business finances, you could be held liable for any debts incurred by your business. It also overcomplicates filing your taxes and increases the chance of you losing money.
Step #2: Choose a bookkeeping system.
There are two main types of bookkeeping systems: single-entry bookkeeping and double-entry bookkeeping.
In single-entry bookkeeping, journal entries are recorded as either an expense or income. Assets and liabilities (ie inventory, equipment, and loans) are tracked separately. This is perfect for businesses that are just getting started and are in the side hustle stage.
In double-entry bookkeeping, all transactions are recorded twice (once as a debit and once as a credit). This system is more complex but it’s also more robust and provides the best financial snapshot. Bookkeepers use this method and it’s recommended for established businesses.
Step #3: Choose an accounting method.
After you’ve decided on the type of bookkeeping you’ll be using, you’ll need to choose if your books are going to be cash or accrual-based.
Cash accounting is a real-time cash flow snapshot. It records income and expenses only when money has changed hands. It’s simple and shows you exactly what your business has in its pockets right now.
Accrual accounting records transactions when they’re billed (not paid). It gives you a full picture of what you owe and what’s owed to you. It’s great for established businesses who need big-picture overviews of their business.
Step #4: Select the right bookkeeping tools.
You’ve got three main options when it comes to bookkeeping tools: accounting softwares, spreadsheets, or a bookkeeping service. Here’s the TLDR:
- Cloud Accounting Software: Platforms like QuickBooks, Xero, or Wave offer automated features, reports, and integrations. Great if you want something comprehensive—but beware, there’s a learning curve if you’re new to bookkeeping!
- Spreadsheets: Old-school but effective, using tools like Excel or Google Sheets gives you full control. Perfect if you love a good formula or want a simple, customizable setup.
- Bookkeeping Services: If you’ve made it this far and already feel over your head, it’s wise to sign up with a bookkeeping service. There are a lot of options out there, so let Bookkeeping Match Up find your perfect bookkeeping match.
Step 4.5: Categorize Your Transactions
Okay, yes, we are cheating by adding step 4.5—get over it! This is important:
Your transactions typically fall into five main buckets: assets, liabilities, equity, revenue, and expenses. For example, “ice cream sales” might go under revenue, while “ice cream ingredients” fall under expenses.
Get in the habit of keeping records on your receipts of what category your spending falls into (remembering a lunch 6 months later is no fun, trust me).
Pro tip: Have a chat with a CPA when setting up your categories to make sure everything aligns with industry norms and keeps Uncle Sam happy!
Step 5: Store your documents.
You’ve got to keep those financial documents safe and sound! Tax time will require proof of every expense, so store your receipts and records securely. And no, crumpled papers in a shoebox don’t count! Remember ink fades…and so does your memory!
Since the IRS accepts digital copies, use cloud-based systems like Google Drive or Dropbox to upload everything. There are also apps like Shoeboxed that are built specifically for receipt tracking.
Step #6: Organize your deductions.
The IRS wants your deductions to be both ordinary (common in your industry) and necessary for your business. For instance, a writer can expense basic office supplies like pens, but splurging on a $900 pen may not cut it.
Even if an expense seems legitimate, you might not be able to deduct it all. For example, working from your dining room table doesn’t mean you can write off your whole rent. When in doubt, the IRS provides a detailed guide on allowable deductions to keep you on track.
Step #7: Make bookkeeping a habit.
We get it, bookkeeping rarely makes it to the top of your list—let alone gets checked off. You’re a business owner, you’re busy—it’s understandable. You have to make bookkeeping a habit in order to avoid massive headaches and stress later.
Block out a specific “bookkeeping day” each month to catch up. Use this time to enter missing transactions, reconcile your bank statements, review your financials, and make any necessary updates.
Should I DIY Bookkeeping Or Higher a Professional?
Just because you know how to keep your books, doesn’t mean you should. Let’s evaluate if DIY bookkeeping is the right move for your business.
Advantages of DIY Bookkeeping
DIY bookkeeping is ideal for small, side-project businesses with limited budgets. It’s a cost-effective option that gives you full control over your finances. Simple tools like spreadsheets or beginner-level software will be enough to get you started.
Challenges of DIY Bookkeeping
Sure, DIY bookkeeping may have given you a hands-on understanding of your business finances, but as your business grows, managing your books becomes time-consuming and complex. Mistakes and missed deductions will happen, and it’s easy to fall behind.
When to Hire a Professional Bookkeeper
When bookkeeping becomes overwhelming or too time-consuming, outsourcing to a professional will save you time and stress. A bookkeeper handles everything for you so you can get back to doing what you love—running your business!
DIY Bookkeeping: Frequently Asked Questions
Can you do bookkeeping by yourself?
Yes, you can do bookkeeping by yourself. Many software programs are designed to make the process easier for beginners, allowing you to track income, expenses, and manage financial reports without needing a professional bookkeeper.
Can I teach myself bookkeeping?
Yes, you can teach yourself bookkeeping. There are plenty of online courses, books, and resources available to help you learn bookkeeping. Start with basic concepts like the accounting equation, debits and credits, and financial statements.
What is the simplest form of bookkeeping?
The simplest form of bookkeeping is single-entry bookkeeping. In this system, every transaction is recorded once, either as income or expense. It’s straightforward and ideal for small businesses with minimal financial transactions.
How do I make simple bookkeeping?
Start by tracking all your income and expenses using a basic accounting method like single-entry bookkeeping. Use tools like spreadsheets to categorize and record transactions. Regularly review your financial records to ensure they are accurate and up-to-date.
Ditch the DIY Bookkeeping and Find Your Bookkeeping Match!
If you don’t have the time (or the willpower) to DIY bookkeeping, you need Bookkeeping Match Up! We’ll connect you with a qualified bookkeeper who fits your business needs. Book a free consultation to get started!