Bookkeeping 101: What is it? Why is it Important? How to Get Started

what is it why is it important tips on getting started this is bookkeeping 101 for small business owners today i'm going to share with you small business bookkeeping tips and tricks to getting your business finances in order i just saved a client over 31 000 in one month because of bookkeeping now you might be wondering wow no way how can boring bookkeeping help with that see for yourself this client improved their profit by over 31 000 after one month of working with me and prioritizing their books now i know what you might be thinking but i can't afford a cpa to work with on a monthly basis or i want to do this myself or maybe you just want a better grip on your small business bookkeeping so you can grow your business either way you can't avoid doing your books because if you don't you're not going to be able to file your business taxes and you won't be able to run your business because you won't know what's going on financially hi i'm crystal with life accounting a full service accounting firm that is dedicated to helping small businesses grow if you're new to our channel be sure to subscribe so you don't miss out on future videos to help your business and please tap the like button if you take away anything from this video in this video i'm going to talk about what is bookkeeping why bookkeeping is critical and necessary in your business how it works and tips on getting started and growing your business let's dive in so what is bookkeeping bookkeeping is the process of tracking your income and expenses that's it most people like to believe it is more than that just because of the plain sight of numbers but honestly it's just that simple just tracking your income and expenses now how you use your bookkeeping to grow your business is the game changer make sure to keep watching to find out how okay up until now you heard what bookkeeping is and how using it can dramatically improve the bottom line of your company but what makes it so important and necessary in your business reason number one bookkeeping helps you budget when you're properly tracking your business income and expenses it makes it easier to manage your financial resources budgeting creates a financial roadmap for your business so there aren't any surprises reason number two bookkeeping is necessary for tax preparation in most cases your business has to file a tax return every year and every year it's a hassle sound familiar the tax filing process can be made more efficient by simply having bookkeeping within your company bookkeeping is important for filing your personal tax return too as a business owner a large part of your income comes from your business in order to know what you earned you have to know what your business earned first reason number three bookkeeping is important because it helps you make better business decisions by first understanding your financial performance remember the client i mentioned in the beginning the product of bookkeeping is financial statements financial statements should be regularly prepared and used for decision making while reviewing your financial statements you can track your cash inflows and outflows and overall profitability this is what you want as a business owner profits and the only way to get there or improve on them is with useful information that is your bookkeeping so how exactly does bookkeeping work think of bookkeeping for your small business as a cycle it starts with a transaction you could be the buyer or seller in this transaction it doesn't really matter because at the end of the day all transactions impact your books as a result of this transaction there should be some type of source documentation this could be a receipt invoice note payable this documentation serves as sources of information that bookkeepers use to record transactions now if you're like most business owners you might find it tedious to keep up with every little receipt so having your monthly bank statements would be a great alternative the next part of the bookkeeping cycle is determining the financial effects of your transactions this part can be a little tricky and is usually where the expertise of an accountant or cpa is needed in general all transactions fall into one of five categories revenue expenses assets liabilities and equity revenue is what you made from selling your product or service so sales expenses are cost incurred related to running your business things like advertising or office rent assets are resources that are owned by the company with a measurable future value inventory or prepaid expenses are good examples liabilities are what the company owes to creditors so loans or credit cards equity is the degree of ownership in your business so things like distributions or contributions impact this account it is very important to correctly classify each of your business transactions so that you can accurately interpret the financial performance of your business this is the bookkeeping cycle in a nutshell now you might be curious to know how to get started with all of this no worries i have outlined five simple steps to help you get started with getting your business bookkeeping up and running let's dive in first you must open a business bank account if you're a sole proprietor you're not legally required to do this step but if you want clean and easy books i highly recommend having a separate bank account for your business even more so for other business types like llcs or c-corps if the irs finds out that those business types don't have a separate account this could mean the end of those businesses and grounds for termination by irs standards furthermore consider the headache you'll avoid at tax time by having a separate account instead of cycling through your year's deposits and expenses and trying to remember what was personal versus business everything will be centralized in your business bank account most banks offer a business bank account option you just want to make sure that you have an ein number or employer identification number which you can request from the irs second set up a bookkeeping system bookkeeping is an ongoing process for every business this process should be completed at least monthly to stay on top of your finances one great way to establish a bookkeeping system is to invest in accounting software like quickbooks or xero these programs allow you to perform monthly weekly and even daily bookkeeping tasks the best part is that most of these programs enable you to connect your business bank account which makes tracking income and expenses easier and less time consuming in addition setting up a bookkeeping system is knowing how you'll classify your expenses remember the five categories of bookkeeping i mentioned earlier it comes to play right here as transactions are coming in they'll need to be placed in the appropriate category asset liability equity revenue or expense however it is best practice to drill down even more into what each transaction is for example perhaps you sell clothing online and made a big wholesale purchase of clothes instead of labeling this as inventory you might find it more useful to label it as summer inventory or winter jackets let's take another example perhaps you're just starting out and are investing a lot into advertising you might consider creating subcategories for advertising like google ads facebook ads and print ads this way you can track how much you're spending in each category in accounting we call this setting up your chart of accounts or coa this is basically your list of accounts that you'll use to define each of your transactions third reconcile reconciling your transactions is the practice of determining any difference between the bank balance shown on your bank statement and in your bookkeeping system you want to make sure that none of your transactions are missing or double counted in your bookkeeping system performing a bank reconciliation at least monthly will help you catch errors or even billing mistakes made by your vendors fourth prepare financial statements specifically the balance sheet income statement or p l and cash flow statement the balance sheet shows your outstanding balance in assets liabilities and equity the income statement or p l shows your profit or loss for a specific period the cash flow statement shows the movement of cash related to your financing investing and operating activities each of these reports should be prepared and reviewed at least monthly and don't worry the bulk of the work has already been done when all of your transactions are classified and reconciled preparing the reports is usually the easy part fifth and finally there is very little point in doing all of these steps if you aren't going to use this information to make better business decisions the textbook definition of accounting is centered around one major concept business decision making as a business owner you are faced with business decisions day in and day out and in any decision you make there are considerations mostly related to your finances would x add value to my company can i afford x what are the financial implications of x x being a decision you're considering these are just a few questions you might ask yourself ultimately the answers to these types of questions and more are found in your bookkeeping there you have it you have just learned the basics of bookkeeping in your business or bookkeeping 101 as i like to call it to recap bookkeeping is simply the tracking of your income and expenses bookkeeping is important because it helps you budget prepare taxes and make business decisions bookkeeping is a cyclical process that starts with a transaction and ends with the preparation of financial statements like the income statement to get started with bookkeeping you need to first open a business bank account second set up a bookkeeping system third reconcile all of your business transactions four prepare financial statements and five implement business decisions that are derived from your bookkeeping simple right all of this sounds a bit overwhelming you may want to consider engaging an experienced bookkeeper or accountant to help you tackle this process i hope you found this video useful and interesting please go ahead and give this video a thumbs up and comment below what you need to do to get your books in order also don't forget to subscribe to our channel to learn more about accounting tax and other financial related topics until next time take care

Channel: LYFE Accounting

Views: 150,854

Keywords: bookkeeping 101, what is bookkeeping, is bookkeeping important, how to do bookkeeping, bookkeeping services

Id: bJTZbfq7amQ

Length: 11min 1sec (661 seconds)

Published: Mon Aug 24 2020