Bookkeeping Basics for Small Businesses

Introduction

• Bookkeeping Importance: Essential for business longevity.
• Definition: Systematic method of recording financial information, categorizing it, placing it into an accounting system, and generating reports.
• Purpose: Helps in making future business decisions by recording past financial data.

Six-Step Bookkeeping Process

1. Gather Source Documents

• Definition: Original records for a transaction (invoice, sales order, receipt).
• Details Required: Date, buyer, seller, amount, product/service provided.
• Tip: Use bank statements for most transactions. Cash transactions need physical receipts.
• Recommendation: Use debit or credit cards to make all payments for easier tracking.

2. Categorize Transactions

• Main Categories:
  • Assets
  • Liabilities
  • Equity
  • Revenue
  • Expenses
• Subcategories: Further breakdown within main categories (e.g., inventory under assets).
• Software Suggestion: Use accounting software like QuickBooks for organization.

3. Reconcile Transactions

• Definition: Matching transactions in bank statements with those in accounting software.
• Purpose: Ensures all transactions are accounted for and helps catch errors.
• Process: Start with the beginning balance, match transactions line by line.

4. Prepare Financial Statements

• Types of Statements:
  • Balance Sheet (Assets = Liabilities + Equity)
  • Income Statement (Revenue - Expenses = Profit)
  • Cash Flow Statement (Cash from operations, financing, investments)

5. Read Financial Statements

• Balance Sheet: Lists assets (in order of liquidity), liabilities, and equity.
• Income Statement: Displays revenue and expenses, yielding net income.
• Cash Flow Statement Overview: Shows cash inflows and outflows in three categories.

6. Make Decisions Based on Data

• Balance Sheet Analysis: Gauge liquidity and sustainability.
• Income Statement Analysis: Understand operating performance.
• Cash Flow Statement Analysis: Evaluate cash on hand and potential adjustments.
• Example: Shortening collection period for better cash flow.

Conclusion

• Benefits of Bookkeeping: Accurate data for smarter business decisions.
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