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Accurate, up-to-date bookkeeping is the backbone of any successful small business. No matter what type of business you operate, an understanding of bookkeeping best practices is essential for keeping your business running smoothly, now and in the future.

If learning the ropes of small-business bookkeeping sounds intimidating, have no fear. Discover the different options available to you, and why it’s so important to keep detailed financial records.

It will be even easier to keep your records organized, stay on top of time management, send out invoices and more in a cloud-based accounting software like QuickBooks Online.

TABLE OF CONTENTS:
What is the Role of a Bookkeeper?
The Importance of Bookkeeping in a Small Business
Which Financial Records Should You Keep?
Preparing Financial Reports
Bookkeeping Methods
What is GAAP?
What is Net Present Value?
Historical Costs
Accounts Receivable & Accounts Payable
Tax Return 101
Finding a Bookkeeper
Conclusion

What Is the Role Of a Bookkeeper

Bookkeeping is the part of accounting that’s concerned with the collection and organization of financial documents. This means that it is the bookkeeper’s job to gather, organize, and file every bit of data related to your company’s finances. A bookkeeper is in charge of compiling:

Receipts
Bill statements
Bank and credit card statements
Tax forms and returns

While accounting encompasses these data-gathering duties, this field also tends to involve analyzing the numbers and making profit and loss projections. However, bookkeeping as a term doesn’t necessarily include such long-term calculations and analyses. That said, good bookkeeping ensures that you have the numbers and data that you need to help your accountant make predictions about your business’ future, and diagnose your business’ financial health.

The Importance of Bookkeeping in a Small Business

Tracking Profitability

Tracking your company’s profitability lets you follow your earnings over time and plan for ways to improve it in the future. Profitability measures let you easily and quickly track transactions and determine how much your business earns on inventory. Some helpful profitability ratios that let you gauge your company’s efficiency include:

Gross margin ratio
Profit margin
Return on assets ratio
Return on equity
Return on capital employed

Maintaining Cash Flow & Improved Financial Management

As a responsible small business owner or bookkeeper, you should be aware of your company’s revenue streams. With accurate bookkeeping, you can tell how much your business is making in terms of income and track your spending to ensure that you have enough cash on hand to cover your business expenses. Proper financial records make it easier for you to analyze the financial state of your firm and determine areas that need improvement.

Bookkeeping Helps You Prepare for Taxation

If you run a start-up you can save time by recording all transactions as they come up. This saves you from tracking important financial information for the end of the fiscal period at the last-minute. With proper bookkeeping, you can determine the types of taxes and calculate the amount payable in advance.

Easier Reporting

As a business owner, you’re responsible for reporting crucial financial data about your firm to potential investors and other stakeholders. Bookkeeping programs that incorporate graphs, charts, and other visual aids make it easier to increase data precision and improve communication when you’re wooing investors.

You’re also responsible for communicating with your employees and allowing them to know the financial state of your firm. They need to know if the company is making some progress and how they contribute to its growth. Bookkeeping accounting ensures that you have the right information to talk to your team and make them feel like they’re part of the company.

Evaluate Performance & Plan for the Future

Accurate bookkeeping helps you trace your firm’s financial records and evaluate its performance levels. You can look back, see patterns, and even draw comparisons with previous business years. Bookkeeping allows you to have a greater understanding of the areas within your business where you can trim costs.

You may need to re-strategize and make adjustments to ensure you stay on top of your business.

Proper bookkeeping also allows you to determine the areas within your company that could benefit from improvements. If you’re a small business owner, it’s necessary to set projections and forecast the future of your business. Bookkeeping accounting lets you know if your small business needs extra employees or requires operational changes.

Which Financial Records Should You Keep?

An obsession with documentation is a good trait to have as a small business owner. Be sure to keep the following:

Receipts
Invoices
Payroll records
Bank and credit card statements
Investment statements
Tax returns

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Take the time to organize your records, whether that means buying a filing cabinet or breaking out the label maker. Saving your records in the cloud also ensures that they’re easily accessible in a digital format from any device. Making sure your records are well-organized can save you a big headache if you’re ever subjected to an audit.

As a business owner, you’re required to keep financial and tax records for six years after the tax year in which they were received; it’s a good idea to keep these archived records in both paper and digital formats for added security. Records older than six years can be securely disposed of by hiring a professional document shredding company. For digital records, QuickBooks allows you to easily delete or condense historic transaction data to save you storage space and secure sensitive financial information.

Preparing Financial Reports

Financial reporting makes up a large chunk of what bookkeepers do on a day-to-day basis. A detailed financial report usually includes the following three elements:

As a business owner, you’ll most likely have to create a complete financial report at least once a year, for tax purposes. However, there are plenty of reasons to make quarterly, or monthly financial statements as well. Frequent financial reports are a great way to check on your budget, and figure out where you can make adjustments if necessary.

Bookkeeping Methods

Manual Bookkeeping

Manual bookkeeping is the “traditional” way of preparing and documenting your business’ financial records. In this method, you might use a pen-and-paper ledger, or an offline program like Microsoft Excel or Word to record income, expenses, interest, and any of the other cash flow items that appear in a financial report. The manual method can work if you prefer a hands-on approach, but it can also be time consuming, and it leaves more room for human error.

Online Bookkeeping Method

Online bookkeeping uses software that takes care of most of the calculations and data entry for you. A program like QuickBooks cloud accounting software, for example, can help you track income and expenses much faster than you could with a traditional ledger.

It’s also possible to link your cloud accounting software to other financial programs that your business uses, like your online banking or mobile payment apps. With all your software linked through the cloud, payments that you make and receive can be automatically recorded to a digital ledger. The software program can then make the calculations for you, giving you an accurate picture of your total income and spending that’s updated every time your money moves.

QuickBooks cloud accounting software also has options for payroll, expense tracking, and inventory. A program like this makes it a lot easier to check your records on your laptop or smartphone even when you’re out of the office.

What is the Difference Between Single-Entry and Double-Entry Bookkeeping?

In single-entry bookkeeping, each transaction is recorded as a single entry in a ledger, while in double-entry bookkeeping, a transaction is recorded twice. For example, if you make a $30 sale, in the double-entry system that transaction could be recorded as a gain in your income ledger, and as a deduction to the total value of your inventory.

Single-entry bookkeeping is simpler — you only have to record each transaction once. This can be sufficient for very small businesses that aren’t incorporated. For example, if you work full time but have a side business selling handmade jewelry, single-entry bookkeeping is probably enough to record your profits and expenses from that side business, so you can claim the amounts on your taxes.

However, if your business is incorporated, or if it’s your sole source of income, the single-entry method just won’t cut it. The double entry method leaves less room for error, making it the better choice for balancing complex books. Plus, it’s really not that much more complicated. With the help of cloud accounting software for small-business bookkeeping, you can pretty much automate the process.

Keep in mind, single-entry bookkeeping’s simplicity doesn’t allow for GAAP conformation. This inability to conform to GAAP’s requirements may not apply to very small businesses which only need to be able to illustrate a method of meeting reporting requirements for taxes and employees. Any company that must highlight cash flow retained earnings, or any other changes in a position financially must use a double-entry accounting system.

Cash Versus Accrual

Both the single-entry and double-entry methods can work in tandem with cash or accrual bookkeeping.

To understand the difference between these two methods, take this example. Say you ordered some new machine parts from a manufacturer. You ordered the parts in January, and the manufacturer sent you an invoice that same month. However, you don’t actually pay the fee until you’ve received the parts, in February.

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In the cash method of accounting, you record the transaction only when the money has actually changed hands. So, even though you received an invoice in January, you’d record the expense as a cash transaction in February, on the date that it was paid.

In the accrual method, on the other hand, you would record the expense in January, on the date that you received the invoice — regardless of when you ended up paying for the parts.

So, which of these methods should you use in your bookkeeping to get the best, most accurate picture of your spending habits? That may depend on the size and complexity of your business.

The cash method of bookkeeping is undeniably easier. By recording cash transactions when the money actually changes hands, you can simply cross-reference your bank statements with your bookkeeping records to ensure accuracy. That said, the cash method also has the potential to be slightly misleading — if you were late on a bill payment one month, for example, your records might end up showing a large sum paid for utilities one month, and nothing at all another month, leading to confusion.

This method also doesn’t account for inventory loss. Maybe you ordered some supplies but didn’t end up using them. Recording just the cost of those supplies with the cash method might give you an inaccurate picture of how much you are — or should be — spending on supplies.

The accrual method is a bit more difficult, in that your bank statements might not reflect the amounts on your income sheet. However, the accrual method is the required method for large corporations in Canada, and besides that, it tends to provide you with a more accurate picture of your overall finances.

QuickBooks accounting software can help you ease into the accrual method of accounting by ensuring that your records are accurate, based on information from your credit card or payment apps. If you plan on growing your business in the future, you’ll probably want to get used to using this method.

The LIFO Accounting Method

What is LIFO accounting? LIFO means Last In, First Out. It is one of the methods you can use to determine the current worth of your inventory if you operate a retail business. This accounting method presumes that your most recent (last in) products will be the first to sell (first out). If your inventory costs fluctuate between the first and last items, this bookkeeping method helps keep the most accurate records possible.

If you manufacture goods, your inventory accounting entries will reflect several stages of completion. If you produce wooden furniture, some of your inventory may be unfinished wood products, furniture currently on the assembly line, and finished pieces. In your ledger, the finished goods inventory will reflect the number of each type you have at any time.

After some of your finished items have sold, you can track the cost of goods sold by including all direct costs. This can be done using the traditional method or with activity-based costing. You can figure both your direct and indirect costs by performing a cost assignment to each type of good you produce or service you provide.

The FIFO Accounting Method

FIFO accounting, or first-in, first-out, is a method of valuing inventory. It’s basically an assumption for cost-flow purposes that states the first goods you purchased are the first goods you sold. This assumption most closely resembles an actual flow of products earning it the distinction as the most correct valuing method in theory. Consider your local supermarket — the first gallons of milk the store purchased to sell to customers are the first gallons sold usually. Otherwise, a lot of milk (product) would spoil, thus creating a loss for the store.

When creating the company’s balance sheet, the FIFO method of valuation offers costs that most closely resemble the costs most recently incurred. On the other hand, it also matches older costs of inventory purchases against revenues currently coming in, which means revenue vs. cost is not necessarily properly reflected, resulting in a potentially higher than actual gross margin.

Whichever accounting method you choose, the best way to make sure you’re dotting your i’s and crossing your t’s is to maintain order in the way you manage your bookkeeping. You can do so by implementing GAAP.

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles, which are the best methods you can use to track and manage your business financials. Why? These are methods used by most people in the accounting profession, so if your bookkeeping is ever questioned, your methods will be accepted by others.

A few ways you can begin using GAAP are standardizing your chart of accounts, classifying your assets on the company’s balance sheets, and implementing a three-way matching system to ensure you never double-pay an invoice or pay for products not ordered or received.

What Is Net Present Value?

The Net Present Value (NPV) of your business is a calculation that helps you analyze potential projects or investments that might be worth your while. The NPV calculation is a snapshot of a period of time that illustrates how much money you’ve had come in versus how much you’ve paid out.

It helps you estimate whether a given project or investment would result in more money coming in, or if you’d lose money on the venture. Understanding how to calculate Net Present Value is beneficial for your long-term financial planning.

Historical Cost

Your goal in bookkeeping is to keep the most accurately detailed account of business financials. To do so, you must factor in the historical cost of certain items. Determining the historical cost of something you’ve purchased or acquired is merely accounting for the purchase or acquisition at the then-rate you paid.

This means you’ll have an accurate valuation of the item and your expenses related to depreciation are accurate. Historical cost may factor in when you’re accounting for lump-sum purchases.

Accounts Receivable & Accounts Payable

After you have sold goods or provided a service, you invoice the purchaser. Once the invoice has been presented, the amount of the sale is now owed to you. This is money that you’re due to receive, hence its placement in your general ledger under Accounts Receivable. Tracking purchasers who have paid against those who haven’t illustrate your company’s accounts receivable turnover ratio.

Any monies you owe to suppliers or other agencies for goods or services provided are placed under Accounts Payable. Accounts Payable is an expense account that lets you know how much money you owe to your creditors. Rent, business insurance, and software subscriptions are expenses you pay before receiving the benefit of the service—these are prepaid expenses.

When you account for deferred expenses, your bookkeeping will reflect the month you actually enjoy the benefit of the expense rather than the month in which you paid it. As illustrated above, between the two basic methods of accounting (cash or accrual), you can best account for prepaid expenses using the accrual method.

A common expense some small businesses incur is payroll. If your business incorporates brick-and-mortar sales with online sales, payroll will be different between the two. To analyze which type of sales amount to the largest profit for your company, you must segregate in-person sales from online sales.

As you balance Accounts Receivable against Accounts Payable, the result is your net income. Divide this amount by net sales amount to obtain your profit margin. If the ratio of income to debt is small, you’re operating with a narrow profit margin. Analyze where you can cut some costs, and you can improve a narrow profit margin. You can also track your gross margin weekly, biweekly, or monthly based on your sales.

Tax Return 101

Everybody hopes for a big tax return come springtime. As a small-business owner, solid bookkeeping is the best way to ensure that you get the most out of your return. If you’re hiring an outside accountant to do your taxes, providing that accountant with detailed financial records not only makes the job go faster, but keeping track of every bit of money that came through your business during the year can open up opportunities for tax deductions and returns that you may not have considered.

In Canada, there are a wide variety of categories that can potentially be claimed as business expenses, including but not limited to:

Insurance fees
Property tax
Meals and entertainment costs
Accounting fees
Travel
Supplies

It can be difficult to remember all of these items offhand, but if you keep detailed books, at the end of the year you have a record of every item that you spent money on, and you can then check that record against the list of deductible business expenses from the Canada Revenue Agency, and know exactly what amounts you can and can’t claim.

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At the beginning of the year, take a look at the list of deductible expenses and determine which categories you’re most likely to spend money in. Consider creating a labelled file folder for each of these expense categories. This way, when you make a purchase, you can immediately file the receipt in the applicable expense category, saving you time when you need to make your expense calculations.

Bookkeeping over the course of a few years also makes it easier for you to estimate how much tax you’ll owe. If your profits and losses remain somewhat stable over a few years, you can get an idea of how much you’ll need to set aside each year for taxes, or how much you should be charging your customers for GST or HST.

Each province in Canada has a different threshold for when a business owner is required to pay taxes by quarterly instalments, instead of as a lump sum at the end of the year.

In Quebec, the annual threshold is $1,800 in net tax owings
In all other provinces and territories, the annual threshold is $3,000 in net tax owings

In all cases, your business needs to exceed the threshold for taxes for two consecutive years. For example, imagine you run a business in Ontario, and last year you owed $3,500 in taxes after filing. You check your financial records and find that business has been slower this year, and your estimated net taxes owed will only be $2,900 this year. In this case, you can still pay your taxes as a lump sum at the end of the year. However, if your business was steady this year and you once again owe over $3,000, you’ll need to start paying by quarterly instalments.

If you’re paying your taxes in instalments, quarterly and even monthly financial reports can really come in handy. A clear picture of your income within a specific quarter makes it easy to figure out how much tax to pay for that three-month period.

Finding a Bookkeeper

By now you should have a pretty good idea of the ins and outs of small-business bookkeeping. Canada is home to plenty of experienced, knowledgeable accountants and bookkeepers who can assist you in developing a system for financial record keeping. One good place to start your search for a bookkeeper is through Quickbooks. A ProAdvisor can assist you with small-business bookkeeping and installing or learning how to use cloud accounting software.

The Charted Professional Accountant firm directories on the CPA Canada website is another great place to find a bookkeeper. Each province and territory has its own version of this website, which can help you find a qualified CPA in your region, or point you in the direction of courses and qualifications to brush up on your own skills.

Business accounting and reporting standards vary slightly from province to province, so it’s important that you find a bookkeeper that’s based in the same region where you’re operating your business.

Ideally, you also want to find a bookkeeper or accounting firm that has experience in your industry. Just as reporting standards vary regionally, they also vary by industry. When in doubt, don’t be afraid to talk to other business owners and find out how they hired a bookkeeper and what bookkeeping methods they prefer to use.

Conclusion

There’s a lot to learn, but good, quality bookkeeping doesn’t have to be complicated. Follow these steps to get started with small business bookkeeping:

Save and organize all your records and receipts
Determine which bookkeeping method (single-entry or double-entry; cash or accrual etc.) works best for you
Download quality cloud accounting software
Practice creating a detailed financial report
Hire a professional bookkeeper to show you the ropes

Online accounting software can help you make sense of your financial reports, review your budget, and prepare for taxes. Don’t forget to visit the QuickBooks bookkeeping hub where you can find additional helpful information and definitions.

Bookkeeping is the profession from which the term “keeping the books” derived. Bookkeepers manage the finances of small businesses and are often responsible for billing and invoicing, as well as tracking deposits and expenditures. They must be sophisticated users of bookkeeping and accounting software such as QuickBooks, and must also understand the dynamics of cash flow within the businesses they serve.

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Bookkeepers have a unique understanding of how the day-to-day operations of a business effect its finances, so a bookkeeper who is attentive and can anticipate the impact of daily operations on cash flow and the management of expenses, helps build a healthy business.

Bookkeeping also involves organizing and reporting a company’s financial information in such a way that the business can make informed decisions about how to use its capital. A skilled bookkeeper can present data clearly and can also assist with analysis.

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The finances of most small businesses can be looked at as being comprised of three main components: accounts payable, accounts receivable and payroll. Depending on the size of the business they work for, bookkeepers may be responsible for some or all of these components by performing the following tasks:

Paying expenditures
Billing services
Recording income and deposits
Balancing accounts
Reconciling statements
Managing past-due accounts
Preparing financial statements
Managing payroll
Withholding and filing taxes

Scope of Practice

A bookkeeper’s job description often depends on the size of the business they work for. Very small businesses may need a bookkeeper only a few hours a month to manage bank statements, pay expenditures and reconcile income and deposits, and may not staff a bookkeeper full time. Larger businesses may need debit and credit balancing completed on a daily or weekly basis and therefore need the support of a full time bookkeeper.

When an organization reaches greater levels of financial complexity, accounting is often broken into subtasks and assigned to accounting clerks. Accounting clerks are financial professionals who manage specialized accounting tasks within an organization, while bookkeepers are responsible for general oversight of financial data from multiple sources. Accounting clerks are generally assigned accounts payable, accounts receivable or payroll functions, and in larger companies are often overseen by an accountant who is more responsible for strategic planning.

A bookkeeper not only records the numbers but can also interpret them. Managers who are responsible for business strategy or development do not always have the kind of understanding of ledgers and bank statements that bookkeepers do. Bookkeeping is neither simple bill paying nor strategic financial planning. Effective bookkeeping includes being able to analyze the movement of funds to optimize benefits to the company, but does not reach so far as to include investment or debt management. Although they function as statisticians and data analysts in a sense, bookkeepers are not by training the professionals who make financial projections or assess financial risk for a company.

How to Become a Bookkeeper: Education and Degree

Education requirements for bookkeepers vary widely by employer. Small companies with simple needs may look for high-school education and offer on the job training. Organizations with any level of complexity in their accounting – or businesses that are hiring freelance bookkeepers for intermittent support – seek individuals with more formal education.

Bookkeeper Certification

There are several organizations that certify bookkeepers. While bookkeeping is not a licensed profession, employers or businesses that need to hire consultant bookkeepers may look to certification as a demonstration of competency.

The American Institute of Professional Bookkeepers (AIPB) offers the credential “Certified Bookkeeper.” Becoming a Certified Bookkeeper through AIPA requires two years of full-time experience in the field as well as passing an examination and agreeing to abide by the AIPB code of ethics. Certification by the AIPB demonstrates proficiency in the areas of adjustments, error control, payroll, inventory management, internal controls and fraud prevention through its testing program.

The National Association of Certified Public Bookkeepers (NCAPB) offers several levels of certification and licensing. In addition to bookkeeper certification, the NCAPB also offers certification in the areas of payroll. Certification is granted for Certified Public Bookkeepers, Certified Payroll Specialists and Certified QuickBooks Advisors. All certifications are issued through a testing process. The certifications are issued by the NCAPB and are not regulated by any state of federal office, so while they convey to a potential client or employer that you have demonstrated competency in a number of accounting areas, they are seldom compulsory.

Companies that develop software for bookkeeping and accounting such as Intuit, who created Quicken and QuickBooks, or Microsoft, who created Excel, offer certifications in theses programs. Companies with more complex record keeping and financial reporting requirements may look to professionals with the most sophisticated understanding of these accounting-support programs, and certifications in these systems can demonstrate that ability. Bookkeepers who become QuickBooks Certified Users or obtain a Microsoft Office Excel Certification demonstrate exceptional abilities with these essential software products.

Career Growth

Many bookkeepers decide to further their educations and become Certified Public Accountants. Becoming a CPA requires a bachelor’s degree in accounting, work experience, and passing the Uniform CPA Examination, which is sponsored by the American Institute of Certified Public Accountants. Passing the examination and fulfilling the work experience requirements qualifies applicants to apply for a state license. Experienced CPA’s may then choose to move into management positions such as financial controllers or strategic positions such as chief financial officers.

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Other bookkeepers grow freelance businesses and service clients through consulting activities, intermittent financial support, or training a company’s in-house accounting staff. A growing business that decides to hire its own bookkeepers or accounting clerks may seek out the services of experienced bookkeepers to help them educate and train their staff.

Many bookkeepers also offer tax preparation services, which create an annual surge in business for bookkeepers. Finances and taxes go hand in hand, so a bookkeeper that pursues education in the area of tax preparation offers a full-service business. Bookkeepers who want to become tax preparers need to register with the IRS, pass an examination and complete annual continuing education requirements to stay current on tax laws.

Salary Potential

According to the U.S. Bureau of Labor Statistics, bookkeepers will actually see a modest decrease in demand over the ten-year projection period between 2016 and 2026, but they still represent a very significant part of the labor force. As of 2016, more than 1.7 million professional bookkeepers were employed throughout the U.S.

The median salary for a bookkeeper in 2018 was $40,240.

Income is highly influenced by experience and work environment with the highest paying industries offering an average salary of $42,560. Top earners across all industries representing the 90^th percentile earned $61,650 that year.

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