Bookkeeping Basics for Small Business Owners

Bookkeeping is the routine of recording every amount of money that enters or leaves a business, sorting each one into a category and keeping the paperwork that backs it up. Kept up steadily, it gives you figures you can rely on when a tax return is due, a lender asks questions or you simply want to know whether last month went well. The basics fit on one page: a separate bank account, a short list of categories, a place for receipts and a fixed habit of updating the books.

Bookkeeping and accounting are different jobs

The two words get used as if they meant the same thing, but they describe two stages of one process. Bookkeeping is the recording stage: entering sales, bills, payments and transfers accurately and on time. Accounting builds on that record. An accountant interprets the figures, prepares financial statements and tax returns, and advises on structure and planning.

Plenty of owners do their own bookkeeping in the early years and pay an accountant for year-end work and tax. That split works as long as the records handed over are complete and orderly, because the person preparing your return can only work with what they receive.

Five building blocks to put in place first

1. A dedicated business bank account. Mixing personal and business spending makes every later step slower. One account, and one card if you use a card, keeps the trail readable.
2. A chart of accounts. The list of categories every transaction is sorted into, explained below.
3. A recording method. Decide whether income and costs are recorded when cash moves or when they are earned and owed. Our explainer on cash versus accrual accounting sets out the difference.
4. A tool. A spreadsheet can carry a very small operation; accounting software tends to earn its fee once there are many invoices, stock items or staff.
5. One home for documents. Receipts, invoices, contracts and statements need a single place, digital or physical, where they can be found again. Several ideas from our guide to organizing a home office carry over to the paper side of a business.

What a chart of accounts looks like

A chart of accounts is a named or numbered list of every category the business records money under. It normally falls into five groups. The first three describe what the business owns and owes at a point in time; the last two describe how it performed over a period.

Start with a short list. Twenty clear categories are easier to apply consistently than eighty that overlap. It also pays to name expense categories after the headings your accountant or tax form uses, so that mapping them at year end takes minutes instead of an afternoon.

Single-entry or double-entry?

Single-entry bookkeeping is a running list, much like a checkbook register: each transaction is written down once as money in or money out. It is simple and can suit a sole trader with few transactions. Double-entry bookkeeping records every transaction in two accounts at once. A sale on credit, for instance, raises income and raises the amount customers owe; when they pay, the amount owed falls and the bank balance rises. Because both sides must agree, mistakes surface sooner, and the records can produce a full balance sheet. Most accounting software runs double-entry in the background even when its screens look like a simple list.

A routine that keeps the books current

• Weekly: record sales and costs, file receipts, send invoices that are ready and note who has paid.
• Monthly: match the books to the bank statement, as described in our walkthrough on how to do a bank reconciliation, then read the month's profit and loss statement.
• Quarterly: put money aside for tax, chase older customer balances and tidy any category that has turned into a catch-all.
• Yearly: close the year, hand the records to your accountant and archive the documents.

Tax money is easier to leave alone once it has physically left the main account. Some owners move a share of each payment into a separate interest-bearing account; our piece on high-interest savings covers what to compare before opening one.

Habits that create the most clean-up work

• Paying personal costs from the business account, or the reverse, without recording it as an owner's draw or contribution.
• Letting receipts pile up for months and then guessing what each one was for.
• Recording a customer's payment as fresh income when the sale itself was already entered, which counts the same money twice.
• Inventing a new category whenever something unusual turns up.
• Never comparing the books with the bank, so small slips grow quietly.

Common questions

How long should business records be kept?

Retention periods are set by tax authorities and vary by country and by type of document, often stretching over several years. Owners who live abroad may face rules in more than one place, which our article on taxes for EU expats touches on. Confirm the current requirement with your accountant or tax office rather than relying on a rule of thumb.

When does it make sense to hire a bookkeeper?

Typical signals are falling more than a month behind, spending evenings on data entry instead of customers, taking on employees or starting to collect sales tax or VAT. A part-time bookkeeper can take over the recording while the decisions stay with you.

Is a spreadsheet enough?

With a handful of transactions a month, often yes. Once you are sending many invoices, tracking stock or running payroll, software that pulls in the bank feed and produces reports usually saves more time than it costs.

General information only, not accounting or tax advice. Requirements depend on where and how your business is set up, so check the details with a qualified accountant.