What are the methods in bookkeeping? Seven Steps
Enough! No more excuses. It’s time to tackle bookkeeping once and for all. Join Goldmine Tax as we share seven simple steps to get you started.
What Is Bookkeeping?
Bookkeeping is the regular process of recording, sorting, and storing a business’s financial transactions.
Is it the same as accounting? No. But the two are related. Bookkeeping is the trunk of the accounting tree. Why?
Accurate record keeping is the foundation of doing taxes, building financial statements, making decisions, and spotting mistakes.
Step 1: Separate Your Business & Personal Transactions
Mixing the two is a recipe for disaster. It’s a waste of time, and you can miss tax deductions.
You may also be legally required to keep them separate. The easiest way is to open a business bank account.
All your business transactions should go through this account. Don’t use it for personal transactions.
Step 2: Choose A Bookkeeping System
A bookkeeping system is a methodical way to record transactions. You could use spreadsheets like Excel or Google Sheets.
These are cheap and easy to use but time-consuming and limited for complex bookkeeping tasks.
Alternatively, accounting software like QuickBooks, Xero, and FreshBooks offer more features but are costlier and more complicated.
If managing bookkeeping is too much, you can always outsource it to Goldmine Tax. This saves you time and allows you to focus on your business.
The key is to find a system that fits your needs, budget, and expertise.
Step 3: Single-Entry or Double-Entry Bookkeeping
Single-entry bookkeeping records one entry for each transaction and is simple to use.
It’s suitable for small businesses but can oversimplify finances. Double-entry bookkeeping records two opposite entries (debits and credits) for each transaction.
This method is more accurate and provides more financial data. Though more complex, it’s worth it for a complete picture of your finances.
Consider using accounting software or a bookkeeper, like Goldmine Tax, to manage this.
Step 4: Cash Method vs. Accrual Method
The cash method records transactions when cash is received or paid. It’s easy to manage and offers a clear picture of cash flow.
The accrual method records transactions as they’re earned or incurred, regardless of when cash changes hands.
It provides a more detailed financial view but is harder to maintain. Choose the method that suits your business.
Step 5: Recording Transactions
This step involves entering your business transactions into your bookkeeping system. You can do this daily, weekly, or monthly.
You could record these transactions yourself or hand them over to Goldmine Tax.
Be sure to include details like the seller, purchaser, document number, date, description, and amount.
Step 6: Sorting Transactions
Transactions should be sorted into the correct accounts. For example, sales should be recorded in your revenue account.
Your complete list of accounts is called a Chart of Accounts. Sorting transactions allows you to prepare financial statements like the income statement and balance sheet.
Step 7: Storing Transactions
After recording and sorting transactions, you need to store them securely. Keep the source documents as well, either in physical form or digitally.
Goldmine Tax recommends backing up all your documents to stay compliant with tax and financial reporting requirements.
Bonus Tip 1: Budget For Taxes
Always set aside money for taxes. Check with tax authorities to know your obligations and plan accordingly.
Open a separate bank account for taxes to keep things organized. If you need help, reach out to Goldmine Tax.
Bonus Tip 2: Do Regular Bank Reconciliations
Regularly compare your bank statements with your bookkeeping records. This ensures everything matches up and keeps your accounts accurate.
At Goldmine Tax, we recommend monthly bank reconciliations for smooth, error-free bookkeeping.
