How to Do Bookkeeping: Basics Every Small Business Owner Should Know

Bookkeeping is an integral part of a business’s finance department. Since small business owners might not have an extensive team of accountants to help them with their accounting processes, they need to know about the bookkeeping basics.

Financial statements are an essential element of a business as it helps you calculate the overall worth of your operations. Most importantly, it can help you with business tax preparation services since accountants and tax consultants can calculate your business’s profit or loss and the tax rate you must pay.
However, they would ask for the bookkeeping records to help them prepare the tax and financial statements. Therefore, business owners need to understand bookkeeping and its basics clearly.
Additionally, there are a few terminologies that you need to keep in mind for your bookkeeping. So, if you aren’t aware of the bookkeeping terms or their basics, you have come to the right place. This article will provide an extensive review of the concept of bookkeeping. So without further ado, let’s get right into it.

What is Bookkeeping, and Why Is it an Integral Part of Your Business?

Before we move on to bookkeeping basics, we must understand what it is all about. Bookkeeping refers to the documentation of financial transactions that concern your business. You need to source the relevant documents for any business transaction, operation, or financial deal.
Bookkeeping is an integral part of your business’s financial and accounting process. It helps you record each transaction, so you can create accurate financial reports to help you assess the business performance.
Moreover, a comprehensive bookkeeping process can help you with a tax audit if you take personal tax preparation services.

Bookkeeping Terms That Every Small Business Owner Needs to Know

If you are a small business accountant or an owner who handles the entire bookkeeping process independently, then there are a few basic terminologies that you need to know. These terms will make the bookkeeping process easy for you. Let’s go over them to give you a better idea.
Accounts Payable: These are parties you have taken a loan from and now have to pay back. It could be the vendors, banks, or any other party to which you owe money.

Accounts Receivable: These are parties that have taken a loan from you. It could be the customers, companies, or anyone that has purchased anything from your business.

Balance Sheet: A financial statement created on the accounting equation: Assets= Liabilities + Equity. A balance sheet helps you to understand the financial situation of your business.

Capital: Also known as equity, it refers to the amount of money you invest in the business.

Income Statement: Also known as the profit and loss statement, it tells you about the net profit or loss that your business made over a specific time. The concept behind the income statement is to subtract the cost of goods sold from revenue to get gross profit. Next, we deduct expenses to get the net profit or loss.

Journals: These refer to the ledgers or accounts where you record each of your business’s transactions.

Revenue: Revenue is the total sales that your business has made in a specific period.

Trial Balance: This process ensures all your business transactions follow dual-entry systems and your books balance out correctly.