Creating an easy-to-follow bookkeeping system is really all about categorization and organization. If you are organized and set aside time in your day to do bookkeeping duties, it shouldn’t take you more than a few minutes a day to keep your bookkeeping perfectly up to date.
Choose Your Accounting Method
This is one of the first things you need to do, and this is prior to considering which type of software you want to buy. You need to figure out if you’re going to do your books on a cash or accrual basis. The method you choose will inform how you recognize when income is received and when expenses are booked or recorded.
- Cash Method – Income and expenses are only recognized at the time they are made. So, you record an expense right when you make it even if it’s on credit, and you record income the day you get it, not the day it clears the bank.
- Accrual Method – Income is recognized the moment the order is made even if the money hasn’t cleared yet. Same with the expenses; you count them the moment the order is made even if you haven’t pay for it yet.
In order to choose the right accounting method, you need to understand which one you can choose. The easiest method is the cash basis method, and you can choose this as long as you have less than $5,000,000 dollars’ worth of sales. If you have more sales than that, or your stock inventory that you sell to the public and your gross receipts are over $1,000,000 per year, then you’ll need to use the accrual method.
Figure Out How People Will Pay You
Now that you know which method you’ll use for bookkeeping, you’ll need to choose how people will pay you. Will people pay you via credit, check or barter? Will you invoice them, or do they pay at the point of sale? Knowing how you’ll handle payments will help you set up the right system.
For example, if you want to take credit cards, you may need your bank to set up an authorize.net system for you. If you want to take PayPal, you’ll need a PayPal business account; if you want to take checks you’ll need to work with your bank. However you choose to accept payment, set it up in advance and be clear about it.
Determine If You’ll Need a Payroll System
Do you plan to hire employees? If so, you’ll need your bookkeeping system to have a payroll option. This is because you have to withhold Medicare, social security and other withholdings from each employee’s paycheques. This can be difficult to keep up with, but it’s easier if you have a good accounting system that enables you to do it easily.
If you do not plan to have employees but only contractors or “1099” workers, you don’t need a payroll system as you simply pay them the agreed-upon amount. In some cases, you may need to send each contractor a 1099 form in the mail at the end of the year; no later than January 31st. Please read about the current laws to ensure that you’re following them.
Determine If You’ll Need an Inventory System
If you don’t have physical inventory, you don’t need an inventory system. Even though you may artificially limit the number of digital downloads you allow for your digital product, an inventory system is not needed in the traditional sense.
You really can’t do without an inventory system if you do have physical inventory. It’s a necessity – not only for your records but for tax purposes too. Avoiding these things may not save you money. Most people who don’t keep track of everything properly tend to overpay on their taxes rather than underpay.
Understand Whether or Not You’ll Need to Collect and Pay Sales Taxes
If you sell physical items, you’re going to have to collect sales taxes in your home state, as well as any state your business has a nexus in. This means that if you have sales people (even contractors) in a particular state or an actual business in that state, you’ll need to collect sales tax and pay the sales taxes in every state. This is something you most certainly should discuss with a CPA to ensure that you do this accurately.
Choose Your Software
Once you are aware of all of the above, you need to choose the type of software you’re going to use, or whether or not you’re going to do it yourself. If you’ll do it yourself, you can pick the software that best fits your needs and budget. If you choose to hire a CPA, you need to allow them to choose the software they’re most comfortable with.
If you’re picking your own, use the free trials to try out different software. At least set up the chart of accounts, and enter some data so that you can figure out if it’s user-friendly for you. Even though most of the software out there does the same thing, one will feel easier to use than another. The best thing to do is choose the one that is easiest for you so that you’ll keep up with it.
Open a Business Bank Account
It’s very important to open a business bank account so that you can do business. It does cost a little more than a personal account. However, if you want other people to take you seriously, and you don’t want problems with the IRS, it’s best to keep business funds and personal funds completely separate.
To open a business bank account you’ll need a business license and an EIN (employee identification number), even if you don’t plan to hire anyone. Check with your city and county license department for what to do.
Get a Business Credit Card / Debit Card
Once you have a bank account, you’ll want to get a business credit card or at least a debit card. It is very helpful when you’re out and find something that would work for your business. If you keep business and personal purchases separate, it’s going to be a lot easier to keep your bookkeeping and finances accurate.
Put Every Transaction into Specific Categories
The thing that the chart of accounts does for a business is to put everything into a particular category. This is probably the best way to organize your files in accordance with state and federal requirements, so that you can prove your deductions if you ever need to. If you know what category a transaction goes into, you’ll have an easier time with bookkeeping duties.
Keep Everything Organized
It’s important to set up a way to keep everything organized where it’s easy to find. The best way to do it is to set up a procedure for how you handle all your receipts, paperwork, and information that you need to save each year. You can use something as simple as an accordion file, or you can scan everything and save it in the cloud. There are special scanner apps just for this purpose that you can download for your mobile devices.
Do Your Monthly Reconciliation
Never skip each month’s reconciliation. You want to reconcile the bank account, double check AR and AP, and handle all your state and federal requirements. Waiting can cause you to miss out on something, and late fees and issues ignored today can cost a lot more tomorrow. If something is not right, you’ll be able to get it resolved faster if it’s recent.
Keep Data Entry Up to Date
Set aside a specific time at least once a week to update your data entry and bookkeeping. If you have a lot of transactions that aren’t automated, then you may need to set aside time each day to work on it. If you set aside the time you need now, you’ll save time later, because it’s a lot easier to book things correctly if you’re doing it in a timely manner.
When you are recording any type of transaction, always be as detailed as possible. Write down on the receipt information that you may need if a question ever arises. Keep everything together so that you can find it too. The more detailed you are now, the less you’ll need to try to remember tomorrow. Also, you won’t remember as much as you think you will about every transaction.
Keep Personal and Business Finances Separate
This was mentioned above a little bit, but it needs to be repeated to make it clear why. When you co-mingle your business accounts with your personal accounts you can get confused about what is income, what isn’t income, and how much you can actually pay yourself. Just because you bring in a certain amount each month doesn’t mean you can spend it all; probably half or more of it is an expense.
Always Back Up Your Data
Don’t do all that work without backing up your data. Most systems have some form of back-up system. If you use a cloud system you probably don’t even have to worry about backing up, since they use redundant systems. You should definitely ask your cloud service whether or not you should back up or not.
Use Automation When You Can
Most bookkeeping software has some form of automation. Usually, you can connect your software to your bank account. If you can do that, it’ll automatically book a lot of transactions for you without your having to do any data entry. It is important to double check on a scheduled basis if the automation is working properly and booking transactions properly. The right automation can save you hours each week.
Use Scanning to Support Income and Expenses
One way to automate and keep things organized is to use a special scanner to turn all your paper into legal digital documents. This will make them searchable too. Some bookkeeping software has these functions and allows you to attach the receipt to the transaction when needed.
It’s very important that you set up some sort of procedure for these tasks so that they become a regular part of doing business. If you do it regularly, you’ll also learn the software. Also, there is something wonderful about being able to print out an accurate profit and loss statement at a moment’s notice.
*This article is not intended to replace professional business advice and planning. Always contact professionals regarding any business advice, financials, planning, operations, and/or management.