Bookkeeping is a fundamental part of any business, no matter how big or small. It works by keeping your finances in check, ensuring they are in excellent working order and that you don’t get an unwanted knock on the door from HMRC… As a business owner, you may be looking to employ a bookkeeper or are even considering taking on the responsibility yourself. If you are sitting wondering to yourself ‘how do you do bookkeeping’, don’t worry you’re not alone.To help you out of your predicament and on your way to improved financial success, here is our beginner’s guide to bookkeeping.
First up, what is bookkeeping?
You probably have an overall idea of what bookkeeping is – the day-to-day handling of your business’s finances. But the process of what this actually entails may not be quite as crystal clear. After all, you probably wouldn’t be reading a blog on how to do bookkeeping if it was.While it may seem simple enough, bookkeeping has a lot of moving parts. Generating financial reports, maintaining a general ledger, reconciling payments and processing payroll all fall under the duties of a bookkeeper (plus a lot more).
All effective bookkeeping starts with maintaining accurate and up-to-date financial records which then can be used in creating a budget, financial analysis, and of course, staying on the right side of the tax man. Bookkeeping is often incorrectly thought of as the same as accounting.
But be warned they are distinctly different and when asking ‘how do you do bookkeeping’ it’s important to know exactly what this distinction is. While bookkeeping is the recording and organisation of your company’s finances, accounting takes this a step further, by interpreting and analysing your financial data to make better-informed business decisions. If you are looking for an in-depth explanation then read our blog on the difference between bookkeeping and accounting.
So how do you do bookkeeping exactly?
Now you have a bit more of an idea of what bookkeeping is all about. Here is the basis of how to carry it out effectively.
1. Choose your bookkeeping method
The first step in bookkeeping is choosing your method, namely double-entry or single-entry. Double-entry will mean that you will be recording each financial transaction in at least two accounts – debit and credit. While single-entry you record each transaction once. As seasoned bookkeepers for creatives ourselves, we would advise the double-entry method.
Why you may ask?
Well, it provides you with a much more comprehensive and accurate picture of your business’s finances, and is better suited for more complex financial transactions. The single entry method is used for cash based bookkeeping where your in-going and out-going transactions are logged as a single translation in a cash journal. Single-entry may be simpler, particularly if you are just starting out. But it will not give you as much detail into your business, and as it grows you will inevitably end up using the double entry method. So it’s good practice to get into the habit early on.
2. Choose your accounting software
If you are not using accounting software then you may as well be back in the dark ages. Accounting software allows you to store all your financial information in one handy place, and access it wherever you are without ever having to worry about keeping physical copies of your records. It also automates many bookkeeping tasks and provides real-time insights into the financial status of your business. What’s not to love?
As experienced bookkeepers for creatives, we have tried and tested the very best accounting softwares out there during our time in the industry. So trust us when we say Xero is the best choice, and that is why we use it for ourselves for both our bookkeeping and accounting services. Not only will it make your bookkeeping a hell of a lot easier but it sure beats relying on an Excel spreadsheet. You can find more about why Xero is the best accounting software for creatives in our blog.
3. Record your transactions
Whether it’s a minor amount or a big chunk of change, you must record all financial transactions, including sales, purchases, expenses, and any other financial activity. This is bookkeeping 101. Remember to input details including the dates, amounts, and any relevant descriptions to help you identify and organise each transaction when the time calls for it. This will not only ensure your books are accurate but also will give you less of a headache when it comes to reconciling your bank statements later on.
Setting up a dedicated business account is the best way to keep on top of your transitions and to avoid any confusion. If you do accidentally end up wacking some of your business expenses on your personal card then don’t panic. Just remember to add these to your transactions too.
4. Reconcile bank statements
This is where you compare your business accounts with your bank statements to ensure that your bookkeeping is correct. If they do not match up then you better don your best deerstalker hat and tobacco pipe, as you’ll have some investigating to do to find out why this is.
5. Track your accounts receivable and accounts payable
Accounts receivable is the money owed to your business for the goods and services you have provided. Meanwhile, accounts payable is the money that your business owes to others. Keep track of both of these figures to ensure that payments are made on time and you have a healthy cash flow.
6. Keep an eye of your expenses and what you can claim for
When it comes to business the bills can start stacking up. Keeping an eye on your expenses will assist you in staying on top of your budget and thus turning a healthy profit. Plus when tax time rolls around you want to be sure you keep as much of your money as possible.This starts with well organised expenses so you can claim back everything you are duly owed. A simple way to manage your expenses is through accounting software like Xero, which allows you to easily input your receipts and track the money you have spent. If you want to know more about what you can and can’t claim for your business then read our blog on deductible expenses every creative business should know about.
7. Regularly review your balance sheet
Your balance sheet is a financial statement that provides a snapshot of your business’s financial position. It shows your assets, liabilities, and equity, helping you assess your business’s overall health and helping to make informed decisions off the back of it. If you are a bit lost as to what we are talking about allow us to break it down for you:
- Assets are what your business owns such as cash, stocks, inventory, property and office supplies.
- Liabilities are what your business owes, this could be tax, loans or goods and service you are required to supply.
- Equity is the value of business and is determined as what would be paid out to its owners or shareholders after all assets are sold and debts paid.
8. Review your accounts regularly
Regularly reviewing your books is a must in case there are issues with your accounts. This will ensure that you catch errors or discrepancies early and prevent problems from snowballing. Giving your accounts the once over helps to detect and prevent fraud, ensures that your financial data is correct, and that you are adhering to bookkeeping best practice.
Should you hire a professional?
Now you have the basics down pat it leads up to the next question, should you hire a professional or do it yourself? While giving bookkeeping a go is commendable there is a reason that professional bookkeepers are in such high demand. In our humble opinion, DIY is better saved for your minor home improvements rather than your professional business. Bookkeeping may seem simple, but when the proverbial s*** hits the fan, and your accounts just aren’t adding up then an expert bookkeeper is worth their weight in gold. Making silly mistakes can cost your business both time and money.
So trust us when we say leave it to the professionals. Whether you’re a dab hand with numbers or not, your attention wants to be on growing your business not trying to figure out your VAT return.
At Raedan we are expert bookkeepers for creatives working with clients in an array of different industries. We are here to expertly manage your finances so you can focus on making your creative business the next big thing. Get in touch now to see how we can help.
