Choose a Bookkeeping System
There are so many different options for recording your income and expenses that it can get overwhelming. My best advice: choose the one you know you’ll use on a consistent basis.
Pen and Notebook
Sometimes you just need to get started with a pen and a notebook—jotting down income and expenses as they come in. At the end of each month, add up all of your income, subtract your expenses and you’ll have an overview of how you did for the month.
There’s absolutely nothing wrong with this method. It just takes a little more manual work than the others.
Spreadsheets
Spreadsheets are the next jump up from paper and pen. Instead of hand-calculating all of your numbers each month, you can use formulas to add up totals for more reliable results.
Just keep in mind that as your business grows, keeping track of invoices, sales tax, and expenses gets a lot more tedious when everything has to be hand-entered. I started out creating invoices in Excel because it was easy and I didn’t want to pay a monthly fee. I found that after my first busy season, I had not implemented a good way of tracking the invoices when they were sent or paid. I moved to a cloud accounting program and my invoicing process takes 1⁄4 of the time it used to.
Cloud Accounting Programs
If you’d like something a little more powerful, accessible from anywhere, and with advanced reporting tools, I recommend choosing a cloud accounting program. This will allow you and your accountant to work together much easier than sending screenshots back and forth or emailing files to each other.
The cloud accounting program that I recommend most is QuickBooks Online. This is the big name in accounting software. Most people have heard of it and automatically buy it because they think that’s the thing to do when you need to get bookkeeping done. While QuickBooks isn’t the best choice for everyone, since the software is so popular, you can generally find the answer to your question on YouTube with a detailed step-by-step video of how to complete a task.
I do want to mention that I sometimes hear from clients that QuickBooks overwhelms them, and the software sits untouched while their bookkeeping piles up. If you’re feeling overwhelmed with the cloud program you’ve chosen, take time to really get to know how it works. Start by categorizing one month of transactions and use the program’s “help” pages to figure out things like money transfers.
If you still feel overwhelmed, switch to another option for bookkeeping. Whatever you do, don’t stop bookkeeping altogether, or you’ll feel even more overwhelmed later on.
Choosing a QuickBooks Online Subscription
If you decide to go with QuickBooks, you’ll need to pick the subscription that meets all of the needs for your business. The least expensive QuickBooks Online subscription allows you to track mileage, assists with quarterly tax estimation, and helps organize Schedule C income and expenses. However, it does not offer accountant access or invoicing.
The next level up allows you to track income and expenses, complete unlimited invoicing, and grant access for up to two accountants. It also has the option to pay an additional fee in order to accept online payments and perform payroll.
However, if you have an inventory that needs to be tracked, you’ll need the third level up on the monthly subscription. It has all the features of the second plan and also includes inventory tracking and the ability to create 1099 forms.
Bonus How-To Videos
The following how-to videos will walk you through different aspects of using QuickBooks. However, if you are using another cloud accounting program or are having trouble setting up your own system, these videos can give you a visual for how your books should look since the concepts are the same no matter which system you use.
Organize Receipts
There are a million ways to organize your receipts and bank statements. Just make sure you save copies of everything for at least 7 years. Here are a few of my favorite options:
Monthly Envelopes for Physical Documents
You’ll need 13 letter-sized envelopes for this method. Label each envelope with a different month and use the 13th envelope for any tax forms or documents you receive throughout the year.
Each month, throw your receipts and canceled checks in the correct envelope. At the end of the month, print out the statements for each of your business accounts, such as your checking, savings, credit card, and PayPal accounts. Put those statements in the monthly folders with your receipts.
Scan and Toss
If you don’t like having a lot of paper around, you can use a scanner or a smartphone to scan all of your receipts and toss the originals. As long as you can easily find the receipts, the IRS says this is totally acceptable. Just make sure you back them up in a safe place.
Email Folders
I’ve created a folder labeled “Expense” inside my Gmail account where I dump all of my emailed receipts. By organizing them in my email account, I’m not wasting paper by printing all of the receipts, and I also have them somewhere that I can easily find if I need to review a receipt.
Categorize Transactions
You’ll have two main types of transactions that you’ll need to keep track of in your bookkeeping system: income and expenses.
Income
Business income includes any money received for providing a good or service. It is also commonly referred to as revenue or gross sales. You don’t necessarily need to categorize the types of income you receive, but types that may flow into your account include:
- Sale of goods
- Services
- Commission and affiliate income
There are also several ways you can receive income:
- Cash or check deposit
- Payment processors such as Stripe, Etsy, Shopify, and PayPal
- Quickbooks invoice payment
One thing to note is that when you receive a deposit from a payment processor, the amount you receive is the net amount. If you are using a third-party payment processor, you need to record the fees that they charge.
Expenses
You’ll want to closely keep track of business expenses not only to calculate your profits and losses but also to make sure you don’t miss out on any tax deductions tied to those expenses (more on tax deductions in Lesson 5).
All expenses should be categorized, but I’m going to share a little secret with you. With the exception of meals, entertainment, cost of goods sold, and car expenses, the categories you use for everything else don’t really matter that much.
Just make sure the categories are descriptive so you know what’s in there, but don’t feel like you need to create a different account for every single purchase. For example, I usually lump Photoshop actions, font downloads, and other digital supplies into a category called “Digital Downloads.”
If you’re using an accounting program, don’t be afraid to create your own categories. For example, you probably won’t see “Digital Downloads” as an option, but you can totally create it yourself.
Reconcile Business Accounts
This step is the one that most business owners put off or skip entirely. The easy part is putting receipts in envelopes; the hard part is devoting time in your schedule to sit down and track your income and expenses and reconcile each account.
If you’ve never heard the term “reconcile” before, think of it like balancing a checkbook. You’re making sure what you have in your bookkeeping system matches exactly what your bank is showing. If there are differences, you need to figure out what’s causing them and make any necessary corrections.
To make this whole process easier, schedule a recurring “meeting” with yourself the first Monday of every month. You can adjust the length of time this needs to be based on experience. Start out by blocking 30 minutes on your calendar. This will save you from spending a weekend in February or March of the next year feeling frustrated while you’re trying to catch up on an entire year of bookkeeping.
When you’re ready for your first bookkeeping “appointment” with yourself, start by pulling together all of the receipts and bank statements for that month.
If you’re using an online accounting program, make sure all of the transactions for the month have been categorized and accepted.
If you’re using the pen and paper method or the spreadsheet method, log all income and expenses for the month and assign categories to the expenses.
Once the tedious data entry is done, you’ll need to reconcile each of your accounts by making sure the transactions shown in your bookkeeping or accounting program match up with what’s shown on your bank statement. Most cloud accounting programs have a tool to make it easy to see when everything matches up.
How to Reconcile Your Account in QuickBooks
If you’re using QuickBooks, here are the steps you’ll take to reconcile your account each month:
- From the Chart of Accounts, select a bank account.
- Select “Reconcile” in the top right.
- Enter the ending balance from your bank or credit card statement in the ending balance box.
- Enter the ending date from your statement.
- In the reconciliation screen, make sure all of the items are selected and the difference is $0.00. (Note: Some transactions at the end of the statement may not have cleared the bank yet, so those may have to be unselected.)
To watch a video of this process in Quickbooks, Click Here.
