Common Small Business Bookkeeping Questions

Regular reconciliation is crucial for identifying discrepancies and maintaining accurate financial records. Waiting until the end of the year or tax time can lead to a tangled mess that can be hard (and time consuming) to unravel.  It can also lead to inaccurate reporting and may lead to making financial decisions based on false information.  The frequency can depend on the volume of transactions, but monthly reconciliation is considered best practice.

The software industry has exploded in the last decade with more and more bookkeeping software companies offering online options.  This can be overwhelming for owners trying to determine which one will meet the growing needs for your business.  Popular choices for some businesses include QuickBooks Online, Xero, and FreshBooks.  I use QuickBooks Online exclusively with my clients.  I find it to works well for many different industries.  The advantage of QuickBooks Online is the flexibility to add or remove services depending on your business’ needs.  It can be used for all sizes of businesses.  For example, I have used it for a law firm, cattle ranch, and a container garden business.  Each has their own unique bookkeeping needs and QuickBooks is able to handle them all.

Keeping track of all your business expenses can be a challenge.  There are many different methods and tools for tracking and categorizing expenses.  It is important to figure out what works best for your business.  Many smaller businesses tend to use credit and/or debit cards for purchases and expenses.  Some bookkeeping software offers the ability to link to your bank account, so transactions are automatically added to the system for your review and categorization.  Some also offer the ability to take a picture of your receipt right from your phone and it match to your bank transactions.  If you have vendors that send invoices, I highly suggest investing in a desktop scanner.  Some software, like QuickBooks Online, will allow you to take the scanned invoices and add it to the software for easy entry and coding.  From there you can either print off a check or use an electronic bill pay process to pay your vendors.  The key is to find a process that works best for your business.

Cash accounting and accrual accounting are two distinct methods used for recording financial transactions, and they differ in how they recognize revenue and expenses. Here's a brief overview of the differences between cash and accrual accounting:

Cash Accounting:  In cash accounting, transactions are recorded when actual cash is received or paid. This means revenue is recognized when payment is received, and expenses are recorded when they are paid.  Cash accounting is simpler and more straightforward, making it suitable for small businesses with straightforward financial transactions.  It provides a real-time view of a company's cash position since transactions are recorded as they occur in terms of actual cash flow.

Accrual Accounting:  Accrual accounting, on the other hand, records transactions when they are incurred, regardless of when the cash is exchanged. Revenue is recognized when it is earned, and expenses are recorded when they are incurred.  Accrual accounting follows the matching principle, which aims to match revenues with the expenses incurred to generate those revenues. This provides a more accurate representation of a company's financial performance over a specific period.  Accrual accounting is generally more complex than cash accounting due to the need to track receivables, payables, and non-cash transactions.

Key Differences:

Timing of Recognition:  The primary difference lies in when transactions are recognized. Cash accounting focuses on actual cash movements, while accrual accounting recognizes economic events, regardless of the cash flow.

Accuracy of Financial Position:  Accrual accounting is considered to provide a more accurate representation of a company's financial position and performance over a specific period because it considers all economic events.

Regulatory Compliance: Larger businesses and those required to follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) often use accrual accounting for regulatory compliance.

Choosing between cash and accrual accounting depends on factors such as the size and nature of the business, regulatory requirements, and the need for more accurate financial reporting. Small businesses might opt for cash accounting for its simplicity, while larger entities often adopt accrual accounting for a more comprehensive financial overview.

Maintaining accurate and organized records is crucial for fulfilling tax obligations and ensuring compliance with tax regulations. The specific records you need to keep may vary based on your business structure, industry, and applicable tax laws. However, here is a general guideline outlining the types of records you should consider keeping for tax purposes:

Income Records:

   - Sales invoices

   - Receipts for cash sales

   - 1099 forms for income received as an independent contractor or freelancer

Expense Records:

   - Receipts for business-related expenses (e.g., office supplies, travel expenses, meals)

   - Invoices from vendors and suppliers

   - Credit card statements showing business-related expenses

   - Mileage logs for business-related travel

Payroll Records:

   - Records of wages, salaries, and bonuses paid to employees

   - Withholding information for income taxes, Social Security, and Medicare

   - Payroll tax filings (e.g., Form 941 for quarterly filings in the U.S.)

Asset Records:

   - Records of asset purchases and sales

   - Depreciation schedules for business assets

   - Receipts and documentation for capital improvements

Bank and Financial Statements:

   - Business bank statements

   - Credit card statements

   - Loan documents and statements

Tax Returns and Supporting Documents:

   - Copies of filed tax returns

   - Supporting documents used to prepare tax returns (e.g., receipts, invoices, W-2s, 1099s)

Contracts and Agreements:

   - Business contracts and agreements

   - Lease agreements

   - Any legal documents related to business transactions

Corporate Records:

   - Articles of incorporation and other formation documents

   - Minutes of meetings for corporations and LLCs

   - Shareholder or member agreements

Receipts for Charitable Contributions:

   - If applicable, records of charitable contributions made by the business

Electronic Records:

    - Digital copies of all relevant documents, invoices, and receipts

    - Backup of accounting software data

It's essential to retain these records for a specific period as required by tax authorities. In the United States, for example, the Internal Revenue Service (IRS) generally recommends keeping tax records for at least three years, but best practice is seven years.  Consulting with a tax professional or accountant is advisable to ensure that you are keeping the necessary records and complying with specific regulations applicable to your business and location.

It is important for small businesses often weigh the pros and cons of hiring a professional bookkeeper.  Check out my post: The Benefits of Outsourcing Your Bookkeeping.