Bookkeeping is the process of recording your business’ financial transactions in an organised manner. It helps you to keep an eye on your business's financial health, therefore enabling you to identify financial challenges and opportunities at an earlier stage. Bookkeeping is a crucial component of business finances, regardless of the size of your business. Here, we’ll guide you on how to do bookkeeping for your small business.
Understand accounts categories
First and foremost, let’s understand the 5 basic categories of accounts:
- Assets – The resources owned by the business to produce income, such as inventories, cash on hand, and accounts receivables.
- Liabilities – The obligations and debts owed by the business to non-owners, such as loans and accounts payables.
- Income – The revenue earned by the business, generally through sales.
- Expenses – The costs incurred for business purposes, such as salaries, cost of goods sold, and electricity bills.
- Equity – The capital contributions and withdrawals by the business owners.
Create a new business account
Now that you have a basic understanding of the five types of accounts categories, you may start by setting up a new bank account for your business. This enables you to keep your personal finances and business transactions separate, which makes it easier to identify the financial information you need when preparing your books.
Develop bookkeeping system
Now, decide how you want to manage your books, either you want to purchase an accounting software like QuickBooks, or you may opt for a simple Microsoft Excel spreadsheet. Choose a solution that suits your business practices the most. You may also choose to adopt single-entry bookkeeping or double-entry bookkeeping according to your business nature. Single-entry bookkeeping is easier to manage and understand, but only appropriate if your business is very simple. Nevertheless, most bookkeeping uses the double-entry system, where there is a debit and a credit for every transaction.
Now it’s time to record all your business financial transactions accurately into the correct accounts. This helps you to keep an eye on the financial condition of your business and eventually makes it easier for you to file a correct tax return. It is crucial to maintain daily records as doing it once in a while could result in omitted transactions and inaccurate records.
Keep your documents
If the expenses are over a certain threshold amount, say RM50, you need to keep the receipts to prove the expense. Also, remember to keep your business documents for a minimum of 7 years. Keeping documents digitally would make it easier to manage and retrieve, as well as consume fewer spaces.
Track your expenses
Keeping track of all your business expenses is important for you to monitor your business growth and cash flows, identify deductible expenses and prepare tax returns. Categorise the expenses based on their nature, such as overheads, purchase costs, payroll, and others as it helps you to identify deductible expenses when doing your taxes. Any expense that is used partly for personal and business purposes must be reflected in the books.
Balance the books
At the end of the quarter or year, you will “post” these entries into your ledger and adjust the balances accordingly. When you tally up your debit and credit accounts, the totals should match. You will produce an adjusted trial balance, with its total assets equal to total liabilities plus equity. If the amounts do not match, go back to your journals and ledger to identify the errors.