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Small business bookkeeping: A few important terms
Start maintaining careful financial records for your business.
Your money matters, and so does the way you account for it.
Maintaining careful financial records can give you a clear picture of your business’s progress, boost your chances of securing loans, and helps you respond to audits and other legal entanglements.
Educate yourself on basic bookkeeping to efficiently manage your money.
Basic small business bookkeeping terms
Bookkeeping has a vast vocabulary, but these key terms are essential:
Accounts payable are payments you owe others.
Accounts receivable are payments customers owe you (e.g., for products and services sold on credit).
Assets are everything you own (e.g., cash, equipment, vehicles, land, and buildings).
Equity is your assets minus your liabilities. When you start a business your “equity” is the money you invested in the business.
Expenses are what you spend money on.
Liabilities are your debts (e.g., unpaid bills and loans).
Net income is the money you have left over after paying expenses.
Revenue is the money that you take in from selling products and services.
Your ledger is where you summarize all revenue and expenses.
Accounting methods: Cash vs. accrual
When starting your business, first decide if you’ll use cash accounting or accrual accounting.
Cash accounting centers on cash flow. You record transactions when you actually make or receive payments. In other words, you record a transaction in your ledger when cash changes hands.
Accrual accounting focuses on when a transaction takes place, regardless of the actual time of payment. If you’re a mechanic, for example, you might repair a customer’s brakes now and bill him later. Even though you may not be paid for weeks, you’ll still record the transaction when you provided the service.
Accrual accounting is more common because it allows you to extend credit to your customers, and it provides a more complete picture of income and expenses. It’s also required for C corporations and companies with inventory or gross sales of more than $5 million.
Bookkeeping entry methods: single vs. double
Single-entry bookkeeping is a lot like keeping a personal checkbook. You make one entry per transaction — a positive number for revenue and a negative number for expenses — and add up all transactions to see your net income. Single-entry bookkeeping does not, however, help you create a balance sheet or track inventory, accounts payable and receivable, or assets and liabilities. Therefore, it is not recommended for even the most basic of businesses.
Double-entry bookkeeping is more common and allows you to do all of those things. In this system, you make two entries per transaction: one in the debit column and one in the credit column. If you bought a hydraulic lift for your auto shop, for example, you would record the purchase as an increase in assets in the debit column and a decrease in cash in the credit column. Accrual accounting requires double-entry bookkeeping.
Bookkeeping sales tax requirement
Remitting sales tax is a legal obligation that requires you to separate sales tax from your total revenue and send it to your local tax authority.
For example, in a jurisdiction with an 8% sales tax, if you sell a product for $50, the customer will pay $54, including tax, of which you can only keep the $50. The remaining $4 is sales tax and must be remitted, or set aside for taxes. Contact your tax authority to determine how often you have to remit — monthly, quarterly, or annually — to avoid penalties.
As small business owners, understanding the basics of bookkeeping can make it easier to keep track of key financial metrics.