What is Bookkeeping? A Complete Beginner's Guide
Bookkeeping is how a business keeps track of its money. Every dollar in or out gets recorded and filed under a category. Then the totals get checked against the bank. The result is a set of records that you or an accountant or the IRS can follow without guessing.
Anyone who searches "what is bookkeeping" gets that answer. What sits behind it is a monthly routine. It is smaller than the jargon makes it sound.
Bookkeeping logs the past and accounting makes sense of it
Bookkeepers keep the log of what already happened. Sales, bills, payroll and loan payments all go in it. Accountants read that log and analyze it. Then they prepare tax returns and advise on strategy. They can only work with what the bookkeeper recorded.
A month of bookkeeping comes down to five jobs
Each step has IRS backing in Publication 583, the agency's guide for people starting a business.
Open a business checking account and keep personal spending out of it. The IRS puts this among the first things a new owner should do.
Every entry needs paper behind it. Keep the invoices, receipts and statements from your card and bank.
Record transactions as they happen. The IRS says daily is generally best.
Sort each transaction into a category such as sales, rent, materials or payroll. The categories are what make the totals mean something.
Reconcile every month by comparing your books with the bank statement. Go line by line. Chase down each difference you find.
Out of this routine come two reports. The first is an income statement. It shows what came in and what went out over a stretch of time. The second is a balance sheet. It shows what the business owns and owes on a single date.
Choose how your books count income and log transactions
The two methods differ on one point: what triggers the count. For cash, it is money changing hands. You count income when you receive it and expenses when you pay them. For accrual, it is the work itself. You count income when you earn it and expenses when you incur them.
Take a client who pays in January for work you finished in December. Cash records January. Accrual records December.
Inventory shifts the rule. When inventory is part of how you earn income the IRS generally expects accrual for purchases and sales. Some small businesses are exempt. You generally need IRS approval to change methods once you pick one.
Single and double entry set the logging. Single-entry records each transaction once and the IRS calls it the simplest system to maintain. Double-entry records each one twice. One side is a debit in one account and the other is a credit in another.
The two sides have to match and that gives you a built-in error check. The IRS's own example is October rent. That is a $780 debit to rent expense and a $780 credit to cash.
Any recordkeeping system works if it proves your income and expenses
With a few exceptions the law does not tell you what kind of records to keep. Your system only has to show your income and expenses clearly. The IRS does decide how long you hold on to the records. It can also ask to see them at any time.
| Situation | Keep records for |
|---|---|
| Most income tax returns | 3 years |
| Income left off the return is more than 25% of gross income shown | 6 years |
| Claim for worthless securities or a bad debt deduction | 7 years |
| No return filed, or a fraudulent return | Indefinitely |
| Employment tax records | At least 4 years after the tax is due or paid, whichever is later |
Unless noted, each period runs from the date you filed. Those are income tax rules. An insurer or a creditor may want you to hold on to records longer. Keeping those records in order through the year is what makes tax preparation straightforward instead of a scramble.
Software saves typing but someone still has to review the match
QuickBooks says its reconciliation tool pulls in your bank transactions and flags mismatches. The review and the confirmation are up to you. Someone still has to notice an expense filed under the wrong category, which usually traces back to how QuickBooks was set up at the start.
If you have one or two accounts and a light month you can reasonably keep your own books. Monthly bookkeeping is priced by how much there is to do. Basic covers up to two bank or credit card accounts and under 100 monthly transactions. It runs $150 to $300 a month. Standard covers three to five accounts and 100 to 300 transactions. It runs $300 to $700. Spending more than a few hours a month on your books is our first sign it is time to hand them off. Dreading tax season is the second.
Book a free call if the books are behind
Tell us how many accounts your business has. Tell us roughly how many transactions it runs each month. We will say whether you need monthly help or just a tidier routine of your own. We also clean up books that are months or years behind. Book a free consultation.
