A Complete Beginners Guide for Small Business Bookkeeping

Accurate, up-to-date bookkeeping is the backbone of any successful small business. No matter what type of business you operate, an understanding of bookkeeping best practices is essential for keeping your business running smoothly, now and in the future. If learning the ropes of small-business bookkeeping sounds intimidating, have no fear. Here’s your introduction to bookkeeping: Discover the different options available to you, and why it’s so important to keep detailed financial records.

What Is Bookkeeping, Who Is a Bookkeeper & What Is the Role Of a Bookkeeper?

It’s a common term that you’ve probably heard countless times before, but what is bookkeeping, really? Basically, bookkeeping is the part of accounting that’s concerned with the collection and organization of financial documents. Bookkeeping means gathering, organizing, and filing every bit of data related to your company’s finances. What sort of documents does bookkeeping cover? A bookkeeper is in charge of compiling:

• Invoices
• Receipts
• Payroll records
• Bill statements
• Bank and credit card statements
• Tax forms and returns

While accounting encompasses these data-gathering duties, this field also tends to involve analyzing the numbers and making profit and loss projections. However, bookkeeping as a term doesn’t necessarily include such long-term calculations and analyses. That said, good bookkeeping ensures that you have the numbers and data that you need to help your accountant or CFO make predictions about your small business’ future, and diagnose your business’ financial health.

Why Your Small Business Needs Bookkeeping

1. Besides keeping your accountant or CFO happy, there are plenty of reasons why your small business needs bookkeeping. Accurate bookkeeping can help you prepare for tax season(a lot is happen to tax defaulters now in Nigeria including frozen business accounts), stay on top of debts, and understand where your business’ profits and losses are coming from.
2. When your books are in good order, you can make sense of your overall income and look for places where you might be overspending. With this type of information at your disposal, you can focus your business activities toward your most profitable products and services, or cut back on unnecessary spending to save yourself some money. Good bookkeeping leaves you better equipped to make decisions that help your business grow and thrive.
3. Keeping detailed financial records is also helpful for securing investors. It reflects well on you as a business owner when you know exactly where all your money is going. Not only that, but keeping your books in order makes it much easier for you to paint a picture of your business’ current financial state, and its potential for future success.
4. Even if your small business didn’t make much money this year, if you have the records to prove that your company is profitable overall, you can give investors the boost of confidence they need to make a decision about supporting you financially.
5. Good bookkeeping is also an essential way to understand your own small business. It’s easier to gauge the overall health of your business when you can see the big picture. Say you run a restaurant and you introduced a new menu item six months ago. Have your profits risen in the past two quarters? If you’ve been keeping accurate records, your books should clearly show whether this profit is the result of more customers buying that specific item, or if you simply had more customers overall. If it’s the former, you might benefit from revamping your menu to angle toward similar products. If it’s the latter, perhaps you want to revisit a particularly successful marketing campaign. In this way,small business bookkeeping makes these types of business decisions less of a gamble.
6. Finally, keeping proper records is essential for filing taxes. Knowing exactly how much you made and how much you spent on certain supplies and expenses during the year allows you to fill out a tax return that’s fair and accurate, and will earn you the deductions and rebates that you deserve.

Hiring an experienced accountant or CFO to do your bookkeeping for you can be helpful, especially in your first couple years of business when your focus might be diverted to other areas of your company. Talking to a professional like us is a great way to gain an understanding of bookkeeping essentials (Talk to specialist now!). Plenty of small-business owners also choose to do their own bookkeeping, so if you’re confident in your record-keeping abilities, this could be a low-cost option.

So what exactly are the essential elements of bookkeeping even for small business?

Preparing Financial Reports

Financial reporting makes up a large chunk of what bookkeepers do on a day-to-day basis. A detailed financial report usually includes the following three elements:

• Balance sheet
• Income statement
• Cash flow statement

So what are these elements? A balance sheet describes the overall value of your company, taking three main factors into account:

1. The value of your assets (your cash and property)
2. The value of your debts and liabilities
3. The value of your equity (your stocks, or however much money you’ve invested into your company)

The formula for calculating a balance sheet looks like this:

• assets = (liability + equity)

The amounts on either side of the equation should be equal, or balanced — now you understand why it’s called a balance sheet.

An income sheet is exactly what it sounds like: It’s a record of all your income. An income sheet shows your gross profits and subtracts all the money you spent, to give you a total net income over a given time period. This total might be in the negative, if you spent more than you made. An income sheet needs to be detailed; it should include every single dollar and cent that you made or spent over your chosen time period.

The costs you list on an income sheet might include business expenses, maintenance and rental fees, and employee salaries. Your income can comprise all your sales, as well as any money you made from foreign exchange or business-related investments.

A cash flow sheet is very similar to an income sheet. The difference is that a cash flow sheet only shows cash transactions — basically, all of your small business expenses and sales. It doesn’t include things like interest accruals from investments, which might not show up immediately in your small business-transaction records.

In combination, a balance sheet, income sheet, and cash flow sheet provide an accurate picture of not only how much money your small business is making and spending, but exactly where that money is coming from and going.

As a small business owner, you’ll most likely have to create a complete financial report at least once a year, for tax purposes. However, there are plenty of reasons to make quarterly, or monthly financial statements as well. Frequent financial reports are a great way to check on your budget, and figure out where you can make adjustments if necessary.

Now you know what’s involved in a financial report. But what about the process? How do you consolidate all that financial information into a useful document?

Bookkeeping Methods

Small Business Bookkeeping Method #1 – Manual Bookkeeping

There are two main methods of bookkeeping: manual and automatic. Manual bookkeeping is the “traditional” way of going about preparing and documenting your business’ financial records. In this method, you might use a pen-and-paper ledger, or an offline program like Microsoft Excel or Word to record income, expenses, interest, and any of the other cash flow items that appear in a financial report. The manual method can work if you prefer a hands-on approach, but it can also be time consuming, and it leaves more room for human error.

Small Business Bookkeeping Method #2 – Automatic or Online Bookkeeping Method

Automatic or online bookkeeping, on the other hand, uses software that takes care of most of the calculations and data entry for you. A program like Zoho books cloud accounting software used by JSC Global Accounting firm and it can for example, help you track income and expenses much faster than you could with a traditional ledger and it can be accessed anywhere in the world and from any devices.

It’s also possible to link your cloud accounting software to other financial programs that your business uses, like your online banking or mobile payment application. With all your software linked through the cloud, payments that you make and receive can be automatically recorded to a digital ledger. The software program can then make the calculations for you, giving you an accurate picture of your total income and spending that’s updated every time your money moves.

Zoho books cloud accounting software also has options for payroll, expense tracking, and inventory. As earlier mentioned, it’s a program that makes it a lot easier to check your records on your laptop or smartphone even when you’re out of the office.

Small Business Bookkeeping Method #3 – Single-Entry Versus Double-Entry

You’ve probably heard these terms before, but what exactly is the difference between single-entry and double-entry bookkeeping?. It’s in the name: In single-entry bookkeeping, each transaction is recorded as a single entry in a ledger, while in double-entry bookkeeping, a transaction is recorded twice. For example, if you sold a bag of N25,000, in the double-entry system that transaction could be recorded as a gain in your income ledger, and as a deduction to the total value of your inventory.

Single-entry bookkeeping is simpler — you only have to record each transaction once. This can be sufficient for very small business bookkeeping that are either registered with CAC or not. For example, if you work full time but have a side business selling handmade jewelry, single-entry bookkeeping is probably enough to record your profits and expenses from that side business, so you can claim the amounts on your taxes.

However, if your small business is registered with a Corporate Affairs Commission – CAC, or if it’s your sole source of income, the single-entry method just won’t cut it. The double entry method leaves less room for error, making it the better choice for balancing complex books. Plus, it’s really not that much more complicated. With the help of cloud accounting software for small business bookkeeping, you can pretty much automate the process.

Small Business Bookkeeping Method #4 – Cash Versus Accrual

Both the single-entry and double-entry methods can work together with cash or accrual bookkeeping. To understand the difference between these two methods, take this example. Say you ordered some new machine parts from a manufacturer. You ordered the parts in January, and the manufacturer sent you an invoice that same month. However, you don’t actually pay the fee until you’ve received the parts, in February.

In the cash method of accounting, you record the transaction only when the money has actually changed hands. So, even though you received an invoice in January, you’d record the expense as a cash transaction in February, on the date that it was paid.

In the accrual method, on the other hand, you would record the expense in January, on the date that you received the invoice — regardless of when you ended up paying for the parts.

So which of these methods should you use in your small business bookkeeping to get the best, most accurate picture of your spending habits? That may depend on the size and complexity of your small business.

The cash method of bookkeeping is undeniably easier. By recording cash transactions when the money actually changes hands, you can simply cross-reference your bank statements with your bookkeeping records to ensure accuracy. That said, the cash method also has the potential to be slightly misleading — if you were late on a bill payment one month, for example, your records might end up showing a large sum paid for utilities one month, and nothing at all another month, leading to confusion. This method also doesn’t account for inventory loss. Maybe you ordered some supplies but didn’t end up using them. Recording just the cost of those supplies with the cash method might give you an inaccurate picture of how much you are — or should be — spending on supplies.

The accrual method is a bit more difficult, in that your bank statements might not reflect the amounts on your income sheet. However, the accrual method is the required method for large corporations in Nigeria, and besides that, it tends to provide you with a more accurate picture of your overall finances. JSC Global accounting can help you ease into the accrual method of accounting by ensuring that your records are accurate, based on information from your bank or payment apps. If you plan on growing your business in the future, you’ll probably want to get used to using this method.

Which Financial Records Should You Keep?

An obsession with documentation is a good trait to have as a small business owner. You probably already know the importance of keeping all your receipts and invoices. But are there other sources of data that you might be overlooking? Make sure you’re keeping the following:

• Receipts
• Invoices
• Payroll records
• Bank and credit card statements
• Investment statements
• Tax returns

And don’t just keep them jumbled in a box. Take the time to organize your records, whether that means buying a filing cabinet or breaking out the label maker. Saving your records in the cloud also ensures that they’re easily accessible in a digital format from any device. Making sure your records are well-organized can save you a big headache if you’re ever subjected to an audit.

As a small business owner, you’re required to keep financial and tax records for six years after the tax year in which they were received; it’s a good idea to keep these archived records in both paper and digital formats for added security. Records older than six years can be securely disposed of by hiring a professional document shredding company. For digital records, JSC Global Accounting Services –  Cloud Accounting allows you to easily delete or condense historic transaction data to save you storage space and secure sensitive financial information.

Getting Money Back at Tax Time

This is something that everybody small business owner can enjoy and should look forward to at the end of the year. As a small business owner, solid bookkeeping is the best way to ensure that you get the most out of your return. If you’re hiring an outside accountant or a JSC Global Accounting services CFO to do your taxes, providing that accountant with detailed financial records not only makes the job go faster, but keeping track of every bit of money that came through your business during the year can open up opportunities for tax deductions and returns that you may not have considered.

In Nigeria, there are a wide variety of categories that can potentially be claimed as business expenses, including but not limited to:

• Business Insurance Cost
• Meals and entertainment costs
• Business Travel Expenses
• Office Rental
• Salaries & Supplies
• Business Machinery, Vehicles, Equipments and Gadgets

It can be difficult to remember all of these items offhand, but if you keep detailed books, at the end of the year you have a record of every item that you spent money on, and you can then check that record against the list of deductible business expenses from the FIRS website, and know exactly what amounts you can and can’t claim.

At the beginning of the year, take a look at the list of deductible expenses and determine which categories you’re most likely to spend money in. Consider creating a labelled file folder for each of these expense categories. This way, when you make a purchase, you can immediately file the receipt in the applicable expense category, saving you time when you need to make your expense calculations.

Bookkeeping over the course of a few years also makes it easier for you to estimate how much tax you’ll owe. If your profits and losses remain somewhat stable over a few years, you can get an idea of how much you’ll need to set aside each year for taxes, or how much you should be charging your customers for GST or HST.

Finding a Bookkeeper

By now you should have a pretty good idea of the ins and outs of small business bookkeeping. Nigeria is home to plenty of experienced, knowledgeable accountants, CFOs and bookkeepers who can assist you in developing a system for financial record keeping. One good place to start your search for a bookkeeper is JSC Global Accounting Services. A CFO – Chief Financial Officer will be assigned to you and fully dedicated to your account and will assist you with small business bookkeeping and installing or learning how to use our cloud accounting software.

Business accounting and reporting standards vary slightly from country to country, so it’s important that you find a bookkeeper that’s based in the same region where you’re operating your small business, so you know that your accountant understands the specific regulations that you’re going to be dealing with. This is another reason JSC Global Accounting is your best bet as well have CFOs in almost all African Countries and still counting. Talk to us today to know if we have a CFO near you.

In Summary

There’s a lot to learn, but good, quality bookkeeping doesn’t have to be complicated. Follow these steps to get started with small business bookkeeping:

1. Save and organize all your records and receipts
2. Determine which bookkeeping method (single-entry or double-entry; cash or accrual) works best for you
3. Work with JSC Global Accounting Services to get quality cloud accounting services tailored to your business needs.
4. Practice creating a detailed financial report
5. Hire a professional CFO or bookkeeper to show you the ropes

JSC Global Accounting Services – Cloud Accounting will help you make sense of your financial reports, review your budget, and prepare for taxes.