A Step-By-Step Guide to Catching Up On Your Bookkeeping

step by step bookkeeping

You also need to understand what debits and credits are before you can start to enter any transactions. Any transaction posted in your ledger or your accounting software will be a debit or a credit. This guide is designed to simplify the bookkeeping process for you, providing you with the basics from proper setup of all of your accounts to why it’s important to record transactions promptly. With double-entry accounting, each transaction has a debit and a credit equal to each other, common in business-to-business transactions. Generally accepted accounting principles (GAAP) require public companies to utilize accrual accounting for their financial statements, with rare exceptions. Each step in the accounting cycle is equally important, but if the first step is done incorrectly, it throws off all subsequent steps.

  • With double-entry accounting, each transaction has a debit and a credit equal to each other, common in business-to-business transactions.
  • For those of you out there thinking of potential late fees, surprises, and a successful tax return, here’s a guide from our partner Bench.
  • A digital app lets you keep your incomings, outgoings and everything in between properly organised which makes it simpler to manage your financial records.
  • Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

Typically, bookkeeping will involve some technical support, but a bookkeeper may be required to intervene in the accounting cycle at various points. Keeping your personal and business expenses in the same account is known as piercing the corporate veil—which may result in you being held personally liable for your business’s debt and actions. The sooner you separate your business and personal expenses, the better.

Step 3: Reconcile your bank accounts

It gives you a long-term view of your business’ income and expenses that cash accounting can’t provide. Setting up an effective process and understanding the accounting cycle can help you produce financial information that you can analyze quickly, helping your business run more smoothly. The trial balance provides the company with insight into the balances in the account and discovers any discrepancies. Since no accounting method is seamless, you might find discrepancies when balancing your books. The general ledger is the master list of any transaction information in journals divided into accounts.

step by step bookkeeping

Although most accounting is done electronically, it is still important to ensure everything is correct since errors can compound over time. Finally, a company ends the accounting cycle in the eighth step by closing its books at the end of the day on the specified closing date. The closing statements provide a report for analysis of performance over the period. At the end of the accounting period, a trial balance is calculated as the fourth step in the accounting cycle. A trial balance tells the company its unadjusted balances in each account.

Step 2. Record the transactions

But for the do-it-yourselfers, this step-by-step guide will help you get through your bookkeeping backlog in no time. Tax season for many is coming to a close with deadlines around the corner. For many others a rush to getting tax-ready and compliant with IRS recordkeeping requirements has just begun. For those of you out there thinking of potential late fees, surprises, and a successful tax return, here’s a guide from our partner Bench.

The easiest way of doing this is by categorising your bills into types of expenses to make things a lot easier. Rather than facing a major surprise when the taxman comes knocking, it’s a good idea that you budget for tax as you go along so you don’t have to pay a big chunk at once. Any and every transaction you make needs to be recorded, either in your ledger book or in your accounting software application. Depending on each company’s system, more or less technical automation may be utilized.

Step 2: Record Transactions in a Journal

If you can’t track your transactions accurately, the following steps won’t be able to create a clear accounting picture. Utilizing great tools to automate accounting processes, such as virtual bookkeeping, will not only make your job easier and faster. There are many tasks that you can automate and streamline through the use of a business accounting platform. Having your process go digital may seem daunting at first, but it will save you a lot of time in the long run.

step by step bookkeeping

Late-paying customers is never a good thing and it can have a negative impact on your cash flow. Make sure you pay attention to when your receivables are due and don’t waste time when they’re overdue – act right away. See if you can work out a plan so you can get the money you’re owed as soon as possible but the longer you leave it, the longer it can damage your cash flow. This process can be as simple as preparing an invoice for a customer to setting up your electric bill to be paid.

Step 3: Separate Personal and Business Expenses

The unadjusted trial balance is then carried forward to the fifth step for testing and analysis. With cash accounting, transactions are recorded once money has been exchanged. If you bill a customer today, that money is not recorded in the ledger until the payment is received. Whereas bookkeeping is specifically limited to the recording and storing of financial transactions, accounting deals with the interpretation of such data. An accountant, therefore, is more like a consultant; he or she can delve deep into a company’s finances and recommend ways to optimize the budget.

Troubleshoot errors quickly

That can often be the case if you haven’t split your personal and business funds, so they’re always combining into one account and it’s easy to lose track. Keep in mind that in most cases, you can edit the chart of accounts to better suit your business. It’s also a good idea to become familiar with the accounts included in your chart of accounts, which will make it much easier when you begin to enter financial transactions.

Leave a Reply