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If you’re in business to earn money, then knowing how to do accounting can help you operate your company far more efficiently. That’s because accounting is merely a monetary means of defining a firm.


This article will teach you how to set up bookkeeping for a small company. Continue reading to learn more about bookkeeping, including how to set up a chart of accounts, what financial reports to anticipate, and how a bookkeeping or accounting system works

What Exactly Is Bookkeeping?

Bookkeeping is the practise of maintaining records β€” or keeping the books β€” of commercial operations such as what the company buys and sells. The goal is to inform the owner of the business’s profit (or loss), what it owns (its assets), and what it owes (its liabilities).

Accounts, journals, and ledgers are the “books” of a bookkeeping or accounting system. An account keeps track of financial transactions of a certain sort (for example, rent, stationery, sales, etc.) or for a specific person or business (ABC Corp). Ledgers are essentially collections of accounts. Journals document the economic aspects of corporate activity.

Some journals, such as the cash book, are specialised and deal with just one sort of transaction. Similarly, some ledgers are secondary ledgers that contain accounts of a certain sort (e.g., sums owing by customers who purchased on credit), known as accounts receivable (AR). However, there is always one primary ledger, known as the general ledger (GL), that contains the totals from subsidiary ledgers. As a result, the GL has a full record of every economic occurrence that affects the firm.

The commercial action will almost always have some documentary record, such as an invoice or check, which is known as a source document.

The accounting cycle – the operational bookkeeping system β€” looks like this:

Each source document should be entered (recorded) in a diary.

Enter the data into a ledger.

Make a trial balance.

Make necessary changes.

Make financial statements.

A trial balance is a list of the GL balances. It gets its name from the fact that it is the first to detect potential problems in the system. Why? As a result of the notion of double-entry.


The majority of current accounting systems are “double-entry” systems, which are founded on the premise that every benefit received by a firm has a cost. As a result, every transaction necessitates two entries: a debit and a credit. Debits are used to represent what is possessed, whereas credits are used to represent what is due. Debits and credits are also used to record costs and earnings, respectively.

If everything goes as planned while recording transactions, the total dollar amount of debits and credits should be the same. A trial balance’s goal is to provide a listing and total of all debits and credits in two columns.

What Is the Role of a Bookkeeper?

The function of a bookkeeper is to keep correct records and guarantee that the books balance (i.e., that the total dollar values of debits and credits are equal). Even if the amount of debits and credits differs, the monetary totals must be the same. Furthermore, the debits and credits associated with each transaction must be posted to the appropriate accounts. A bookkeeper requires basic accounting skills to examine each transaction and classify it correctly.

Select an Accounting Method

Bookkeeping may be done on either a cash or accrual basis. Revenue and costs are recorded in cash basis accounting when cash is actually paid or received. Revenue is recorded when it is generated, and costs are reported when they are spent, according to accrual accounting.

Accounting on a Cash Basis

While cash accounting is easy, it excludes many commercial transactions, such as credit purchases, since there is no cash component. It also does not allow you to keep track of your assets, obligations, or equity. This might lead to a misleading view of corporate operations. Furthermore, cash basis accounting is not in accordance with Generally Accepted Accounting Principles (GAAP). Nonetheless, the IRS accepts cash basis accounting, and some firms may discover that it is more appropriate for their operations.

Accounting on an Accrual Basis

Revenues are reported in accrual basis accounting when a sale is made even though no cash is received. Expenses, on the other hand, are recognised when a cost is incurred even if it has not yet been paid for. Accrual basis accounting is in accordance with GAAP.

Make a balance sheet and a chart of accounts.

Accounts are the fundamental building elements of an accounting system, and a chart of accounts connects all of the accounts together to form a system. The chart of accounts is a listing or index of all the accounts relevant to a certain organisation, which are often classified into five categories: assets, liabilities, equity, income, and costs. The owner’s portion in the company is referred to as equity.

Prepare financial statements

An accounting system generates three fundamental financial reports: a balance sheet, an income statement, and a statement of cash flow.

The balance sheet depicts a company’s financial position at a certain moment in time.

The income statement and cash flow statement depict the movement of resources through time.

These three assertions are historical in the sense that they are about the past.

The Balance Sheet

The balance sheet depicts a company’s financial situation. It’s a snapshot of a company taken at a certain period in time, usually at the end of the month or year. A balance sheet is often set up to represent the accounting equation (Assets = Obligations + Equity), with assets on one side and liabilities and equity on the other.

Earnings Statement

The income statement, often known as the profit and loss statement, summarises a company’s revenue and costs. It is possibly the most crucial financial statement since it reveals whether or not the company is profitable. When creating the income statement, extreme caution must be used to avoid conflating cash receipts with revenues or cash expenditures with costs. Accrual accounting is required for a good income statement.

Statement of Cash Flow

A cash flow statement tracks a company’s liquidity status. It is often divided into three sections: cash flows from operations, investment, and borrowing. The surplus or deficit contributed to the closing cash balance is shown in each area.

The cash component of transactions that determine net income or profit is included in cash flows from operations. The cash flow statement starts with net income (net profit) as the top line. Following that, adjustments are performed in each column to demonstrate how changes in the income section effect the closing cash balance. As a result, the statement of cash flows demonstrates the relationship between net income and the closing cash balance.

Keep your personal and business assets separate.

Bookkeeping systems consider a company to be a separate entity from its creditors, customers, and owners. Even though a company is legally recognised as just an extension of an individual’s activities (as in a sole proprietorship), it is viewed as distinct and independent from its owner(s) for accounting reasons. This strategy has a sound logic behind it. If a company’s actions can be separated and quantified, determining its success becomes simpler.

Furthermore, when it comes time to submit a tax return, every single expenditure must be evaluated to determine if it is a company or personal cost. This might be difficult unless precise records are maintained since the rationale for many spending will be forgotten.

Establish a Business Checking Account

All companies need a bank account in order to collect payments from clients and make their own payments. All company-related cash transactions should go via the corporate bank account, and you should avoid using the account as much as possible for personal activities.

Because almost three-quarters of cash transactions are done electronically, you may connect a business checking account to a merchant services account or a payment processor. Payments may be made via debit and credit cards, as well as the Automated Clearing House (ACH).

You may also connect a company checking account to your accounting system (i.e., your accounting software). This permits bank account transactions to be readily reconciled with the cash book, your record of cash receipts and payments.

Make use of a Business Credit Card.

A business credit card is one way for a small business to expand its financing options. Unlike loan financing, which requires the money to be provided immediately and then returned in payments over time, a company credit card offers a revolving line of credit. A credit limit is established, and monies may be pulled down and reimbursed as needed. If the debt is not paid in full at the end of each payment cycle, interest is levied.

A credit card is typically simpler to qualify for than a loan. Credit card interest rates, on the other hand, are often greater than loan interest rates. Business credit cards, like personal credit cards, may be used to help develop credit.

Install Accounting Software

Accounting software is a modernised version of the traditional accounting method. It has a notable advantage over conventional systems in that the only manual inputs that are often necessary are the insertion of source documents. Other inputs, such as posts to ledger accounts and financial report production, are performed automatically.

Many accounting software solutions used to require a small company owner to buy or licence the system before it could be downloaded. Many accounting systems are now available as Software-as-a-Service (SaaS). The programme is accessed by a web browser or dedicated app, and the service charges a monthly membership fee for its usage.

Employ a Certified Public Accountant

Hiring a competent accountant has several benefits. This engages the services of a professional who is up to speed on the most recent standards and regulations. You may be able to complete the books yourself, but professional accountant will take much less time since they are far more knowledgeable with the challenges.

In-house bookkeeping is the most cost-effective option. However, a professional is preferable for creating financial statements from the system that will pass scrutiny from the IRS, lenders, auditors, and other parties to whom you may like to present them.

Even if you utilise accounting software, hiring a professional to analyse the reports generated is a smart idea. A professional may also assist in the analysis of the data using accounting ratios, and he will be able to give advise based on his expertise with other firms similar to yours.