This article is for informational purposes only and does not constitute legal, personal, or tax advice. The information contained herein is subject to change and may vary from time to time. For specific advice applicable to your business, please contact a professional.

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If you’re not a financial wizard, bookkeeping can sometimes seem like a foreign language, but you don’t need a degree in numbers to understand it for your small business. Follow our guide to discover what bookkeeping is and how to keep up to date with your accounts.

What is bookkeeping?

Bookkeeping is the practice of recording and organising all the daily financial transactions that flow into and out of your business.

A bookkeeper will keep detailed records, make sure everything is up to date and accurate, and produce daily summaries of activity. They’ll produce reports which show how your business is doing. Bookkeepers can also undertake other tasks such as invoicing or paying bills.

Bookkeeping is a distinct activity and an essential part of the wider accounting process.

The importance of bookkeeping

Accurate bookkeeping is essential for your business for several reasons:

1. Helps with budgeting

Keeping good financial records means it’s much easier to budget and to review your sales and costs. It can give you a picture of your business’s financial health.

2. Makes filing tax returns easier

Every business has to file an annual tax return with the Australian Taxation Office (ATO). Good financial record-keeping makes the process far smoother and ensures you don’t miss any deadlines.

3. Setting business targets

If you understand your past and current financial position you can set business targets and make more accurate future performance forecasts.

4. Can create a detailed financial picture

You may know what your sales are and what your expenses are but by breaking it down you can understand which products are best sellers, which ones you need to ditch and where your biggest expenses are.

5. Government rules and regulations

Accurate bookkeeping makes sure you stay compliant. For example, by recording and keeping track of GST collected.

What’s the difference between bookkeeping and accounting?

Bookkeeping and accounting are terms which are often used interchangeably, but while accounting covers the overall practice of managing a business’s financial wellbeing, bookkeeping refers specifically to the practice of recording daily transactions accurately.

For example, you could employ a bookkeeper to keep track of sales and expenses, then an accountant can use the information from that to file tax returns and provide financial advice.

Basic bookkeeping terms

If you’re a bookkeeping novice there will be lots of terms you’ve never heard before. Here we list the most used ones and what they mean:

• Accounts receivable
  The amount of money a business is owed by customers for goods or services that have been delivered.
• Accounts payable
  Money you owe to creditors (suppliers, utility bills, rent etc.)
• Assets
  Anything the business owns or earns income through such as cash (accounts receivable), property, land, tools or equipment.
• Liabilities
  Anything you owe anyone else. For example, accounts payable, loan repayments, wages owed, taxes owed.
• Cost of goods sold
  Any direct expenses required to produce a good or service e.g. raw materials or employee labour.
• Expenses
  The expenses you accrue on a day-to-day basis through the normal running of your business. they can be fixed or variable. Fixed costs, broadly speaking, stay the same over a period of time, for example rent or loan repayments. Variable costs will change depending on supply and demand, for example labour costs, raw materials.
• Equity
  The amount of money invested in a business. For example, the amount of stocks and shares you or your shareholders own.
• Revenue
  Also referred to as sales or turnover, this is the amount of money collected by selling your product or services.
• Balance sheet
  A financial report which summarises everything a company owns (assets) and everything it owes (liabilities) at a given moment in time.
• Cash flow
  The flow of money into or out of a business. Understanding your cash flow is essential because you need to make sure you have enough coming in to cover what’s going out.
• Profit and loss statement
  Also, known as an income statement, this details your company’s profit and loss over a specified period of time.
• Accounting period
  This is a particular amount of time in which you organise and track financial results – weekly, monthly, quarterly and annually.
• Journal
  It’s where you record the daily financial transactions of a business. You may have separate journals for accounts receivable and payable. It might be a physical journal or spreadsheet or you can use online accounting software to simplify the process for you.

Bookkeeping methods

The type of method you use will depend on the size of your business and volume of transactions. A complex system for a small business complicates things unnecessarily. However, if you have a high volume of transactions or you grow rapidly you need a bookkeeping system that can stay on top of that.

Single entry bookkeeping

One entry is made for each transaction in your books. It’s suitable for:

• Small companies or sole traders
• Hold small amounts of inventory
• Don’t buy and sell on credit
• Have few physical assets

Double entry bookkeeping

Double entry bookkeeping follows the principle that every transaction affects two accounts. For example, you sell a box of chocolates for $15 cash, your cash account will be debited $15 and your sales account credited $15. Credits must always equal debits so your books are balanced. It’s a more rigorous accounting method suitable for:

• Larger businesses
• If you buy and sell on credit

Cash accounting or accrual accounting

Whether you choose cash-based or accrual-based depends on how your business recognises your income and expenses. In cash-based accounting a transaction is only recognised in your accounts when money physically/electronically changes hands even if an order was placed months before.

For accrual-based accounting the transaction is recognised when a sale is made or an expense is accrued, not when the money changes hands, so more useful if you offer sales on credit or buy supplies on credit.

The main drawback of cash accounting is it might not always provide an accurate picture of your business. If you have incurred liabilities you’ve not yet paid your business will look better off than it is. Similarly, if you’ve made plenty of sales but not received the funds for them, it will look worse off than the reality.

How to record your bookkeeping entries

For you to create an accurate picture of your business’s financial health, the daily transactions must be recorded properly. There are several ways you can do this:

• Journal/Spreadsheet
  The traditional way pre-digital was to physically record your transactions in a book or journals and you might have multiple journals. This method requires a good understanding of accounting and is time-consuming because you have to match and reconcile transactions manually. You can also record transactions in an electronic spreadsheet but again this requires an understanding of accounting and reconciliation as these processes will need to be done manually if you’re to create business financial reports from the data.

• Accounting software
  Small business accounting software is specifically designed to take the strain from small businesses, automating many daily accounting processes such as calculating tax, transaction matching, reconciliation, payroll and recurring invoices. Most also offer a free trial so you can try out which one you like best before committing.

Square POS integrates with accounting software to keep track of and categorise all transactions. It can also help you keep on top of inventory management.

There are many accounting systems you can try, but some which work well for small businesses include QuickBooks and Xero.

Bookkeeping examples

If you sold a piece of furniture for $1,000 with $100 for 10% GST on top this is how it would be recorded in a double entry accounting system.

Account	Debit	Credit
Bank account	$1,100
GST account		$100
Sales		$1,000

Similarly, if you invest $1000 when you start a business, this is how you would record it.

Account	Debit	Credit
Bank account	$1,000
Owners Equity		$1,000

Bookkeeping and budgeting

When you start a small business, finances can be tight but having a budget can help with financial management and tracking cashflow. Robust bookkeeping will allow you to create a budget initially and to make sure you’re staying on track with it too.

Having a budget is also important if you decide to apply for a loan. The requirements differ from lender to lender but usually, in addition to a budget or cash flow forecast, you’re asked to submit your transaction history and certain business accounting reports.

Payment types

Decide how to take payments for your small business – cash, credit and debit cards, bank transfer and invoices. There are several options, but choose the ones that are easiest for your customers to use and for you to incorporate into your bookkeeping.

• Cash: easy to use, but you need to physically pay it into your business bank account regularly as well as have some sort of Point of Sale system that lets you take it and record the transaction

• Cards: convenient with funds appearing directly in your business bank account. A Square Reader lets you accept contactless and chip and pin cards anywhere in Australia

• Invoices: with Square Invoices you can accept money 24/7 and track your transactions anywhere. They also integrate with your business accounting software

Payment terms

If you use invoices to request money from your customers, make sure you set out your payment terms and small business details clearly. These should include:

• The words ‘tax invoice’ at the top

• Your ABN

• Your trading name and business details

• Date of invoice

• List of items sold, quantity and price

• GST if applicable

• Date invoice falls due

• Any credit terms you offer

Small business bookkeeping is a necessary evil, but it doesn’t have to be onerous. With the right accounting software in place and sound advice from an accountant or bookkeeper, you should be able to spend minimum time on it, allowing you to get on with running the business you love.

Useful resources to help you with bookkeeping

1. The Australian government website has further information on setting up your accounting

2. Take a look at Square Payments for services to handle EFTPOS transactions, send electronic invoices and make sales through your website

3. Read this for advice on financial planning for your business

4. Learn how to create an invoicing template