Small Business Bookkeeping 101 - Everything You Need to Know
Starting a Business is Hard Enough Without Bookkeeping Confusion
You've got a business idea, maybe some customers, and definitely a lot of questions about money management.
Or maybe you've already started and are doing well.
Either way, these are all questions I've personally heard from new and existing business owners:
"Do I really need bookkeeping software right away?" "What's the difference between cash and accrual accounting?" "How do I separate business and personal expenses?" "What records do I actually need to keep?"
If you're asking these questions, you're not alone. Most new business owners start with the same bookkeeping confusion.
Here's everything you need to know to get your business bookkeeping started right, avoid expensive mistakes, and set yourself up for tax success.
Why Bookkeeping Matters (More Than You Think)
Bookkeeping isn't just about taxes, though that's important and huge part of it. Good bookkeeping helps you make better business decisions, manage cash flow, and avoid financial surprises.
When you track your numbers properly, you know which services or products make money and which ones don't. You can see seasonal patterns in your business. You'll spot problems early instead of discovering them during a cash crisis.
For tax purposes, good bookkeeping can save you thousands, or even tens of thousands, in deductions you might otherwise miss. It also keeps you compliant with IRS requirements and reduces the chance of failing audits.
Most importantly, clean books make your business more valuable if you ever want to sell, and they're required for business loans or investor funding.
Bookkeeping Basics: What You Actually Need to Track
Income (Revenue)
Track every dollar that comes into your business. This includes cash payments, checks, credit card payments, and electronic transfers.
For service businesses like plumbing, electrical, or HVAC work, track income by job or project when possible. This helps you see which types of work are most profitable.
For retail or product businesses, track sales by product category so you can see what's selling and what's sitting on shelves.
Don't just record the total, track the payment method and customer information for follow-up and analysis.
Expenses
Record every business expense with enough detail to prove it's legitimate if questioned later. The IRS wants to see what you bought, from whom, when, and for what business purpose.
Common expense categories for small businesses include:
Direct costs (things that vary with your business volume):
- Materials and supplies for jobs
- Subcontractor payments
- Direct labor costs
- Shipping and delivery
Overhead costs (things you pay regardless of how busy you are):
- Rent or mortgage for business space
- Insurance
- Software subscriptions
- Office supplies
- Marketing and advertising
- Professional services (legal, accounting)
Vehicle and travel expenses:
- Fuel for business vehicles
- Vehicle maintenance and repairs
- Business mileage (if using personal vehicles)
- Business travel and lodging
Assets and Liabilities
Track business assets like equipment, vehicles, and inventory. These often qualify for tax deductions through depreciation.
Monitor business debts including loans, credit cards, and money you owe suppliers. This affects your cash flow and tax planning. And track your interest payments!
Don't forget about money customers owe you (accounts receivable) and money you owe others (accounts payable).
Cash vs Accrual Accounting: Which Should You Use?
This is one of the most common questions new business owners ask, and the answer depends on your business size and type.
Cash Accounting
With cash accounting, you record income when you actually receive payment and expenses when you actually pay them.
This method is simpler and matches how most people think about money. If a customer hasn't paid you yet, it's not income. If you haven't paid a bill yet, it's not an expense.
Most small businesses under $25 million in annual revenue can use cash accounting. It's easier to understand and requires less complex bookkeeping.
Accrual Accounting
With accrual accounting, you record income when you earn it (send an invoice) and expenses when you incur them (receive goods or services), regardless of when money actually changes hands.
This gives a more accurate picture of business performance but requires more sophisticated bookkeeping. You need to track what customers owe you and what you owe suppliers.
Businesses with inventory or those seeking investors often benefit from accrual accounting because it shows business performance more clearly.
Which to Choose
For most small service businesses in northeast Texas - contractors, consultants, home service providers - cash accounting works fine and keeps things simple.
If you carry significant inventory, have large jobs that span multiple months, or need detailed financial statements for loans or investors, consider accrual accounting.
Setting Up Your Bookkeeping System
Choose Your Software
You need some kind of system to track your finances. The three main options are bookkeeping software like QuickBooks, spreadsheets like Excel, or manual paper records.
QuickBooks is the most popular choice for good reason. It handles bank connections, invoicing, expense tracking, and tax reporting automatically. Plans start around $30/month.
Excel or Google Sheets can work for very simple businesses but require more manual work and don't connect to banks or payment processors.
Paper records are the least efficient but still legal. However, they make tax preparation much more expensive and provide no business insights whatsoever.
For most businesses, QuickBooks or similar bookkeeping software provides the best balance of features and ease of use.
Set Up Your Chart of Accounts
Your chart of accounts is how your bookkeeping system organizes different types of income and expenses.
Start with a simple structure and add categories as needed. Common accounts for small businesses include:
Income accounts:
- Service revenue (your main business income)
- Product sales (if applicable)
- Interest income
- Other income
Expense accounts:
- Cost of goods sold (materials and direct labor)
- Rent
- Insurance
- Vehicle expenses
- Office supplies
- Professional services
- Marketing
- Utilities
Avoid creating too many categories initially. You can always split them later if needed.
Open Business Bank Accounts
Separate business and personal finances from day one. This isn't just a good idea, it's essential for legal protection and tax compliance.
Open a business checking account and use it only for business transactions. If you need to pay personal expenses, write yourself a check or transfer money to your personal account first.
Consider a business credit card for business expenses. This creates a clear paper trail and often provides better expense tracking than cash purchases.
Daily Bookkeeping Tasks
Recording Transactions
Enter transactions as they happen, not weeks later when you can't remember what they were for.
For income, record who paid you, how much, what it was for, and the payment method.
For expenses, record what you bought, from whom, the business purpose, and keep the receipt.
Use your phone to take pictures of receipts immediately. Many bookkeeping apps can automatically extract information from receipt photos.
Bank Reconciliation
Check your bookkeeping system against your actual bank balances regularly. This catches errors early and ensures you're not missing transactions.
Most bookkeeping software can download bank transactions automatically, making reconciliation much easier.
Weekly and Monthly Tasks
Weekly Review
Spend at least 30 minutes each week reviewing your numbers. Look for unusual transactions, check that everything is categorized correctly, and follow up on any overdue customer payments.
Monthly Reconciliation
Reconcile all accounts monthly - checking, savings, credit cards, and any loan accounts. This ensures your bookkeeping matches the real world.
Generate a profit and loss statement monthly to see how your business performed. Compare it to previous months and the same month last year.
Review your cash flow regularly. Do you have enough money to cover upcoming expenses? Are there seasonal patterns you need to plan for?
Industry-Specific Considerations
Service Businesses (Plumbing, Electrical, HVAC)
Track job costs separately from overhead. You want to know which jobs are profitable and which ones cost more than expected.
Use job costing features in your bookkeeping software to track materials, labor, and subcontractor costs by individual project.
Track vehicle expenses carefully since they're often a major deduction for service businesses.
Construction and Contractors
Set up progress billing for larger jobs. You need to track how much work you've completed versus how much you've been paid.
Handle customer deposits properly. They're not income until you do the work.
Track equipment depreciation since vehicles and tools are major expenses that provide tax benefits.
Retail and Product Businesses
Inventory tracking is a must. You need to know what you have, what you've sold, and what needs to be reordered.
Track cost of goods sold separately from operating expenses for better profitability analysis.
Sales tax compliance is messy but required. Track taxable versus non-taxable sales carefully.
Professional Services and Consulting
Time tracking integration helps you understand profitability by client and project type.
Handle retainers correctly. Like contractors, they're not income until you do the work.
Track business development and marketing expenses carefully since they're often significant for professional services.
Tax Considerations
Quarterly Estimated Taxes
Unlike employees who have taxes withheld from paychecks, business owners usually need to pay estimated taxes quarterly.
Calculate your quarterly payments based on your expected annual income. Underpaying can result in penalties.
Good bookkeeping helps you estimate taxes accurately and set aside money throughout the year.
Deductible Business Expenses
Proper bookkeeping ensures you don't miss legitimate deductions. Common deductions include:
- Business vehicle expenses or mileage
- Home office expenses (if you work from home)
- Equipment and software purchases
- Professional development and training
- Business meals (usually 50% deductible)
- Business insurance
- Marketing and advertising
Keep detailed records and receipts for all deductions. The IRS requires proof of business purpose.
Record Retention
Keep business records for at least three years after filing your tax return. For some situations, longer retention is required:
- Keep employment tax records for four years
- Keep records for property (equipment, vehicles) until you dispose of them plus three years
- Keep records indefinitely for things like business formation documents
Digital storage is acceptable, but make sure you have reliable backups.
Common Mistakes New Businesses Make
Mixing Personal and Business Expenses
Using the business account for personal expenses or vice versa creates confusion and compliance problems.
The IRS requires clear separation between business and personal finances. Mixed accounts make it harder to prove business deductions.
Poor Receipt Management
Losing receipts means losing deductions. Create a system for capturing and storing receipts immediately.
Many business owners use smartphone apps to photograph receipts, then store them digitally by category or date.
Inconsistent Categorization
Using different category names for similar expenses makes reports confusing and analysis difficult.
Create a simple system and stick to it. When in doubt, ask "what would my tax preparer want to see this categorized as?" (Or ask us)
Ignoring Cash Flow
Profitability and cash flow are different things. You can be profitable on paper but still run out of cash if customers pay slowly or you have large equipment purchases.
Monitor both your profit and loss statement and your actual bank balances regularly.
Waiting Until Tax Time
Don't ignore bookkeeping all year and then scramble before tax deadlines. This leads to higher tax preparation fees, missed deductions, tax extensions, and penalties.
Regular bookkeeping throughout the year makes tax preparation easier and more accurate.
When to Get Professional Help
Signs You Need Help
Consider professional bookkeeping assistance if you're spending more than 2-3 hours monthly on bookkeeping, making frequent errors that affect your tax situation, struggling to understand your financial reports, or just plain don't want to.
If your tax preparer consistently charges extra fees for "cleanup work," your bookkeeping system needs improvement.
What to Look for in a Bookkeeper
Find someone who understands your industry and business type. A bookkeeper who works with contractors understands job costing. One who works with retail businesses understands inventory.
Look for local experience. Someone familiar with Texas tax requirements and the challenges facing businesses in northeast Texas puts you at an advantage.
Make sure they use the same software you use (or can help you choose appropriate software).
Costs vs Benefits
Professional bookkeeping typically costs $300-800 monthly for small businesses, depending on transaction volume and complexity.
This investment often pays for itself through tax savings, avoided penalties, and better business decisions based on accurate financial information.
Consider the value of your time. If bookkeeping takes you away from revenue-generating activities, professional is very be cost-effective.
Setting Up for Success
Start Simple
Don't try to track everything perfectly from day one. Start with basic income and expense tracking, then add complexity as your business grows.
Focus on accuracy over perfection. It's better to track things simply and consistently than to create complex systems you can't maintain.
Build Good Habits
Set aside specific time each week for bookkeeping tasks. Consistency prevents small problems from becoming big ones.
Create checklists for routine tasks so you don't skip important steps.
Review your numbers regularly, not just at tax time. Monthly reviews help you spot trends and problems early.
Plan for Growth
Choose systems that can grow with your business. Starting with proper bookkeeping software prevents the need to migrate data later.
Consider what you'll need as you add employees, expand to new locations, or offer new services.
Resources for Continued Learning
Online Resources
The IRS website provides guidance on business record-keeping requirements and deductible expenses.
Local Resources
The Small Business Administration (SBA) offers workshops and counseling for new business owners.
Local business organizations often provide networking and educational opportunities.
Professional Development
Consider basic accounting or bookkeeping courses at local community colleges.
Many successful business owners find that understanding financial basics helps them make better business decisions.
Your Next Steps
Getting started with bookkeeping doesn't have to be overwhelming. Here's what to do first:
- Separate business and personal finances - Open business accounts if you haven't already
- Choose your bookkeeping system - Software, spreadsheets, or professional help
- Set up basic income and expense categories - Start simple and add detail later
- Create a routine - Weekly transaction entry and monthly reconciliation
- Keep good records - Receipts, invoices, and bank statements
Remember, good bookkeeping is an investment in your business success, not just a tax requirement.
If you're a business owner in Quinlan, Hunt County, Rockwall, or the Dallas area and need help getting your bookkeeping started right, we work with small businesses throughout Texas.
Ready to set up bookkeeping that actually works for your business? Contact us here to discuss bookkeeping setup, training, or ongoing support that keeps your business finances on track.