Bookkeeping sounds like an overwhelming concept to most entrepreneurs. It’s not that the duties performed in bookkeeping are all that difficult—it’s that bookkeeping consists of a variety of tasks that can take a lot of time to complete.

Regardless of the time involved, if you’re an entrepreneur and you want to run a successful small business, bookkeeping will be the building block or the financial foundation of your business. Everything will revolve around this financial hub.

Here, we have created a step-by-step guide to simplify the process of bookkeeping for entrepreneurs.

Why is bookkeeping for entrepreneurs important?

As an entrepreneur, bookkeeping is essential because it gives you insight into the financial health of your business so that you are able to make informed decisions about your company’s finances. Bookkeeping enables entrepreneurs to do the following:

1. To manage budgets

An efficient bookkeeping system helps entrepreneurs create and manage budgets. Budgets show how much money is coming in as income and where it is coming from. It also reflects how much money is going out as expenses and where it is going to. Entrepreneurs rely on budgets to tell them if they have enough income coming in to cover all of their expenses, to plan for upcoming costs, to accomplish their business goals, and make adjustments for operational changes. A budget is essential to the success of a business. Without a budget, you risk overspending and underperforming which can put you out of business.

2. To prepare better financial reports

With an effective accounting system in place, entrepreneurs are able to better prepare financial reports. Financial reports are essential to your business because they tell you how efficiently you’re generating revenue and running your business. Financial reports also help you monitor your assets and liabilities so you can watch for patterns of growth. From your revenue, you can evaluate the effectiveness of your marketing strategies, see what is bringing in the most profit, and make adjustments for the future, if needed.

3. To get ready for tax season

A bookkeeping system also helps prepare entrepreneurs for tax season. With all of the bookkeeping records and financial reports already prepared, filing income taxes becomes a much quicker and easier process.

Why is Bookkeeping Important? by Leader Associates

Bookkeeping for entrepreneurs: step-by step

When starting up a business, it’s important that your bookkeeping system is set up to meet all local, state, or federal requirements. Here are some bookkeeping basics for entrepreneurs to follow when establishing a proper bookkeeping system for their business.

1. Choose a business model

The first thing you’ll need to do is register your business. To register your business, you will need to choose a business model. Business models you can choose from include the following:

a. Sole proprietorship.

sole proprietorship is an unincorporated company owned by a single individual who can file the business taxes on their personal income tax return. The registration process is affordable, quick, and easy. The downside is that you can be held personally responsible for any business debts.

b. Limited liability company.

With an LLC, you’re protected personally from any business debts and you have the option of filing your business taxes on your personal income tax return or on a separate business return.

c. Partnership.

If you want to share ownership of your business, then a partnership is the model to choose. Each partner brings their own special talent to the business which is outlined in a formal partnership agreement.

d. Corporation.

A corporation acts as a single entity and has lower tax rates. This form of business is the most complex structure and the most expensive and time-consuming to set up.

2. Adopt a suitable accounting and bookkeeping method

There are two types of accounting methods entrepreneurs can choose from. These include cash-basis accounting and accrual-basis accounting.

  • Cash-basis accounting. With cash-basis accounting, revenue is recorded when received and expenses are recorded when paid. It’s a very simple and straightforward method.

  • Accrual-basis accounting. With accrual-basis accounting, you record revenue when the service is performed or goods delivered and expenses are recorded when they are incurred instead of when the money is actually exchanged.

When choosing a bookkeeping method, there are several options. You can track all of the business transactions yourself, and you can do the bookkeeping. You can subscribe to a cloud-based solution where you can manage your bookkeeping online. You can outsource the work to a part-time bookkeeper, or you can hire an in-house bookkeeper. 

3. Track your expenses

As an entrepreneur, you’ll need to track, record, and create a paper trail of all of your business expenses so that you can generate an income statement, balance sheet, and complete your tax return. It’s important to either create a digital filing system or a physical filing system to keep all of your receipts organized. Paperwork that should be stored and filed away for tax season should include the following: 

See also: 7 Useful Documents Every Independent Contractor Should Keep

Never lose a receipt again 📁

Join over 1 million businesses scanning receipts, creating expense reports, and reclaiming multiple hours every week—with Shoeboxed.✨

Get Started Today

4. Monitor payment

You’ll need to choose which payment methods you will accept when conducting business. The more flexible your payment options are, the larger your customer base will be. The following are payment methods to consider:

  • Credit card payments. One option is to accept debit and credit card payments in person by setting up a point-of-sale system.

  • Mobile payments. If you get a mobile card reader to attach to your phone, you can accept payment anywhere that has an internet connection. This is a great option for entrepreneurs who do business outside of an office.

  • Online payments. You can set up online payments through your website or through your cloud-based software. This has the potential of building a customer base from all over the world.

5. Know your tax obligations

Your tax obligations will depend on how your business is set up. The following are some taxes you may have to pay:

  • Self-employment tax. If you’re self-employed, self-employment tax must be paid to cover Medicare and Social Security.

  • Employment tax. If you have employees, you’ll have to pay FICA to contribute to their Medicare and Social Security.

  • Income tax. Income tax is dependent upon your business model. Sole proprietors file their business taxes on their personal returns. Corporations need to file a separate tax return.

  • Sales tax. The sales tax you collect is determined by the state. Once collected, the sales tax is submitted to the government.

See also: A Definitive Guide to Commonly Missed Small Business Tax Write-offs

Bookkeeping best practices for entrepreneurs

Good bookkeeping practices are essential to any successful business because they will ensure that your business runs much more efficiently. Here are some bookkeeping tips for entrepreneurs that will make life so much easier.

1. Create a separate business account

It’s important to keep your personal finances separate from your business expenses. The best way to do this is to open a separate bank account for your business. When considering which bank to open an account with, make sure you keep banking fees and transaction limits in mind.

2. Keep all receipts

You should keep track of receipts of all of your business transactions. The numbers on the income statement and balance sheet originate from your receipts.

Hanging on to all of your receipts will also provide you with what you need to claim any potential deductions on your tax return. You should always have a paper trail that backs up the numbers on your financial statements and your tax return in case you are ever audited.

Turn receipts into data for tax time ✨

Try Shoeboxed’s systematic approach to receipt tracking for tax season. Try free for 30 days!

Get Started Today

3. Digitize your financial data

One of the biggest reasons entrepreneurs should digitize their financial data is because it is one of the most cost-effective methods for managing data. It’s a lot quicker and easier than recording everything manually. Your financial data is right at your fingertips and easily accessible. It streamlines a lot of tasks and therefore saves a lot of time by eliminating repetitive tasks. It also minimizes the risk of human error.

How to turn receipts into data and deductibles with Shoeboxed, a receipt scanning and digitizing service

4. Pick the right tools

As an entrepreneur, it’s important that you find the tools that are right for you and your business. The right tools will increase productivity, free up time, and make your business run smoother. Finding the right set of tools creates an optimal work environment and is crucial to the success and growth of your business.

5. Take advantage of professional help

Just because you’re an entrepreneur doesn’t mean that you need to be knowledgeable about every aspect of your business. Businesses are governed by many rules, regulations, and tax laws. Professionals with expertise in these areas keep up with the ever-changing requirements and guidelines and can prevent you from making costly mistakes with their valuable advice. It’s extremely important to rely on CPAs when tax time rolls around.

Bookkeeping Practices EVERY Small Business Should Know by AppSumo

As an entrepreneur, can I do my own bookkeeping?

Entrepreneurs can either manage their own books, outsource the work to a bookkeeper, or hire an in-house bookkeeper.

Why is it important for entrepreneurs to track expenses?

Tracking expenses creates an organized record making it much easier when it comes time to file taxes.

Frequently asked questions

Is bookkeeping essential to small businesses?

Bookkeeping is essential to running a successful business because it allows you to analyze the financial security of your business.

What are the basic bookkeeping accounts?

All transactions either fall under the category of a liability, expense, asset, equity, or revenue.

In closing

The key to tackling bookkeeping for entrepreneurs is to break it down and just take it step-by-step. That way it doesn’t seem as overwhelming. As an entrepreneur, bookkeeping will be the single most important thing you will ever do for your business. You might also be interested in our list of 45+ bookkeeping resources you shouldn’t ignore.

Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.

About Shoeboxed!

Shoeboxed is a receipt scanning service with receipt management software that supports multiple methods for receipt capture: send, scan, upload, forward, and more!

You can stuff your receipts into one of our Magic Envelopes (prepaid postage within the US). Use our receipt tracker + receipt scanner app (iPhone, iPad and Android) to snap a picture while on the go. Auto-import receipts from Gmail. Or forward a receipt to your designated Shoeboxed email address.

Turn your receipts into data and deductibles with our expense reports that include IRS-accepted receipt images.Join over 1 million businesses scanning & organizing receipts, creating expense reports and more—with Shoeboxed.

Try Shoeboxed today!