Frequently Asked Questions (FAQ)

What is bookkeeping, and why is it essential for small businesses?

Bookkeeping is the process of keeping a record of every single financial transaction in your business. Transactions include receiving payment from your customers, paying your company’s bills, and other company expenses.

It’s an essential small business function because all businesses need to know how much money they are bringing in, how much they are paying and what their profit is regularly. Without bookkeeping, you may have no idea how much profit you make daily, week to week, or month to month. And without profit? You can’t stay in business.

Read Chapter One: Bookkeeping Basics to learn more.

What are the fundamental components of a small business bookkeeping system?

The fundamental components of a small business bookkeeping system are:

• The Chart of Accounts (COA), which divides all transactions by categories, such as assets, liabilities, owner’s (or shareowner’s) equity, revenue, and expenses.
• The general journal, which is a chronological record of transactions.
• The general ledger, which is a summary of general journal entries divided by COA categories.

Read Chapter Two: Best Practices in Setting Up Bookkeeping to learn more.

How often should I update my business’s financial records and ledger?

It’s a good idea to keep track of all financial transactions as they occur. For some businesses, such as those with multiple daily customer sales, that may result in daily updating. Updating should be done weekly, monthly, quarterly and annually in all businesses. The key is to not let a backlog occur as that can obscure what your financial position is.

What is depreciation/amortization and which assets are subject to it?

Both depreciation and amortization are ways of recovering the expense of business assets over time for tax purposes. Depreciation is used for physical assets, such as property (examples: a company car, computers, a building the business owns). Amortization is used for assets that aren’t physical, such as intellectual property or franchise agreements. (These are often called “intangible” because they aren’t physical.)

Cost of these assets cannot be expensed out in a year of purchase. Instead, the cost of these assets will be expensed over the life of the asset set by the IRS. Depreciation and amortization are the method of the expensing these costs over the life of the asset.

What are common examples of business liabilities, and how do they affect the bookkeeping process?

Common business liabilities include accounts payable, accrued expenses, and your company’s debt obligations. Liabilities must be tracked and recorded in your bookkeeping system and reflected in the balance sheet. Since some of the liabilities are not paid out immediately (such as wages, payroll liabilities, bank loans), it is important to know exactly how much you are obligated to pay and when those payments due. By keeping accurate books with correct liability balances, business owners will be able to see their future obligations and plan accordingly.

Read Chapter Three: Understanding Balance Sheets — Assets, Liabilities, and Equity for more information.

What is “break-even”?

Break-even is the point where your total revenue and total expenses are equal. Break-even is very useful to small business owners, as it helps you calculate how much revenue you need to generate in order to cover both fixed and variable expenses in a given period (weekly, monthly, quarterly, annually). If your business is not breaking even (or better), this means your business is spending more money than it is bringing in, which will result in eating up the existing assets (such as cash) to keep the operations afloat.

What is non-cash expenses or income?

Non-cash expenses are exactly what they sound like: business expenses for which you don’t exchange any cash. They can include nonrecoverable (bad) debt, deferred costs, and depreciation or amortization.

Non-cash income is income or assets that aren’t booked in cash, such as a rise in the value of an asset (such as a building you own).

What is the difference between cash basis and accrual basis accounting, and which one should I use?

Cash basis and accrual basis are the two basic methods of accounting.

In cash basis accounting, financial transactions are recorded when the settlement transaction occurs. Sales revenue, for example, are recorded when you receive the payment from the customer. Your expenses are recorded when you pay the vendors.

In accrual basis accounting, on the other hand, financial transactions are recorded as they are earned or billed rather than when they are paid. Sales revenue, for example, are recorded when you invoice customer, rather than when you collect the payments. Expenses are recorded when you receive the vendor bills, rather than when you make the payments to vendors. The actual payment will be also recorded, but only impacting balance sheet accounts instead of the income and expense balance.

Which one you should use depends on the type of business you have. Many startups and sole proprietorships use cash basis, as it is simple and provides a clear picture of your cash flow. But larger businesses (such as publicly traded businesses) almost always use accrual basis as it is required per the U.S. Securities and Exchange Commission (SEC), Financial Accounting Standards Board (FASB), and Generally Accepted Accounting Principles (GAAP).

See Common Bookkeeping Methods in Chapter One: Bookkeeping Basics to learn more.

What is financial reconciliation, and how does it work?

In financial reconciliation, your business’s internal bookkeeping transactions are double-checked against external financial records, such as bank statements, to ensure you have complete and accurate records. If there are discrepancies in either direction (your company transactions are not in the external records or the outside transactions are not in yours), you track down why and rectify it.

See Bookkeeping: Essential Transactions in Chapter One: Bookkeeping Basics to learn more.

What are the common bookkeeping mistakes that small business owners should avoid?

The most common bookkeeping mistakes small businesses make are poor record-keeping and not reconciling accounts. Both make your business vulnerable to costly mistakes. They can also lead to a lack of accurate knowledge about your cash flow and profits and inaccurate financial statements. These are dangerous to your business because they can lead you to overspend or make poor decisions in the short term and to your business simply not being profitable in the long term.

In addition, poor record-keeping can cause your tax filings and payments to be inaccurate, which can lead to fines and penalties.

There’s one more common bookkeeping mistake, too — and that’s trying to do it yourself. Many small business owners assume that bookkeeping is simple and easy to manage. In fact, even simple individual bookkeeping functions can end up being a drain on your time and lead to frustration. 

Bookkeeping is also complicated enough that it’s easy to make mistakes. It’s better to hire a third-party service provider or bookkeeper than to spend way too much time on bookkeeping tasks and run the risk of error. If you’re looking for a cost-effective, all-in-one service, see Guidant’s Bookkeeping & Tax plans. 

How can I streamline bookkeeping and filing taxes for my business?

Many third-party service providers and software can handle both bookkeeping and accounting functions, including filing taxes. Look for one, such as Guidant’s Bookkeeping & Tax, that can handle and integrate both seamlessly.

Discover how Guidant’s Bookkeeping & Tax can benefit you and your business in Chapter Six: How Guidant’s Bookkeeping & Tax Service Can Help Your Business.