Bookkeeping Basics: A Guide on How to Do Bookkeeping
- Patrick Roney
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Bookkeeping Basics: A Guide on How to Do Bookkeeping
March 6, 2025
QuickBooks Tips
Welcome to bookkeeping 101, the place where we discover how to do bookkeeping effectively, accurately and easily. If you’ve started your small business already or if you’re on the verge of the big launch, knowing some easy bookkeeping basics will help you be more prepared when managing your business’s finances.
In this article we’re going to:
- Define essential bookkeeping basics so that you don’t embarrass yourself when doing your taxes
- See how to set up a booking system and what is the best option out there
- What are the most common mistakes and how to avoid them
Are you ready? Mastering these bookkeeping basics can save you time, money, and stress—here’s how.
Contents:
1. First Things First – What is Bookkeeping?
According to the Cambridge Dictionary, bookkeeping is defined as “the job or activity of keeping an exact record of the money that has been spent or received by a business or other organization”. In other, more normal words, it means that bookkeeping deals with every cent that goes in and out of your business. Bought new software for your computers? That’s money you’ve spent, money that went out of your business. Your client finally paid that two-week old invoice? That’s money that came into your business.
Your job as a bookkeeper is to keep track of all of these expenses and incomes, no matter how big or small. Printing paper? Paper clips? Yes, we count that too, although you’re most likely going to deal with money resulting from your activity.
2. Types of Bookkeeping:
- Single entry: this is a simple method where every transaction ever made is recorded once. Spent some money? Got some money? You record each transaction once and call it a day.
- Double entry: this is a more complex method, but it is one that you will be thankful for during tax season. This method records every transaction twice – one account is debited and one is credited. For every debit, there must be equal credit. This keeps everything balanced and this is what we use the balance sheet for.
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3. Common Misconceptions About Bookkeeping:
- Bookkeeping and accounting are the same thing: while the two of them are very similar, they’re not synonyms. You can see bookkeeping as the first ladder step and accounting as the second step. They both deal with the income and expenses of a business or individual, but accounting goes one step above by providing not just financial records but interpretations and analysis as well, which serve in decision-making and tax purposes. Bookkeeping is accounting’s little sister, if you want. It deals with the ins and outs without providing any specific insight into the financial situation.
- Bookkeeping is only for large corporations: this one couldn’t be falser. Every business, no matter the size, benefits from a bookkeeping service. Even freelancers need to track their income and expenses to get a general idea of their cash flow to prepare for tax season and plan expending.
- You don’t need a bookkeeper if you use a bookkeeping service: you might use the best service out there, QuickBooks, and you could still benefit from the input of a bookkeeper. While the software can automate certain tasks, you need an experienced supervisor to monitor the situation and check for errors, resolve discrepancies and maintain compliance.
4. Bookkeeping Basics: Short Glossary
- Assets: Something valuable belonging to a person or organization that can be used for the payment of debts
- Liability: The amount of money that a person or organization owes
- Accounts payable: The amounts in a company’s accounts that show money that it owes, for example to suppliers.
- Account receivable: The amounts in a company’s accounts that show money that is owed to the company by its customers
- Revenue: The income that a government or company receives regularly
- Expenses: The use of money, time, or effort
- General ledger: The book or part of a computer program that a company uses to record the amounts of money it sends and receives.
- Equity: The value of a company, calculated by subtracting the value of its debts from the value of its assets
All of these terms are presented according to the Cambridge Dictionary. Please consult their website for further information. Now that we know what’s what, we can move on to the bookkeeping process.
5. How to do Bookkeeping: The Bookkeeping Process Step by Step
Take a deep breath – this one might take a while!
Step 1: Recording the Transaction
This includes the money coming in (revenue, sales) and money going out (expenses and purchases). Loan payments, salaries and taxes have their own category. When it comes to recording all of these transactions, to make things more complicated, there are two methods one can choose from. You might have heard of them and most people give up on the thought of bookkeeping at this point but don’t worry – it is really not that complicated and we’re going to see why.
- Cash method: this means we record the transactions when money enters our bank account or our hands (for face-to-face transactions), when you’re in possession of the money you’re owed or when the money you owe has reached their recipient.
- Accrual method: this method is the opposite. We use this method when the transaction occurs, not when the money is received (on both ends). For example, if you paid online for a new ergonomic chair, you count it the moment you click “pay”, not the moment the money reaches the recipient’s bank. Same way, if you sell a product, you record it here the moment you received the order, not the moment money finally entered your bank account.
Simple, right? Don’t worry, with time it will become second nature. Getting to understand the bookkeeping basics can be very difficult at first, but it will get better.
Step 2: Transactions Categorization
Here’s where that glossary from earlier first comes into help. There are four main categories we use for this step:
- Operating expenses: this is where salaries, taxes, rent and utilities go into)
- Revenue: this includes sales, income, investments
- Liabilities: this refers to loans, accounts payable and credit card payments
- Assets: this is your equipment, inventory and cash on hands
It is important that you correctly categorize each expense and income source so that when season tax rolls around, you’re good to go. Depending on your activity, there might be additional categories, but these are the basic ones.
We’re halfway done with the process!
Step 3: Bank Statements and Their Reconciliation
Obviously, your bank statements should reflect the income and outcomes of your business. This helps identify errors, such as missed transactions, duplicates (imagine you have to spend money twice, ouch!) or any incorrect amounts. This is a mirroring process that ensures what is in your book is also in the bank’s books. It is a tedious and incredibly detailed step to process, but it is necessary.
Step 4: Generating the Financial Report
These are important, as they provide insight into your business’s situation. The most common forms and documents included in this report are:
- Profit and loss statement: this regards the total revenue and expenses, determining whether or not your business worked on a profit or loss
- Balance sheet: this document summarizes assets, liabilities and equity. You debit what comes in, credit what goes out and, at the end of a period, the balance must be zero, otherwise something went wrong and trust me, you do not want that to happen.
- Cash flow statement: this shows the movement of money in your company.
And that’s it! We’re done – easy, right? If you think it sounds complicated in writing, wait till you see it play it out. Don’t worry, it is manageable, it just takes time. And experience. And expertise. And a lot of trial and error. But it will work, eventually, in the end.
We’re not done with the process of bookkeeping. Let’s now move on to the next concept we’re going to discuss in this bookkeeping basics class, shall we?
6. Bookkeeping Methods
If you’re starting to feel tired or pressured, this is where you can rest knowing that there are automated processes and software that are designed to make your life easier. These methods save money, increase accuracy and reduce errors, your transaction records are updated in real-time, they are cost-effective and are also easy to scale. Moreover, software such as QuickBooks, which is regarded as the best option for small businesses available on the market, allows you to integrate platforms such as eBay and Amazon into your records, increasing the flow of management between multiple areas. You can even integrate payrolls and other recurrent costs here and smooth inter-department communication – even if it’s you managing all departments.
Automated methods also help you in terms of compliance. Most options available come with built-in tax features, making the tax season go by like a spring breeze. They are also more secure in comparison to the manual method, where you’d have to manually input every transaction in a spreadsheet or a chart. Transform complicated bookkeeping into easy bookkeeping with the help of an automated process.
These automatic methods are intuitive, they are simple and easy to use, but that doesn’t mean you’ll figure them out at once. Many business owners request the help of a bookkeeper or accountant when they first work with software, which is why here at ProLedge we created a training service specially designed to meet this need. We’ve worked with this program for decades, we know it in and out and we can get you to master it in no time. Learn from experts and learn it once and for all. Soon, tax season will have nothing on you and you’ll be able to run your business stress-free (at least when it comes to taxes).
7. Common Bookkeeping Mistakes to Avoid
- Not keeping receipts or documentation
- Mixing personal and business finances
- Neglecting bank reconciliation
- Inconsistent book-keeping
- Missing tax deadlines
Based on this article, we’re sure you know why any of these mistakes have a detrimental effect on your business. We know you want to do a great job, which is why we’re providing this list of common bookkeeping mistakes even people with the best intentions and most determination sometimes make.
8. Tips for Efficient Bookkeeping:
Transform difficult bookkeeping into easy bookkeeping with these tips.
- Set up a bookkeeping schedule: you can choose a daily, weekly or monthly time to do your bookkeeping in order to be organized.
- Use automation tools: there’s no bookkeeping superman, and there’s no need for you to do everything manually when there is software that does it for you. Don’t be stubborn or greedy and take advantage of what the industry has to offer.
- Separate business and personal finances: the mix-up between the two of these is not among the common mistakes for no reason. Separate them. Right from the start. You’ll thank yourself.
- Hire a personal bookkeeper if needed: do not shy away from this option. We know this is a bookkeeping basics class, but there’s no shame in admitting this thing is difficult, because it is. Give it a try, see how it goes and if you don’t want to deal with this for the rest of your life, give us a call. We’ll be able to take this matter off your hands – or, we’ll be happy to aid you and your team in learning the program. Just let us know if we can be of any help.
We hope you enjoyed this bookkeeping 101 class today! You were a remarkable student and we wish you the best of luck in your endeavors. Oh and one more thing, always remember – debit all expenses and losses, credit all incomes and gains.
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