Every business, regardless of size or industry, needs to track money coming in and going out. A solid bookkeeping system can help you maintain accurate financial records, make informed decisions, and prepare for tax season with confidence.
This guide explains the fundamentals of bookkeeping—with practical tips to help you build an effective bookkeeping strategy for your business.
Definition of bookkeeping
Bookkeeping is the cornerstone of strong business financial management—it's the systematic process of recording and tracking every financial transaction your business makes. Think of it as creating the organized financial story of your business: documenting all the money flowing in from sales and loans, and all the money flowing out through expenses, supplier payments, and payroll.
Good bookkeeping means maintaining detailed records of each transaction with proper documentation—whether that's receipts for office supplies, invoices from vendors, records of customer payments, or payroll records.
Most modern businesses use digital bookkeeping software to automate this process, making it easier to capture, categorize, and store financial records. These tools can automatically import bank transactions, match payments to invoices, generate financial reports, and more—significantly reducing the manual work of traditional paper-based bookkeeping while improving accuracy and providing real-time visibility into your business finances.
What is the difference between bookkeeping and accounting?
It's not uncommon for the terms "bookkeeping" and "accounting" to be used interchangeably. While there is some overlap between these two processes, bookkeeping and accounting are not quite the same.
Bookkeeping simply refers to the recording of financial data. This means recording debits and credits and organizing these transactions according to the company's chart of accounts.
If the bookkeeping process is largely about collecting data, the accounting process is about interpreting data. Accountants review the financial information gathered by the bookkeeper and analyze this data, assessing the business's financial health.
These professionals also assist with tax preparation, offer strategies to maximize the deductions you take on your annual tax returns, and ensure that your financial reports adhere to standards set by the Financial Accounting Standards Board (FASB).
Certified Public Accountants (CPAs) supervise the internal controls of computerized bookkeeping systems to preserve accuracy. Many accountants also possess additional certifications and specialized training in forensic accounting, managerial accounting, tax accounting, and more.
Why bookkeeping matters for your business
The data stored in your books can help you better understand your business's financial position so you can make better financial decisions. According to the U.S. Small Business Administration, more than half of new businesses close their doors within five years, and only about one in three will see their 10th birthday.
As a business owner, staying on top of your financial records and knowing how your business is performing can help you beat those odds. Proper bookkeeping practices allow you to:
- Make better budgeting decisions
- Understand your cash flow
- Manage business debt and credit
- Time new investments wisely
- Prepare for tax filing
By helping you base your decisions on sound financial data, the right bookkeeping system can help your small business thrive.
What does a bookkeeper do?
The role of a bookkeeper is relatively straightforward and organized around a basic set of tasks.
1. Recording financial transactions
At its heart, bookkeeping involves recording daily transactions in accordance with Generally Accepted Accounting Principles (GAAP). Whether you’re getting paid by a customer, spending cash on office supplies, buying new office equipment, or writing off a bad debt, every financial transaction needs to be captured and recorded in a particular way.
Following these standards ensures that your business complies with IRS guidelines, state income tax guidelines, and other tax guidelines such as employment tax and state tax. The standards also help protect the shareholders of both public and private companies by ensuring that financial statements provide meaningful valuations and comparisons from one company to another.
Today, even professional bookkeepers rely on accounting software to help them adhere to these standards.
2. Managing asset accounts and liabilities
Asset and liability management helps you understand your business's true financial position. The key is maintaining accurate records of everything your business owns (assets) and everything it owes (liabilities).
Assets include not just your physical property like inventory, equipment, and real estate, but also your financial assets such as cash in the bank, investments, and the money customers owe you (accounts receivable). Your assets may also include intangible items that have value, such as patents, trademarks, and other intellectual property.
Liabilities encompass all your business debts and financial obligations. These include short-term liabilities like accounts payable (money you owe suppliers), credit card balances, and payroll obligations, as well as long-term liabilities like business loans and leases. Tax obligations, whether current or deferred, also count as liabilities.
3. Determining equity
Because of the relationship between assets and liabilities, bookkeeping also lets you see the value of your ownership in the company. That relationship is captured in the fundamental accounting equation:
Assets = Liabilities + Owners' Equity
This equation always stays in balance—when one side changes, there’s a corresponding change on the other side. For instance, if you take out a business loan, your assets (cash) increase, and your liabilities (loan amount) increase by the same amount.
For a small business with a single owner, the equation also reveals what your personal ownership in the company is worth: your equity. That’s the value of everything your company owns minus the value of everything it owes.
For larger businesses, the owners’ equity means the same thing—it’s just split between multiple people. For a very large, publicly traded company, that ownership might be split among millions of shareholders, but the basic principle remains the same.
Modern financial automation tools can help you track assets, liabilities, and owners’ equity in real time, giving you better visibility into your financial position.
3. Preparing financial statements
Bookkeepers can also prepare financial statements that help business owners assess their performance. The four major financial statements include:
- Income statement (or "profit and loss statement"): shows revenue/expenses over time
- Balance sheet: shows the financial position at a specific point in time
- Cash flow statement: shows movement of cash in and out of your company
- Statement of changes in equity: shows how your equity has changed changed
Be aware, however, that only a licensed accountant can prepare certified financial reports for lenders and investors.
Still, bookkeepers can provide these basic internal documents that you can use to evaluate the financial results of your business processes, and an accountant can review them when preparing your taxes.
Frequent financial reporting can help you better understand your business. For instance, generating a profit and loss statement (P&L) every month can show you how your profitability is changing over time. It may even reveal annual cycles that can help you plan financially—like holding onto cash from your busy season to help you make it through the slower months.
4. “Closing” the books on a regular basis
A bookkeeper will close the books at the end of every accounting period (usually monthly). This involves:
- Reconciling all bank statements, credit card balances, and loan amounts
- Reconciling accounts payable and accounts receivable
- Reviewing financial statements for accuracy and completeness
The “monthly close” is the process of squaring everything up, checking the information in your books against bank statements, loan statements, and so on. This helps you spot any bookkeeping errors early as well as monitoring for fraud or theft.
Accrual basis vs. cash basis accounting
In bookkeeping, there are two accounting methods to choose from: cash basis accounting and accrual accounting.
Cash basis accounting focuses on the movement of cash in and out of the company—transactions are only recorded when cash changes hands. For instance, you'll record income when a customer pays you and expenses when you pay your bills.
Accrual basis accounting focuses on the moment when money is earned or owed rather than waiting for it to change hands. For example, when you send a customer an invoice, you'll record the amount they owe you. Then, when they pay you, you’ll record that payment against what they owe you.
As you can see, cash basis accounting may involve more work, but it also gives you a more up-to-date picture of your finances. That said, modern accounting systems let you record invoices you’ve sent, even if you want to use cash basis accounting. So small businesses can get the best of both worlds, tracking those unpaid invoices while still generating relatively simple financial statements.
The accrual method is more complex, but it provides a more accurate picture of your financial position. When a company gets large enough, the IRS requires accrual accounting.
Bookkeeping options for small business
As a small business owner, you have three basic options when it comes to bookkeeping.
Hiring an in-house bookkeeper
Your first option is to hire a professional. An in-house bookkeeper can handle your books, perform data entry, and manage your chart of accounts, but that adds another salary to your bottom line. Most new businesses don’t have enough bookkeeping work to keep even a part-time employee busy—especially not when you’re using modern accounting software to simplify the job.
Outsourced bookkeeping
Some business owners choose to outsource their financial needs to an accounting firm, bookkeeping contractor, or a combination of the two. A bookkeeper can review your transactions once a week, for example, while the accounting firm provides expert guidance in preparing your taxes and formulating your financial strategy. Or the accounting firm may offer both services at a single monthly rate.
Either way, outsourced services are usually much cheaper than hiring a full-time staff member.
DIY bookkeeping
While you might choose to hire an accountant for specialized services or tax preparation, you can always handle the books yourself. With today's accounting software, it’s relatively simple to keep accurate, organized records of your financial transactions—and you can always ask your accountant if you aren’t sure how something should be recorded.
Integrated solutions for modern business
BILL provides a comprehensive financial operations platform that streamlines invoicing, bill pay tasks, and expense management to make them even easier. Plus, it integrates with modern accounting software options to feed that info straight into your books.
If you’d rather use a professional bookkeeper or accountant, BILL works perfectly with that option too, letting you set rules for the bills you want to approve personally and the ones you want them to pay automatically. For the ones you do want to approve, you can do that right on your phone, with just a few clicks.
Bookkeeping FAQ
Here are some of the most commonly asked questions about the bookkeeping process.
How much does it cost to hire a bookkeeper?
According to the employment website Indeed.com, the average bookkeeper makes $22.60 per hour, translating into just over $45,000 per year if you need someone full-time. But many bookkeepers are willing to work just a few hours each week or each month, making this option more affordable.
If you hire a full-time CPA, you might spend as much as $150,000 or more.
What are the requirements to become a bookkeeper?
There are no educational requirements to become a bookkeeper, though most professional bookkeepers possess an associate’s or bachelor's degree in a field such as business or accounting.
The most important thing you need is a core understanding of the accounting practices described above. If you’d like to become a bookkeeper, consider earning a bookkeeping certificate and then volunteering to keep the books for small, local charities or causes to gain experience.
