Small-business bookkeeping basics
A practical sequence for a sole prop or single-member business that is starting from a bank account, not from an accounting degree.
What bookkeeping is for
Bookkeeping is the record of what happened to the money: who paid you, what you bought, what you still owe, and what customers still owe you. Accounting uses those records to produce a profit and loss and a balance sheet, and to prepare a return. You can keep the records yourself. Interpreting them for a tax position is a different job, and this site does not do that job.
Start here
- Separate the money. Open a business checking account and run sales and costs through it. A personal coffee on the business card is not a business expense; it is a draw or a reimbursement waiting to happen. See owner’s draw versus salary.
- Pick cash or accrual and write it down. Cash records income when it hits the bank and expenses when you pay them. Accrual records income when you earn it and expenses when you incur them. The cash versus accrual guide covers the bookkeeping difference. The tax method has extra IRS rules in Publication 334.
- Give every transaction an account. A starter chart of accounts is a numbered list: cash, receivables, sales, rent, and so on. New accounts are cheap. A junk drawer called “miscellaneous” is expensive later.
- Keep the source document. Each entry points at an invoice, a receipt, a bank line, or a contract. No document, no confidence.
- Reconcile every month. The bank reconciliation proves the book balance matches the bank after outstanding items. Do the credit card the same way.
- Read both statements. Profit is not cash. A profitable month can still empty the account if customers pay in 45 days. Runway uses the cash, not the profit.
- Close the month on purpose. The month-end checklist is the habit. The year-end checklist adds inventory, contractors, and fixed assets.
A week in the life
Monday you invoice a $1,200 job. If you are on accrual, that is revenue and accounts receivable today. If you are on cash, it is nothing until the deposit. Wednesday you buy $80 of supplies with the business card. That is an expense or a prepaid, depending on whether you consumed them. Friday the customer pays. Cash goes up. On accrual, receivable goes down and revenue does not move again. On cash, revenue appears now. Mixing those two stories in one set of books is the usual reason a profit and loss “doesn’t match the bank.”
What good records let you calculate
Once revenue and cost of goods sold are real numbers, gross margin is arithmetic. Once fixed and variable costs are separated, break-even is arithmetic. Neither calculator can repair a miscoded year. Categorize with the expense list before you trust a ratio.