Bookkeeping for Small Business: A Routine You Can Keep

Quick Answer: Bookkeeping for a small business comes down to four habits: keep business money in its own bank account and card, record every transaction from those statements each month, put each one in a consistent category, and reconcile the books to the statement balance. Keep the receipts and invoices behind the numbers. Do it monthly and year-end becomes a printout; skip it and it becomes a project.

Small business bookkeeping is less about accounting knowledge than about routine. The records you need are mostly already being produced by your bank, your card issuer and your invoicing. Your job is to collect them on a schedule, sort each transaction into the right category, and prove the totals match the bank. A sole proprietor can do it alone in an hour or two a month.

What do you need before you start?

Four decisions make every month easier:

1. Separate accounts. Open a business checking account and use one card only for business. Mixed accounts are the biggest source of bookkeeping time, because every row has to be judged business or personal.
2. Cash or accrual. Cash basis records income when money arrives and expenses when they are paid. Accrual records them when you invoice or are billed. Most sole proprietors and startups begin on cash because it matches the bank; an accountant can tell you whether yours shouldn't.
3. A chart of accounts. A short list of income and expense categories you'll use every month. Fifteen to twenty-five is plenty.
4. A tool. A spreadsheet, or software such as QuickBooks Online, Xero or Wave.

The IRS's recordkeeping page says you may choose any recordkeeping system suited to your business that clearly shows your income and expenses, and notes that the kind of business you run affects the records you need.

If you go the spreadsheet route, our bookkeeping spreadsheet template guide lays out the tabs and formulas.

What is the monthly bookkeeping routine?

Pick a day, such as the fifth of each month after statements have posted, and do the same steps in the same order.

1. Collect statements for every business bank account, card, loan and payment platform (PayPal, Stripe, Square).
2. Bring in the transactions. In software, check that the bank feed downloaded the whole month. In a spreadsheet, import each statement's rows. If you only have PDFs, a converter like QuickBankConvert turns them into CSV or Excel rows with no bank login, and paid plans add QuickBooks (QBO) and Xero CSV files you can import.
3. Categorize each transaction. Do vendors you see every month first; the leftovers are where the thinking happens. Our data entry guide covers doing this quickly.
4. Match income to invoices or sales reports, so you know which customer paid what.
5. Attach or file receipts for anything over the threshold you set.
6. Reconcile each account: the opening balance plus the month's transactions should equal the statement's closing balance. The bank reconciliation guide walks through it.
7. Review a profit and loss report for the month and compare it with the last few months.

Weekly and quarterly additions

• Weekly: send invoices, chase overdue ones, and snap photos of receipts while you remember what they were for.
• Quarterly: review the year to date, put money aside for taxes, and, if you pay estimated tax, give your preparer the numbers.
• Yearly: close the year, produce the year's P&L, list equipment bought, collect 1099s received, and send everything to your tax preparer.

Which records should a small business keep?

The IRS's page on what kind of records to keep groups supporting documents by purpose:

• Gross receipts: deposit information, receipt books, invoices, cash register tapes and Forms 1099-MISC.
• Purchases: canceled checks or other proof of payment, credit card receipts and statements, and invoices.
• Expenses: canceled checks or other proof of payment, account statements, credit card receipts and statements, invoices.
• Assets: purchase and sales invoices, real estate closing statements, and canceled checks or other documents that identify the payee, amount and proof of payment.

Store statements as PDFs by year and account, and receipts in a matching folder or in your software. How long to keep them depends on the situation; the IRS's retention page gives the general three-year period and the longer ones.

How do you handle money you take out of the business?

Sole proprietors don't pay themselves a salary through the books. When you move money from the business account to your personal one, record it as an owner's draw, not an expense. When you put personal money into the business, record an owner's contribution, not income. Getting these wrong is the most common reason a do-it-yourself P&L shows the wrong profit. If you paid for something business-related with a personal card, record it as an expense paid by the owner and keep the receipt.

How does a startup's bookkeeping differ?

A new business has a few extra items in its first year that an established one doesn't:

• Costs before you opened. Money spent researching, registering and setting up the business before it started trading is recorded separately, because start-up costs can be treated differently from ordinary expenses. Keep the receipts, even for items paid personally.
• Funding. Record money from founders, friends, family or investors as contributions, loans or equity, with the paperwork that says which. A loan from a relative needs repayment terms written down; an investment needs an agreement.
• Equipment. First-year purchases are often larger than later ones. List each item with its date and cost, since your preparer may depreciate it.
• Registrations and fees. State filings, licenses and permits have their own category and are easy to forget at year end.

Starting clean is cheaper than fixing it later. Open the business account before the first sale, and record the first transaction the day it happens.

What mistakes cause the most trouble?

• Letting months pile up. Catching up a year at once takes much longer than twelve monthly sessions; see catch-up bookkeeping if you are already there.
• Trusting the bank feed without reconciling. Feeds miss and duplicate transactions.
• Counting card payments as expenses. The purchases are the expenses; paying the card is a transfer.
• Using "Other" as a category for anything awkward. Review it monthly and recode.
• Keeping receipts only in an email inbox you can't search by amount.

When should you hire a bookkeeper?

Do it yourself while the routine fits in an afternoon a month and you understand the reports. Consider help when:

• You have employees and payroll filings.
• You hold inventory or have several sales channels.
• You keep falling behind, or the books haven't reconciled for months.
• A lender, investor or buyer needs reliable financial statements.

A bookkeeper still needs your statements, receipts and answers, so the habits above carry over. Many bookkeepers use statement conversion for clients who send PDFs; see our page for bookkeepers if that's your side of the desk.

Related guides

• Excel bookkeeping template
• Bookkeeping data entry
• Bank statement reconciliation guide