Should You Do Your Own Bookkeeping or Hire a Pro?
Every business needs someone to keep the books. A bookkeeper is someone who tracks financial transactions and keeps an eye on day-to-day finances. They can provide entrepreneurs with a picture of where their money comes from, where it goes, and how much is available to spend or save.
Accurate bookkeeping for small business owners is important because:
- It prepares you for tax season.
- It helps give you access to loans and lines of credit.
- It helps you keep track of cash flow and catch errors before they cause problems.
Five Things to Consider Before You Keep Your Own Books
Deciding between hiring a professional bookkeeping service or keeping your own books? You’re not alone. Many entrepreneurs weigh the pros and cons of investing in a bookkeeping service. Before you totally rule out partnering with a professional, here are five things to consider about keeping your own books.
1. You’ll need to separate business and personal expenses.
If there isn’t a sufficient firewall between your personal and business finances, business bookkeeping can get confusing. You might struggle to identify which purchases are personal vs. professional, resulting in extra stress around tax time. And, in some cases, you could be held personally liable for debts incurred by your business.
That’s why finding a way to clearly separate personal expenses from business expenses is so important. Many small business owners open a bank account specifically for their business (even when they’re a one-person show!) to ensure cash flow stays separate. Establishing a business credit card can also help you track future purchases with confidence.
2. You’ll need to decide between single entry and double entry.
When it comes to professional bookkeeping, you can track finances using a single-entry or a double-entry method. In single-entry bookkeeping, entries are recorded once, as either an expense or income. Assets and liabilities are tracked separately. If you’re a one-person show or a small business, single-entry may be right for you.
Double-entry bookkeeping is often more suitable for large businesses, though any business can use it. Under this system, all transactions are entered into a journal, then entered into the general ledger as both a debit and a credit. Before you choose a method, learn more about single-entry and double entry to ensure you’re picking the path that’s best for you.
3. You’ll need to choose between cash accounting and accrual accounting.
Small business bookkeepers will also need to choose between cash accounting and accrual accounting.
With cash accounting, you record transactions after money has changed hands. Many small businesses choose to use cash accounting because it’s easy to maintain and doesn’t require tracking receivables or payables. It tells you exactly how much cash you have on hand at any given time.
When you use the accrual accounting method, you record income when you bill customers as accounts receivable, instead of waiting for money to exchange hands. You record expenses when you’re billed as accounts payable It tracks the money you are contractually obligated to receive or pay, rather than tracking cash as it actually flows in and out of the business. There are pros and cons to both approaches, so it’s important to be mindful when choosing a method for your business.
4. You’ll need to determine your transaction categories.
To meet professional bookkeeping standards, every business transactions will need to be categorized The way you categorize transactions usually depends on your industry, but in general, they fall into five account types: assets, liabilities, equity, revenue and expenses. Once you decide on broad categories, individual line items are then broken down into subcategories.
5. You’ll need to track and organize your deductions.
To truly count, deductions must be considered both ordinary (a common expense in your field) and necessary to your business. Before your first tax season, you’ll want to review official IRS guidelines to help you figure out what IS or ISN’T allowable when it comes to deductions.
Feeling Decision Fatigue Already? Consider Hiring a Bookkeeping Service.
When it comes down to it, bookkeeping involves a lot of detail-oriented decision-making. From choosing an entry system to keeping track of transaction categories (and everything in between), good business bookkeeping takes time — time that many small business owners would rather spend doing what they do best, running their business!
If you’re ready to free up your time and get out of the financial weeds, consider partnering with a virtual bookkeeping service. A professional bookkeeping partner can set up a financial tracking system that’s reliable, compliant, and easy to for any entrepreneur to read and understand.
Learn more about BookWerks™ and our virtual bookkeeping services for small businesses.