The Ultimate Beginners Guide to DIY Bookkeeping
If you’re here, bookkeeping has become a problem for your company. You’re not alone. Bookkeeping is frequently a source of stress and concern for small business owners. You may think that your business is too small, or you’re too busy with important tasks, but bad record keeping will only become a larger headache the more you ignore it.
By the end of this guide, you won't be able to do your own books. It takes much more work than reading a blog post.
However, you will be set up to decide if DIY bookkeeping is right for you, and when to consider hiring professionals. We’ll provide you with some learning tips and resources to help you on your path to clean books.
Let's dive in.
Why Is Bookkeeping Important?
Formally defined, bookkeeping is an accounting process of recording and maintaining accurate records of your company's financial transactions.
For a layperson: Record everything.
How much money, where it went, what it was for, and supporting proof.
With accurate records of all your monetary transactions, you can make informed decisions about your company's operations, investment opportunities, and other financial decisions. A good set of books gives banks, investors, and the government insight into your business performance, its financial health and even the future potential of the business. Almost every business decision, by owners, by the CRA, or by investors, relies on the foundation of your books. So we can summarize why we need to do our books into two broad reasons:
1/ You need to pay taxes.
You need to pay your taxes, and your books are how the government determines your tax liability. Simple as that.
2/ You need to know where your money is going.
Even for simple business operations, you need a record of what your money is doing. Once you have a clear record of your transactions, all other business decisions flow easier. A bank can track your profitability and determine your risk levels to issue you a loan. Investors can see if your products and marketing have the potential to generate large returns. You can see if the business meets your profitability goals, and balance it against your personal goals.
Bookkeeping is a critical part of running your business. How do you get started?
Basics and First Steps
1/ Pick your software
Picking the right software suite will save you untold hours of data entry, and many software suites have hundreds of additional time-saving features that integrate with software you are likely already using in your business. We won’t dive into a head-to-head comparison here, as there are many trusted publications on the matter. Just pick one and stick with it. Most feature differences just come down to preference.
2/ Create your chart of accounts
Everything you will record has to be categorized into an account. There is a bit of an art here, and you’ll find many opinions on the best methods to create your chart of accounts.
In Canada, all corporations and partnerships have to file using a reporting standard called GIFI. We like starting here, even if you are not required to file using this standard yet, you will have to if your company grows and incorporates. We think it’s good practice to start early.
The GIFI is simply a numbered listing of accounts that the CRA expects to see when you file your taxes. By standardizing top-level accounts in this way, it is quicker for tax preparers to analyze financial information and complete your tax return.
We recommend creating top-level GIFI-based accounts as you need them, and creating sub-accounts that are more relevant to your business. This way, everything cascades up into a GIFI account for tax filing, but is readable to you on your financial statements.
3/ Record Everything
Now you simply record everything! In general ledgers of old, you had a book to write down the date of a transaction, how much money was involved, where it came from, who it went to, and for what purpose. Modern accounting software generally follows this system, but has added layers for convenience and other benefits. The basics are still the same, no matter what software you use.
Unfortunately, it’s not enough to simply write your transaction down. You must also provide supporting documentation. A huge, often overlooked, part of good bookkeeping is good document storage. The headaches of receipt management, document storage, and document retrieval are easily mitigated by good software. We strongly recommend supplementing your accounting software with a document capture system. Google Drive or Dropbox are good, cheap starter solutions you may already be using, but there are cheap accounting focused ones that integrate with accounting software, like Hubdoc.
If this step seems oversimplified, that's because it is! While you can boil it down to recording everything, the individual steps and standards of accuracy are where people get tripped up. Just like how the basic rules of chess are few and simple, emergent game play follows a complex set of tactics and strategy. The basic rules of bookkeeping are simple, but the job is complex, and requires leveraging multiple skill sets.
What Does A Bookkeeper Do?
You likely have heard of a few job titles relating to accounting or bookkeeping. Just like the Executive Happiness Controller job your colleague just landed on LinkedIn, a job title does not necessarily describe the job. As it relates to you, a small business owner, there is typically one distinction you need to worry about.
Your taxes are filed by your accountant.
In the corporate world, accountants are not necessarily tax preparers. For the vast majority of small businesses, however, the person that prepares your tax returns is likely a 3rd party small business accountant that you hire. The services of that person can vary greatly depending on what they offer and what you need.
If your business is small enough, you probably just need an accountant. They will get you set up with the software they like to use, go over some transactions in your bank, train you on how they like to see them recorded, then leave you until tax time, only answering the occasional question through email. If you did a good job following their instructions, they can file your taxes quickly, and relatively cheaply. If not, they’ll need hours to go through your books and make adjustments and they’ll charge you accordingly.
If you have a lot of transactions, and your business is getting more complex with payroll, inventory, suppliers, and invoices that are not being recorded properly, your accountant may tell you that this is too much work and charge you more, or refer you to a bookkeeper.
In general, you will be working with your bookkeeper often throughout the year, and only work intensely with your accountant after you’re ready to submit your year end documents, excluding the odd clarification or advice requested by you or your bookkeeper.
Your bookkeeper is in charge of recording your daily transactions, and regularly updating accounts like your Sales, Accounts Payable/Receivable, Purchases, and Retained Earnings. Depending on your needs, they may also support you with, or be responsible for, inventory valuation, payroll, and payable collections. They will chase you to provide supporting documentation for every single transaction in your bank feed. It’s their job to make sure every transaction, and its purpose, is accurately recorded.
This process of recording your transactions has been formalized as part of:
The Accounting Cycle
The accounting cycle is the process of identifying, analyzing, and recording the financial processes of a business. The cycle is designed to make accounting easier by providing a structure for recording a transaction when it occurs, all the way to its inclusion in financial statements.
The cycle covers the steps that a single transaction takes, but in practice, you will be collecting, recording and posting transactions through a fiscal year, and then preparing trial balances, posting adjusting entries, preparing financial statements, and closing the books after the fiscal year has ended.
1/ Identify Transactions
The first step is to identify every transaction. Part of this step is to gather source documents. So think POS reports, vendor statements, receipts, invoices, bank statements etc. Anything that’s a transaction for your business, and any proof that it occurred.
2/ Record Transactions in a Journal
Once you have identified a transaction, you need to determine its financial impact and record it in a journal entry. A journal entry is the written record of a business transaction. These entries will determine the effect a single transaction has on several accounts in your chart of accounts, and how it shows up in your income or balance statements.
3/ Post Transactions
A carryover step from manual bookkeeping. Modern software automatically generates a general ledger, which all journal entries are posted to. In the past, you would have to create a journal entry, then re-enter that information into a master general ledger. This way, multiple people can work on creating journal entries, but the general ledger would still be the single source of truth.
4/ Unadjusted Trial Balance
At the end of a fiscal period (usually year end, but you can generate these tests at any time for more regular reporting of financial statements), an unadjusted trial balance is generated. The unadjusted trial balance is a test of your bookkeeping fundamentals. It lists the credits and debits of all the accounts affected in the period. It is a quick test to see if your credits and debits are equal. If it is not equal, you know there are errors or omissions.
Take a moment here to read the definitions of credits and debits. They’re the foundation of double entry bookkeeping, and they are not instinctual concepts, and almost every bookkeeping and accounting professional uses a quick reference from time to time.
In modern accounting software, an unbalanced trial balance is virtually impossible as every transaction posted is forced into double-entry bookkeeping. It is especially important to conduct a thorough analysis at this step to ensure that transactions are posted correctly, and not affecting incorrect accounts.
5/ Worksheet
The worksheet step helps you fix errors caught in the unadjusted trial balance. Typically, it is around here that your accountant or tax preparer gets involved. The worksheet is a bundle of reports and tests that help your accountant or bookkeeper identify key financial performance indicators. Using analysis compared to previous years, and experience in what ratios typically are, your accountant or bookkeeper can catch many errors and make adjustments as needed.
6/ Adjusting Journal Entries
Once the required adjustments are identified, they must now be input. You’ll usually find that your accountant will send these back to you or your bookkeeper so that only one person is responsible for making changes to the books.
These entries are to fix errors, reclassify transactions, and to capture transactions that occur with the passage of time rather than at a specific time, like interest, or depreciation.
Once these are made, you can run an adjusted trial balance, and you can assume that your books are accurate enough to show decision makers and external stakeholders.
7/ Prepare Financial Statements
There are hundreds of financial reports, but four are commonly used. They are the Balance Sheet, Income Statement, Statement of Cash Flows, and Statement of Equity. These statements combined give you an excellent overview of the performance and health of your business.
8/ Close the Books
After spending all that time to correct errors, make adjusting entries, and prepare financial statements, you wouldn’t want someone to accidentally record a sale in the wrong year and throw your entire year off. Accounting software typically allows you to “lock” a closed fiscal year with a double confirmation or password lock so that accidental entries can’t be made. Other than making sure no unauthorized changes are made, you also need to make closing entries to close your books. They are to close temporary accounts, like moving your net income amount into the retained earnings account. The goal of closing the books is to start a clean new year. Start at 0 for your net income, and start at an accurate opening balance for your assets, liabilities, and equity.
The impact of accounting software on the accounting cycle
All accounting software is built on the accounting cycle. Every transaction will have most of these steps immediately applied. In order to fully leverage the power of accounting software, you will want to integrate it into as many other software packages as possible. Lets use a POS system as an example. Instead of manually entering hundreds of weekly transactions by reading each receipt, an integration can automatically capture the transactions, import them with valuable information like customer accounts, tax amounts, item inventory information, and salesperson/cashier information. Not only are these transactions automatically included in financial statements that you can generate immediately at any time, but are filled with a wealth of additional information. You can run reports on your best customers, best salespeople, estimate your tax early, and run inventory reports. Just be aware that financial reports run before you review them, or have given them to an accountant to make adjusting entries, is not a completely accurate representation of the state of your accounts.
How To Learn Bookkeeping
The accounting cycle is an overview of what a bookkeeper’s day looks like. Finding source documents, recording transactions, working with accountants to create adjusting entries, and preparing financial statements. But how do you actually complete any of these tasks? That is, unfortunately, beyond the scope of this article. It would be irresponsible to assume that a single article could contain enough information for you to start bookkeeping.
There are hundreds of courses, videos, and accreditations available online to help you on your journey.
Some of the best resources are:
Your local college or university
MOOC’s like edX, Coursera, and Udemy
Bookkeeping books
Courses sold by bookkeeping educators
Free resources like Youtube
Learning from a bookkeeper you work with
Our recommendation for an accessible, affordable path, is to start with a MOOC (Massive Open Online Course). They are affordable, and are often structured to learn at your own pace, so you can continue with your life and business and tackle a class when you have the time. Many will come with useful coursework, and graded tests. Some are also tied into accounting software, so a portion of the course is about how to use the software to complete common bookkeeping tasks.
Here are some examples of Quickbooks and Xero courses.
To become a productive bookkeeper, learning the specifics of your chosen software suite is equally important as fundamentals of bookkeeping. It is why you see so many bookkeeping companies or freelancers (us included) specialize in one accounting suite. You become familiar with the nuances of the software, and how to post complex transactions in the way that the software handles it, and your productivity skyrockets.
When should you hire a bookkeeper?
If there are so many affordable, and even free resources to learn bookkeeping, why would anyone ever need to hire a bookkeeper?
A bookkeeper’s job is much more complicated than most people think. The basics are easy to understand, but the number of tasks required creates an overwhelming To-Do list. The standards required to uphold accurate and honest books are too high for many.
If your business is simple, the books are simple as well. So simple, that you may decide to push it off until next week while you work on your new product. Push it yet another week while you work on your social media advertising. Before you know it, you’ve forgotten what that purchase at Staples was, and the receipt has gone missing. You should know, by now, to never let this happen.
You also need to have the right mentality to be an expert bookkeeper. Cutting corners and “that’s good enough” will never cut it. A detail oriented mind, and the tenacity to hunt down a typo that caused a $0.03 discrepancy are requirements.
When the opportunity cost gets too high, consider hiring a bookkeeper or bookkeeping firm. You should be working on your businesses, not working on recording your business.
While bookkeeping is a critical requirement, it is not a competitive advantage. No business ever got ahead because of its slick books, yet many companies have failed or faced fines and other charges due to poor or fraudulent record keeping.
Bookkeeping represents a fascinating mix of ultra-critical, but low priority tasks. You absolutely must record these transactions, but not before this shipment is packaged!
There is no hard and fast rule that says when you should hire a bookkeeper, much like any job. When you find yourself putting off bookkeeping too long, or you’re making mistakes, or when it's costing more because your accountant needs longer to close your books, or you find yourself doing bookkeeping instead of tasks that could grow your business, it may be time to hire a bookkeeper.
Bookkeeping Best Practices
Whether doing it yourself, or hiring a professional bookkeeper to help, there are a few best practices that will help you keep your books under control:
Keep your business and personal finances separate
You’d be surprised how many times we have to remind our clients to do this. It makes it harder for you and your bookkeeper to keep track of your finances, and your bookkeeper is going to have a harder time trusting automated rules and is going to have to ask a lot more clarifying questions.
Worst of all, if your offences are egregious, you may lose limited liability by mixing personal and business finances.
Embrace accounting software
The most advanced bookkeeping products are fully integrated into a wide range of other business software, and nothing is going to improve your bookkeeping productivity like leveraging software. Automated rules could mean that simple, regular purchases are posted and closed just by you emailing or taking a photo of a receipt.
Keep your chart of accounts up-to-date
Your business changes every day. So should your accounts. You may purchase new classes of assets, or create a new product line that you want to accurately track expenses for, and these require new accounts.
Manage payables and receivables
Your payables and receivables are essentially a long list of deadlines for your cash-flow. Make the most of your cash-flow by understanding what you owe, what you can expect to come in, and the work required to realize both. There’s nothing like being hit with a late payment fee because you forgot to put a deadline in your calendar.
Create bookkeeping standards of procedure
Take the time to make decisions on how you will handle bookkeeping processes. Things like making or receiving payments requiring multiple employees to sign off, and making sure that the person that writes or receives cheques is not the same person inputting them, or making sure you have an email or cloud folder to forward all documents to.
Ask your vendors for electronic documents
You can fully integrate your software, and keep electronic records. Save the digitizing step by requesting electronic documents from all of your vendors, and by issuing all your documents electronically as well.
Always review your work
We consider it a necessity to complete a high level review of your books regularly. Doing so will give you an up-to-date picture of your overall finances, and will also give you the chance to catch and fix errors before they cascade out of hand.
Evaluate your financials regularly
The benefits of staying up-to-date on your finances are twofold. Firstly, if you’re doing all this work and not analyzing the financial documents that this work generates, you’re wasting a huge benefit of good bookkeeping. Secondly, regularly analyzing and evaluating your financial documents will help you see trends and catch outliers or mistakes quicker.
Plan for taxes in advance
You will have to pay taxes regularly, according to a schedule set by the CRA or your provincial financial body. Don’t let each bill be a surprise. Expect the expense, and use accounting software to forecast the bill.
Closing
Doing your own bookkeeping makes a lot of sense for a small business proprietor. You already know what you spent money on, you have every receipt, and you are intimately familiar with the state of your bank account.
If you’re willing to put in the time and effort to learn, and to commit to maintaining accurate and truthful financial records, it could save you a lot of money.
However, you must be aware of the opportunity costs. You didn’t start your business because you were passionate about your books, but you were passionate enough about something to start a business! Why not focus your efforts, talent, and passion there, and let someone else take care of the books? We see many small business owners whose passion has flamed out under the admin pressures of running a business and have lost a sense of purpose in businesses and life.
Whether you pick us, or some other bookkeeping firm that makes more sense for you, having a trusted 3rd party bookkeeper in your pocket is one of the best decisions you can make as a small business owner. You get someone impartial to go over your finances with you, and you can trust that it’s done properly and accurately. Bookkeeping is a huge stressor with our clients, and the relief is palpable after we take over their bookkeeping.
We know some businesses just don’t have the budget for an external bookkeeper, but consider finding one you can trust to hire for a few hours a month to go over your work, and to teach you their best practices.
Hopefully this article has given you some resources to decide if DIY bookkeeping is right for you, and how to get started on that journey. We hope even more that this article helps guide you down the path of the most stress relief.
