How to Do Bookkeeping for a Small Business: A Practical Monthly Workflow

Bookkeeping vs. accounting

Bookkeeping focuses on maintaining the underlying records: what came in, what went out, where transactions belong and whether the books agree with source records.

Accounting can go further into interpretation, accounting-policy decisions, tax treatment and professional judgment.

If a transaction raises a tax-treatment or accounting-policy question, do not guess simply to clear it from the bookkeeping queue. Ask the appropriate accountant, CPA, tax professional or other qualified adviser.

What “done” should mean at month-end

A bank feed with no uncategorized transactions is not necessarily a finished set of books.

A stronger month-end standard is that:

• business transactions have been recorded and reviewed;
• active bank accounts have been reconciled;
• business credit-card accounts have been reconciled as part of the bookkeeping control process;
• discrepancies have been investigated;
• unclear transactions have been documented rather than guessed;
• accounts payable and receivable have been reviewed where relevant;
• financial reports are available for review; and
• supporting records are organized for any required accountant handoff.

NenoBooks describes its monthly bookkeeping outputs in similar terms: reconciled account records, categorized transaction detail, open-question follow-up and agreed financial reports.

Separate business and personal records

Start by keeping business activity separate from personal activity.

IRS Publication 583 advises business owners to keep a business checking account separate from a personal checking account and use the business account for business purposes.

Keep the documents that explain your transactions as well. Depending on your business, these may include invoices, receipts, bills, deposit records, credit-card records and other evidence supporting income and expenses.

IRS guidance specifically identifies documents such as sales slips, paid bills, invoices, receipts, deposit slips and canceled checks as supporting business records.

Electronic records can form part of a proper recordkeeping system. The IRS states that the recordkeeping requirements applying to hard-copy records also apply to electronic records.

Choose a bookkeeping system

At minimum, your system should let you:

1. capture transactions;
2. organize them into accounts;
3. reconcile balances; and
4. produce records and reports you can review.

A business with very few transactions may be able to use a carefully controlled spreadsheet. As transaction volume, accounts, cards, invoices or sales channels increase, accounting software generally makes the process easier to manage.

Do not choose a system only because it automatically imports transactions. Automation can reduce data entry, but imported activity still needs review, categorization and reconciliation.

NenoBooks currently works with Xero, QuickBooks Online, FreshBooks, Wave, Sage and Zoho Books.

Understand cash and accrual methods

The timing of income and expenses depends partly on the accounting method being used.

For federal tax accounting purposes, IRS Publication 538 says that under the cash method, income is generally reported when received and expenses when paid. Under an accrual method, income is generally reported when earned and expenses when incurred.

Those are high-level rules, not a recommendation for which method your business should use. Eligibility, inventories, entity type and method changes can introduce additional requirements. If you are unsure which method applies to your business or tax return, ask a qualified accountant or tax professional.

Build a useful chart of accounts

Your chart of accounts is the organized list of accounts used in your ledger.

At a basic level, it groups activity into:

• assets;
• liabilities;
• equity;
• income; and
• expenses.

The objective is not to create as many categories as possible. Use enough detail to produce meaningful reports without making routine bookkeeping unnecessarily complicated.

A single category called “Business Expense” tells you very little. Dozens of categories for one-off purchases can create the opposite problem.

Use consistent categories and involve your accountant when classification requires professional judgment.

1. Collect your source records

Start with the evidence behind your transactions.

Depending on the business, this may include bank activity, credit-card activity, customer invoices, supplier bills, sales records, receipts and deposit records.

A bank or card statement shows that money moved. It does not always explain the business purpose of the transaction.

IRS Publication 583 notes that proof of payment alone does not necessarily establish entitlement to a deduction; other records may also be needed to show the nature of the cost.

2. Record or import business transactions

Make sure business transactions reach the bookkeeping system consistently.

Transactions may enter through direct entry, bank feeds, integrations, uploaded files or a combination of methods.

Do not allow imported transactions to accumulate indefinitely. IRS recordkeeping guidance recommends recording expenses when they occur, identifying income sources and generally recording transactions daily as a good recordkeeping practice.

That does not mean every owner must manually do bookkeeping every evening. The point is to maintain a reliable process rather than attempting to reconstruct activity months later from memory.

3. Categorize transactions consistently

Assign each transaction to the appropriate account in your chart of accounts.

For routine transactions, the correct account may be obvious from the supporting record. Others require more context.

If a bank feed displays an unfamiliar merchant description, an automated category suggestion is not evidence by itself. Check the receipt, invoice or other source record when the business purpose is unclear.

Consistency matters because repeatedly changing the treatment of similar transactions can make reports harder to interpret.

4. Review transfers, owner activity and unusual items

Some transactions deserve extra attention before they are finalized.

Examples include transfers between business accounts, transfers involving an owner's personal account, loan payments, refunds, unusually large purchases, unclear deposits and possible duplicate transactions.

Do not force an uncertain item into an income or expense category just to clear the review queue.

If the missing information is factual—such as which purchase a payment relates to—the owner may be able to resolve it from the supporting record.

If the question involves tax treatment, accounting policy or another professional judgment, refer it to the appropriate qualified professional.

5. Reconcile your accounts

Reconciliation asks a simple question:

Do the balances and transactions in the books agree with the independent source records?

For a bank account, compare the bookkeeping ledger with the bank statement. For a business credit card, compare the card ledger with the card statement.

If balances do not agree, investigate the difference rather than overwriting one balance to make the discrepancy disappear.

Common causes include:

• missing transactions;
• duplicate entries;
• unrecorded fees;
• incorrect amounts;
• transactions posted to the wrong account; and
• legitimate timing differences such as uncleared transactions.

IRS Publication 583 specifically advises reconciling a checking account each month and notes that differences may result from unrecorded bank charges, deposits after the statement date or checks that have not cleared.

Reconciling business credit-card accounts is likewise an important bookkeeping control, although that recommendation should not be confused with a specific IRS monthly credit-card rule.

6. Resolve discrepancies and open questions

A discrepancy should lead to investigation, not guesswork.

Maintain an open-question list for transactions that require more information. A useful question identifies the transaction, states what is unclear and tells the owner or adviser what information is needed.

NenoBooks' current monthly bookkeeping process follows this approach: unclear items are listed for owner clarification before the close is finalized.

7. Review accounts receivable and payable where applicable

If you invoice customers before collecting payment, review accounts receivable (AR) so you know which customer balances remain open.

If you record supplier bills before paying them, review accounts payable (AP) so outstanding bills are reflected in the bookkeeping system.

Not every small business uses formal AP or AR workflows. Review them when they form part of your accounting system.

For NenoBooks' core monthly bookkeeping service, AP or AR tracking is available after scope confirmation rather than being represented as part of every engagement.

8. Generate and review financial reports

Once transactions are recorded, categorized and reconciled, generate the reports used to review the month.

Two common starting points are:

Profit and loss statement: summarizes recorded income and expenses over a period.

Balance sheet: presents assets, liabilities and equity at a point in time.

The SBA describes the balance sheet as a snapshot of business finances and notes its role in tracking assets, liabilities and equity.

Do not stop at generating reports. Review them.

Look for unexpected expense changes, unusual or negative balances, missing income, duplicate transactions, old receivables or payables and balance-sheet accounts that moved unexpectedly.

A report can be generated from inaccurate records. Its usefulness depends on the quality of the books beneath it.

Mixing personal and business activity

Combining personal and business spending creates extra categorization and reconciliation work.

IRS Publication 583 advises keeping a business checking account separate from a personal checking account.

Accepting every bank-feed suggestion

Automation can speed up repetitive bookkeeping, but software does not always know the business purpose of a transaction.

Check the underlying record when a category is unclear.

Categorizing similar transactions inconsistently

If the same type of cost moves between accounts from month to month, reports become harder to compare.

Document consistent treatment for recurring transactions.

Skipping reconciliation

A clean-looking transaction list can still contain missing, duplicated or incorrectly recorded activity.

Reconcile accounts rather than assuming an imported balance is correct. IRS Publication 583 specifically recommends monthly reconciliation of the business checking account.

Guessing when a transaction is unclear

An unresolved question is usually better than a confidently incorrect category.

Document what information is missing and ask the appropriate person.

Waiting until year-end

Delayed bookkeeping leaves more transactions to reconstruct and more opportunities for source documents or context to disappear.

Regular transaction capture reduces that problem, and IRS guidance generally recommends recording transactions daily as good recordkeeping practice.

Treating the bank balance as complete bookkeeping

A bank balance tells you how much cash is in an account. It does not tell you whether transactions are correctly classified, whether other accounts are reconciled, whether invoices or bills remain outstanding or whether the ledger contains errors.

Producing reports without reviewing them

Generating a P&L or balance sheet is not the final control.

Review the reports for unexpected balances before treating the month as complete.