Basic Bookkeeping Knowledge
Basic bookkeeping knowledge is the background of every bookkeeping task. One must understand the basics of what you seek to learn before reliable results can be obtained. There are many accounting systems out there, but systems are just that, systems and the one running that system must have a sufficient level of knowledge in order to have correct results.
The Concepts of Bookkeeping are not hard to learn if you are willing to put in some time and then apply that knowledge. A good bookkeeper must always seek to stay up with changing tax rules, changing systems, but the very basics always remain the same.
Since you are here, I assume you have come to learn bookkeeping or at least become somewhat familiar with the concept. You either seek to start your own business, become a freelancer, or have a small business and have decided to do the books yourself, at least until you feel more established and time becomes an issue.
I find it wonderful that you have decided to invest in yourself. I will be here to help guide you. Let’s get started.
Basic Bookkeeping Concepts
- The very basics of bookkeeping rest in understanding the following: Assets, Liabilities, Equity, Revenue, Expenses and their applications. Assets are positives, items like money in the bank, savings, equipment owned, Accounts Receivable (invoices that will be paid), investments. Liabilities are things you owe, like accounts payable (things you have bought but not paid, have a bill to be paid), sales tax payable, payroll liabilities like withheld taxes and company share of taxes, withheld child support that must be paid in, notes payable for mortgages, vehicles, equipment, lines of credit. Revenue is your income, the payment of invoices sent or cash/check received for services and Expenses are the things that go against your revenue at tax time to reduce gross taxable sales to net sales. If you are using Accrual accounting method then all of the accounts payable that you have not paid yet, goes against that revenue as an expense, but, on the flip side, all that accounts receivable that you have not yet received payment on, counts as revenue. If you are using cash basis, then only what you have been actually been paid for counts as revenue and only what you have actually paid, counts as expense with few exceptions. More detailed information on this in another article. Depending on the type of business you have you might even have Cost Of Goods Sold expense and these would be things directly related to a job, like lumber used in building a specific house, etc. This area would be strictly direct costs. At the end of the day the equation is Assets=Liabilities + Equity.
- Study – Rules and regulations are ever changing and this affects how you should or can record given transactions, what is allowable or not and if there is a specific way it should be recorded. This also affects your level of skill. It wouldn’t do to not have an understanding and record items incorrectly having them disallowed or worse in an audit. Many people will say that bookkeepers just record data but this is far from the truth. You should have a basic understanding of taxes and rules and regulations in general in order to be able to record transactions correctly.
- Have a set of Ethics and stand by them.
- Finances – Keep personal and business finances separate. Learn how to properly record any draws or personal expense that may be found in the books. For a DBA / sole proprietor often you will find that personal and business expenses get mixed together in the same account. You should have a separate business account and pay yourself either as a draw, payroll (depending on the type of company) etc. If you are an LLC, S-Corp, or Corporation mixing finances could result in what is called “piercing the veil.” This could occur in the event of a law suit from an outside source, a divorce, or even a disgruntled employee. To allow this to happen could result in a status of loss of protection for personal assets that you had chosen this particular type company for.
- Vendors and 1099’s. Study the rules for 1099 that are due at year end. All service related items you pay for that are paid to any person or organization that is not a corporation or S-Corp should get a 1099 at year end. In order to have the information you require to accomplish this necessary task you should always get W9’s before a vendor is paid, preferably. The purchasing of items is not a 1099 event at least at this point but who knows the future, right? Stay up on rules and regulations. There is a fine per vendor that could potentially be assessed for the failure to issue required 1099’s when due.
- Payroll – Payroll can be a very involved subject depending on the nature of the business. Most bookkeeping system have payroll modules that will handle deductions, correct tax rates and the like but these systems and the employees must be set up correctly. The most important part of payroll is to have all of the required documents you may need, to withhold the correct amount of taxes and the company share and to pay these payroll tax liabilities in on time, every time. If child support deductions are related to some of the employees, study those rules and ensure you send in the correct and allowable dollar amount of payments timely. Having payroll leads into having to file quarterly and year-end end payroll reports and W2’s.
- Neatness and Consistency – Always try to be consistent in how you record transactions and neatness counts. For example, on your chart of accounts you want reports to look nice when printed so as you add accounts be sure to be consistent with how you capitalize them. Like Rent expense, vs rent expense. I would always capitalize at least the first word and if you cap the others be consistent, don’t have one start with a capital and the next with a lower case. This would make reports look very unprofessional. Look at which expense you usually record certain vendor payments to and unless there is a special case then try to be consistent when recording them.
- Keep a permanent record of assets. Items like truck purchases, large equipment purchases, etc. Better even is to always attach a pdf copy of the document to the transaction if using a system like QuickBooks Online that has this feature. Your tax professional may well need copies of these documents for depreciation also. My preference is to attach a copy and keep a copy in a digital file.
- Reconcile – Always reconcile checking accounts, savings accounts, note payable, credit cards, and things of this nature, monthly. I cannot stress this enough. If you are not reconciling these accounts monthly then you can not be sure that all revenue and expenses are accounted for and that your set of books is relative to what’s happening in the bank and vice versa. Never ever have taxes filed until the books are completely reconciled. This will prevent most future issues from cropping up.
- Sales Tax – The rules for sales tax are ever changing. This is another expansive matter that you will have to apply some attempt to stay up with especially as nexus becomes more of a thing. If you are required to collect sales tax and someone states they are exempt, you must get a correctly filled out exemption certificate or direct pay certificate from that customer. Without this certificate you are responsible for the taxes you didn’t charge. They may well be exempt but without this properly filled out and signed certificate then they are taxable for you. Sales tax owed to your State Comptroller is from sales you make to customers. You should also study the concept of use tax. If you buy an item, say truck tires, from just someone and this someone doesn’t charge sales tax then you are responsible for paying in use tax. Sales and Use tax can be a lengthy topic and I feel sure we will touch on it further in this blog. If you find yourself with an upcoming Sales Tax Audit this post may well be of value to you.
- Seek to be a valued resource and a point of help for others.
- Practice good credit card usage. If you often make use of credit cards for your business, get one in the company name if possible, else choose a personal card that you will “only” use for business. This is just a good practice over all.
- Learn the system you choose to use and follow it’s required workflow for best results. At times there are varied ways that an item can be recorded. Learn it well.
- Meals and entertainment – With the last tax changes entertainment in general was disallowed, business meals that use to be only fifty percent deductible were one hundred percent for 2021 and 2022 when purchased from restaurants, because of pandemic related economic issues, and as it stands now, will revert back to fifty percent deductible on January 1, 2023. Meals should always have a separate expense account and should never be lumped in with other expenses. It would be impossible to have a correct tax return with items that are actually only fifty percent deductible on taxes spread all over the place. This would certainly reflect badly on your skill level. Also, if you study the rules for such things you will find that meals should have a specific business purpose and in general this purpose should be clearly written on the receipt or in the notes section of a receipt capture system, in a log book, something. During an audit, if the rules are not followed and items lack required information, they could be fully denied. I am huge on scanning and attaching receipts to the transactions. Scanning is important because most of these receipts you won’t be able to read six months or so from now and if an audit happens in two or three years, what you gonna do then? Scanned copies of original documents are allowed and considering the times in which we live when all this is so easily attainable, pretty expected. The IRS rules state that “only business expenses that are ordinary, necessary and reasonable in amount are deductible.” Searching the IRS website for publications on this topic also is a good idea.
- Notes Payable – When you finance a vehicle or have other notes where you make monthly payments, the cost or principal paid would be recorded against the note and the interest portion would be recorded to interest expense. The initial set-up of such an item might go something like this this, pretending we just bought a piece of equipment to be used in the business for 25k: Machinery and Equipment (a fixed asset account) debit for 25k then credit Note Payable – Creditor name, etc.) (a liability) 25k. Then each month when this payment is made you would record the principal portion against the note and the interest against interest expense. Example: write a check, or ach, etc. (credit cash 550.00 for total payment amount, debit Note Payable – Vendor liability account 500.00 and debit Interest Expense, expense account 50.00. The cost of the 25k portion of the vehicle is deductible via what is called depreciation, over the period of time allowed for the specific type of asset it is and the interest is deducted as paid.
- Journal Entries – A journal entry is a way to record certain transactions and usually they will be used to make month end of year adjustments, to record depreciation, to record accruals and/or reversals and for varied others things. This is something that as a bookkeeper you will become very comfortable with as you gain experience.
At the end of the day good bookkeeping is one of your best and most essential business tools. It gives you the confidence of clear, correct records and a clear picture of how your company is doing overall. It can give you the information necessary to seek capital expansion, to differentiate between products and their profitability, and reliable tax information. A good bookkeeper that truly cares about the company or companies they engage with is a valuable asset. Don’t doubt it. For more information on what a bookkeeper is refer to my article What is Bookkeeping.
As always reach out to me for suggestions, questions, or help when you need it.
I believe in you, you can do it.
You have brains in your head. You have feet in your shoes. You can steer yourself in any direction you choose.
– Dr. Seuss