How to Do Bookkeeping for Small Business: A Step-by-Step Guide

Starting a business is exciting. Bookkeeping? Not so much. But here’s what I tell every small business owner I work with: understanding the basics of bookkeeping is one of the most valuable skills you can develop.

You don’t need to become an accountant. But knowing how the numbers work helps you make better decisions, catch problems early, and have smarter conversations with your accountant or bookkeeper.

In this guide, I’ll walk you through exactly how to set up and maintain bookkeeping for your small business—step by step.

What Is Bookkeeping (And Why Does It Matter)?

Bookkeeping is the process of recording your business’s financial transactions. Every time money comes in or goes out, bookkeeping captures that information.

Think of it as the foundation of your financial house. Without solid bookkeeping:

• You can’t know if you’re actually making money
• Tax time becomes a nightmare
• You can’t get business loans (lenders want to see your books)
• You’re flying blind when making business decisions

Good bookkeeping gives you clarity. It’s the difference between hoping your business is doing okay and knowing exactly where you stand.

Step 1: Choose Your Bookkeeping Method

Before you record a single transaction, you need to decide on your bookkeeping method. There are two options:

Cash Basis Accounting

With cash basis, you record income when you receive it and expenses when you pay them.

Example: You invoice a client on January 15, but they don’t pay until February 3. With cash basis, you record the income in February when the money hits your bank account.

Pros:

• Simple and straightforward
• Easy to understand cash flow
• Works well for small, simple businesses

Cons:

• Can distort your profit picture
• Not ideal for businesses with inventory
• Some businesses are required to use accrual

Accrual Basis Accounting

With accrual, you record income when you earn it (when you complete the work or deliver the product) and expenses when you incur them.

Example: Same scenario—you record the income in January when you invoice, even though payment comes in February.

Pros:

• More accurate picture of profitability
• Required for larger businesses
• Better for businesses with inventory or long payment terms

Cons:

• More complex to maintain
• Need to track accounts receivable and payable

My recommendation: Most small businesses should start with cash basis. It’s simpler, and you can always switch to accrual later if needed. However, if you sell products on credit or have significant inventory, accrual might be better from the start.

Step 2: Set Up Your Chart of Accounts

Your chart of accounts is the list of categories you’ll use to organize your financial transactions. Think of it as a filing system for your money.

Every chart of accounts has five main types:

1. Assets (What You Own)

• Bank accounts
• Accounts receivable (money owed to you)
• Equipment
• Inventory
• Vehicles

2. Liabilities (What You Owe)

• Credit cards
• Loans
• Accounts payable (money you owe others)
• Sales tax payable

3. Equity (Owner’s Investment)

• Owner’s equity/capital
• Retained earnings
• Owner’s draws

4. Income (Money Coming In)

• Sales revenue
• Service revenue
• Interest income
• Other income

5. Expenses (Money Going Out)

• Rent
• Utilities
• Payroll
• Supplies
• Marketing
• Professional services
• Insurance

Pro tip: Don’t overcomplicate your chart of accounts. Start with 15-20 accounts and add more only when needed. The goal is useful categories, not an account for every possible expense.

Here’s a starter chart of accounts for a service business:

Account Name	Type
Business Checking	Asset
Business Savings	Asset
Accounts Receivable	Asset
Office Equipment	Asset
Business Credit Card	Liability
Owner’s Equity	Equity
Owner’s Draws	Equity
Service Revenue	Income
Advertising & Marketing	Expense
Bank Fees	Expense
Insurance	Expense
Office Supplies	Expense
Professional Services	Expense
Rent	Expense
Software & Subscriptions	Expense
Utilities	Expense

Step 3: Choose Your Bookkeeping Tools

You have three main options for tracking your books:

Option 1: Spreadsheets

Best for: Very small businesses with few transactions

Using Excel or Google Sheets is free and flexible. You can create your own system or use templates.

Pros:

• Free
• Complete control
• No learning curve if you know spreadsheets

Cons:

• Manual data entry
• Easy to make errors
• No bank feeds
• Time-consuming as you grow
• No built-in reports

Option 2: Accounting Software

Best for: Most small businesses

Software like QuickBooks, Xero, or Wave automates much of the bookkeeping process.

Pros:

• Automatic bank feeds
• Built-in reports
• Professional invoicing
• Easier to work with accountants
• Saves time

Cons:

• Monthly cost (except Wave, which is free)
• Learning curve
• Can be overwhelming at first

My recommendation: If you have more than 20-30 transactions per month, use accounting software. The time savings and accuracy improvements are worth it.

Here’s a quick comparison:

Software	Best For	Monthly Cost
Wave	Freelancers, very small businesses	Free
QuickBooks Simple Start	Small businesses	$30/month
QuickBooks Essentials	Growing businesses	$60/month
Xero	Businesses wanting unlimited users	$15-78/month
FreshBooks	Service businesses, freelancers	$19-60/month

Option 3: Professional Bookkeeper

Best for: Business owners who want to focus on their business

Hiring a bookkeeper means someone else handles the day-to-day recording and reconciliation.

Pros:

• Saves your time
• Expert handling of complex situations
• Catches errors you might miss
• Usually includes software

Cons:

• Monthly cost
• Need to find someone trustworthy
• Still need to provide receipts and documentation

Step 4: Open a Dedicated Business Bank Account

If you haven’t already, stop using your personal bank account for business. This is non-negotiable.

Mixing personal and business finances:

• Makes bookkeeping harder
• Looks bad to the IRS
• Can jeopardize your liability protection (if you’re an LLC or corporation)
• Makes it impossible to know your true business profit

Open a separate business checking account. Many banks offer free or low-cost business accounts. Shop around.

If you’re using the Profit First system (which I highly recommend), you’ll eventually want multiple accounts:

• Income
• Profit
• Owner’s Pay
• Taxes
• Operating Expenses

But start with at least one dedicated business account.

Step 5: Record Your Transactions

Now for the actual bookkeeping. Every financial transaction needs to be recorded. Here’s what that looks like:

Recording Income

When money comes in:

1. Identify the source: Who paid you and for what?
2. Choose the right account: Usually Sales Revenue or Service Revenue
3. Record the date, amount, and description
4. Save documentation: Invoice, receipt, or contract

Example entry:

• Date: January 15, 2026
• Description: Consulting services - ABC Company
• Account: Service Revenue
• Amount: $2,500

Recording Expenses

When money goes out:

1. Identify what you bought: What was the purchase for?
2. Choose the right expense category: Match it to your chart of accounts
3. Record the date, amount, and description
4. Save the receipt: Digital photos work great

Example entry:

• Date: January 16, 2026
• Description: Monthly software subscription - QuickBooks
• Account: Software & Subscriptions
• Amount: $30

The Daily Habit

If you’re doing your own books, here’s what I recommend:

Daily (5 minutes):

• Take photos of any receipts
• Quick review of bank account for new transactions

Weekly (30 minutes):

• Log into your accounting software
• Categorize new transactions from bank feed
• Match receipts to transactions

Monthly (1-2 hours):

• Reconcile all accounts (more on this below)
• Review profit and loss statement
• Follow up on unpaid invoices

Step 6: Reconcile Your Accounts Monthly

Reconciliation is the process of matching your books to your bank statements. It’s how you catch errors and ensure accuracy.

Here’s how to reconcile:

1. Get your bank statement for the month
2. Compare the ending balance on your statement to your book balance
3. Check off matching transactions in your accounting software
4. Investigate differences: Outstanding checks, deposits in transit, errors
5. Make adjustments until balances match

If your reconciled balance doesn’t match your bank statement, something is wrong. Don’t ignore it—find and fix the discrepancy.

Common reconciliation issues:

• Duplicate entries
• Missed transactions
• Wrong amounts
• Transactions in the wrong account

Step 7: Maintain Proper Documentation

The IRS requires documentation for business expenses. More importantly, good records protect you.

What to keep:

• Receipts for all purchases over $75 (I recommend keeping all receipts)
• Bank statements
• Credit card statements
• Invoices (sent and received)
• Contracts
• Payroll records

How long to keep records:

• Tax returns and supporting documents: 7 years
• Employment records: 7 years after termination
• Asset records: 7 years after disposal
• General records: 3-7 years

Digital storage tips:

• Use a consistent naming convention (Date_Vendor_Amount.pdf)
• Organize by year and category
• Back up regularly
• Consider a receipt scanning app like Dext or HubDoc

Step 8: Generate and Review Financial Reports

Your books tell a story. Learn to read it through these essential reports:

Profit and Loss Statement (P&L)

Shows your revenue, expenses, and profit over a period (usually monthly).

What to look for:

• Is revenue growing, flat, or declining?
• Are expenses in line with revenue?
• What’s your profit margin?
• Are any expense categories unusually high?

Balance Sheet

Shows what you own (assets), what you owe (liabilities), and your equity at a point in time.

What to look for:

• Is the business building assets?
• Are liabilities manageable?
• Is equity growing (sign of a healthy business)?

Cash Flow Statement

Shows how cash moved in and out of your business.

What to look for:

• Do you have positive cash flow from operations?
• Where is cash coming from?
• Where is cash going?

Pro tip: Run these reports monthly and compare to previous months. Trends are more important than any single number.

Common Bookkeeping Mistakes to Avoid

After working with hundreds of small businesses, here are the mistakes I see most often:

1. Not Keeping Receipts

The IRS can deny deductions if you can’t prove the expense. Keep everything.

2. Using the Wrong Categories

Putting expenses in the wrong category skews your reports and can cause tax issues. When in doubt, ask your accountant.

3. Forgetting to Record Cash Transactions

Cash is easy to forget. Create a system for logging cash immediately.

4. Not Reconciling Monthly

If you skip reconciliation, errors compound. Small problems become big problems.

5. Mixing Personal and Business

Every time you buy something personal with a business card (and vice versa), you create extra work and risk.

6. Waiting Until Tax Season

Catching up on a year’s worth of bookkeeping is painful and error-prone. Stay current.

When to Get Help

DIY bookkeeping works—up to a point. Consider getting professional help when:

• You’re spending more than a few hours per week on books
• Your business is growing more complex (employees, inventory, multiple revenue streams)
• You’re making mistakes that cost money
• You’d rather spend time on revenue-generating activities
• Tax time is stressful and expensive due to messy books

A good bookkeeper pays for themselves through time savings, accurate records, and tax deductions you might miss.

Your Next Steps

Here’s my suggested action plan:

1. This week: Open a dedicated business bank account if you don’t have one
2. Next week: Choose your bookkeeping method (cash vs. accrual) and set up your chart of accounts
3. Week three: Select your bookkeeping tool and set it up
4. Ongoing: Establish your daily, weekly, and monthly bookkeeping routine

Remember: The goal isn’t perfection from day one. It’s building consistent habits that keep your books accurate and useful.

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Need help getting started? At Profit Path Books, we specialize in helping Utah small businesses set up proper bookkeeping systems—and we can take it off your plate entirely with our monthly bookkeeping services. Book a free consultation to discuss your situation.