Photo by Wes Hicks
Staying up to date with your company’s bookkeeping is an uphill battle. When I first started my business, I didn’t update my books for a handful of months - nine, to be embarrassingly honest. As more time passed, more work added up and my fear of tackling it all grew to a critical mass. When I finally sat down to do all the work, I cursed myself and promised myself I’d never let me books get that out of control again.
I’m sure as tax season closes in many of you might also be filled with this same sense of dread. If that’s the case, worry not. Although we offer catch up bookkeeping over at Hell Yeah, Bookkeeping, there are lots of small business owners who prefer to handle bookkeeping on their own. If you’re in the latter camp, here’s a step-by-step guide to help you get your caught up on your bookkeeping. Let’s dig in.
Step 1: Sort and Organize Your Documents
The first step is getting organized. You’ll want to start compiling invoices you sent to customers, receipts and/or the bank and credit card statements where you made purchases that are business expenses.
Invoices
Find all the invoices you sent to clients and organize them in one place. Make a note of what invoices are still outstanding, if any. The invoices and their status (paid or unpaid) will help you compile your business’ income or revenue and your receivables (what’s owed to you).
But of course there is a caveat. You’ll need to know what accounting method your company uses to operate. The two methods here in the U.S. are cash and accrual. Most businesses operate on a cash basis. If you don’t remember, you can ask your accountant to confirm.
For a cash basis business, you technically only need to send the customer an invoice once they have paid. For accrual accounting, you record the income when the sale occurs.
For example, let’s say you made a sale in the amount of $1,500 in December 2018, but the client didn’t pay you until March 2019. With cash method, revenue isn’t recorded until March 2019, whereas with the accrual method, you’d record the sale in December of 2018.
Collect on Debt
Sometimes you’ll have invoices that are outstanding for a long time. At some point, you might need to cut your losses. In order to do this, you must first make a concerted effort to collect on the debt. If that doesn’t work, you can charge off the debt using accrual accounting or non-accrual experience method. I know, the names of these methods really just roll off the tongue, huh?
For accrual accounting, when a customer flakes on their obligation to pay you, you’re able to write off this off as bad debt expense. Remember, you’ll need to prove to the IRS that you took reasonable steps to try to collect on the debt and recover the loss. The specific charge-off method means you can deduct a specific bad debt that becomes partly uncollectible during the year.
You can use the beautifully named, nonaccrual experience method to deduct what you were unable to collect. The deduction would reduce your gross income for tax purposes.
Separate Business and Personal Expenses
Most accountants will tell you that they prefer it if you’d keep receipts for every single business expense. Of course, this doesn’t always happen. But most accountants will advise that you should still deduct legitimate business expenses even if you didn’t keep the receipt.
At any rate, gather all your receipts for your business expenses and organize them in one place. I like to scan everything to Google Drive or Dropbox. I also like to include the date of the expense in the title of the scanned file so it’s easy to reference the receipts by date.
Here’s one hack that has made keeping meal receipts especially easy. I set up an email account, something like pacosreceipts (at) gmail.com. And every time I do business over a meal, a drink, or a coffee, I simply snap the picture of the receipt and email it to that email. In the subject line, I write who I was with and what the meeting was about. With this method, I have an audit trail that was kept in real time. This is important to the IRS if you ever get audited. They would like to see a real-time record as opposed to a spreadsheet that you threw together on one day of the year.
Vendor Invoices
If you’ve paid vendors and contractors, you should make sure that you’ve got all these invoices and bills organized in case you need to access them for an audit. If you don’t have all your bills, you can simply reach out to your contractors and vendors and ask them to send you whatever you’re missing.
Step 2: Update + Reconcile Bookkeeping
Now that you’ve gathered everything together, it’s time to get into your bookkeeping software updated and reconciled with your bank accounts. Bank account reconciliation is when you make sure your accounting records match your bank and credit card statements exactly. Each transaction in your account should be categorized and entered into your bookkeeping software. It sounds redundant to replicate your banking records within an accounting software program, but the software can allow you to run reports that your bank doesn’t. Reconciliations ensure your records are accurate.
Make sure to spend the time needed to ensure your accounts are accurately reconciled; it may be costly to have a bookkeeper or accountant go back and fix your books if they aren’t.
Alternatives
Hire A Bookkeeper
If you don’t have a bookkeeping system, you have a few options. First option is to hire a bookkeeper to put your books together for you. This method will likely result in the most accurate records, saving you time, but costing you more to pay for someone else's time and expertise.
Use Your Statements
One method to add up all your expenses is to use the bank statements and credit card statements where the transactions occurred. For any expenses that were cash, you’d have to add that back in after. This method is super easy if you’ve kept your business and personal expenses separate. It’s not recommended for a long-term solution because you won’t be able to accurately and quickly generate financial reports.
Use Your Receipts
If you saved all your receipts, another method is separating your them by expense category and adding up them all up. Again, this is not a long-term solution or long-term bookkeeping alternative. It’s only a very small, limited picture of your company’s finances.
If you'd prefer to outsource all of the bookkeeping work and your feeling of existential dread, please get in touch, we'd love to help.