Bookkeeping 101: The Full Process

Welcome to Part 3 of the Bookkeeping 101 series! We’ve talked about the accounting background and we’ve talked about the bookkeeping setup process - now it’s time to learn how to maintain the system moving forward!

Once you conquer the initial learning curve and backlog hurdles, maintaining a clean bookkeeping system can actually become a really low-energy, habitual process. As your business falls into a consistent routine, so will your financials!

So today, let’s take a look at exactly what a typical monthly bookkeeping routine looks like, so you can check off every box and know that you’ve done your duty this month.

 
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Your Bookkeeping System

This routine is for after-the-fact bookkeeping, which does not including managing accounts receivables or payables. What does this mean?

Some of you may choose to follow what’s called accrual-basis accounting, whether for personal preference (more detailed) or legal requirement (some countries require this format for tax reporting).

So, in your case, your records need to reflect income as you earn it, even if you haven’t been paid yet, or expenses as you incur them, again, even if you haven’t paid them yet.

This is most commonly seen through Accounts Receivables. Throughout the month, you track your invoices issued, invoices outstanding, and invoices paid.

This level of detail requires a bit more finesse, and is beyond the scope of the monthly routine in this post. So just know, that we’re tracking CASH as it moves within our bookkeeping systems, and we’re only tracking it at the end of each month.


Step 01: Import Transactions

I have found that the best way to create a lasting bookkeeping routine is to develop one that eliminates as much manual data entry as possible. Whether your software integrates with your bank, or you’re downloading and importing .csv files into the program, shortcutting this process is a life-saver for someone who hates bookkeeping. And probably even for people who like bookkeeping.


Download statements

First up, you’ll want to download your month-end statements from your bank. These usually come in PDF format. Note that this means you’ll probably have to wait until a couple days into a new month to do your books, but that’s okay! You’ll want the official statement ending balance of each business account you have (you do have at least one, right?) for reconciling later.


Update Transaction Imports

Once you have the statements, you can import your transactions for the full month or update your banking integration, however you have it set up. Make sure you’ve updated for the exact date range listed on your bank statement!

This may seem like common sense, but some banks use weird statement dates. I’ve seen banks end on March 29th or September 27th, which makes absolutely no sense to me. Typically local banks do this, but double check yours. It’ll make reconciling easier!


Pro Tip: Once you import, do NOT delete any transactions. There are ways to classify any transaction that touched your business bank account, even if it wasn’t business related. Deleting transactions leads to a large host of issues.


Step 2: Classify Transactions

Step 2 is going to be the bulk of your bookkeeping routine! I’m going to explain a variety of transaction types in this section, but have faith! Once you start to learn your own banking patterns, this step can take you minutes. Plus, there are a few little tricks to speed up the process!


Identify & Match Transfers

The first thing you want to do after importing is clear up all transfers. If you’re someone who frequently transfers between your checking and savings accounts (or if you use Profit First!), this will clean things up a lot right from the get go!

Plus, by doing transfers first, you’ll make it easier to avoid the mistake of double-counting income or expenses! Because not all deposits are income, and not all withdrawals are expenses, right? Sometimes, you’re just moving money around.

Every bookkeeping program is a little different, but they’ll all have the option for you to specify that a certain transaction is simply a transfer between business bank accounts. Note the word business, there. If you’re transferring to a personal account, we’ll treat that differently in a moment!

Once you identify one side of a transfer, your program should automatically match the other side of the transaction. So, if you transferred $100 from checking to savings, you’d mark the $100 cash outflow as a Transfer TO Savings. Then, the program should automatically classify the $100 cash inflow in Savings as the other half of the same transaction.

If that sounds wonky, don’t think too much on it - the program should take care of itself for you. Just remember the importance of marking transfers as, you guessed it, transfers!


Paypal Pro Tip 1: Paypal complicates bookkeeping for beginners. If you use it minimally (only a certain type of income and/or only occasional expenses), don’t add Paypal to your books. Instead, when you transfer your Paypal balance to your bank, or Paypal draws money from your bank to pay for a purchase, classify the income and expenses within the bank account.

Paypal Pro Tip 2: Just like we use separate bank accounts for business and personal, make your life 1000x easier and use separate Paypal accounts for business and personal use!

Paypal Pro Tip 3: If you DO use Paypal heavily, you’ll want to add it as a bank account into your books. This will make it tricky to avoid double-counting income and expenses (since Paypal will often draw directly from your bank, or your income will get lumped into one deposit), but it’s critical that you manage this properly.


Identify Owner Investments/Draw

Remember when I mentioned above that transfers are only for business-related accounts? If you transferred money into your business account from a personal account, you’ll simply categorize this as an Owner Investment. You should not have your personal bank account linked to your business bookkeeping records.

Likewise, if you transferred money out of your business account into your personal one, this would be an Owner Draw. (The names vary by program or bookkeeper, but you should be able to recognize them in all their variations! They’re relatively self-explanatory.)

The other instance where you will use this account is in how you pay for certain expenses.

For example, you import your transactions and realize that you must have accidentally swiped your business debit card at Starbucks last week. The money has already come out of your business account, so you will simply classify that as Owner Draw. (It’s just as if you transferred $10 out of your business account into your personal one to pay for your morning coffee, but you just accidentally skipped the transfer step!)


Classify “Balance Sheet Transactions”

This next one isn’t as common, but should still be addressed! If you miss these, it can really throw off your records.

Most of us are pretty familiar with the concept of a Profit & Loss Statement, also known as a P&L or even an Income Statement. This statement shows your business’ income minus your business’ expenses!

However, not every cash-related transaction is related to income and expenses.

Sometimes, you’re going to purchase a piece of equipment (computer, camera, printer, etc.) that your tax accountant will recommend you depreciate over time - this means that, rather than saying the equipment purchase is an office expense, you’ll do what’s called Capitalizing. You’ll categorize the purchase as an Asset, which won’t have any impact on your P&L until your tax accountant starts depreciating it. This is a more advanced topic, but worth mentioning if it becomes relevant for your business!

Another example would be debt payments. Again, this is another complex topic that could probably use its own blog post one day, but here’s the short of it. If you make a payment on a business loan or a business credit card balance, that cash outflow from your bank is going to be categorized to the liability that you should have on your Balance Sheet. It is NOT an expense! (However, to complicate things, you do usually have to split out the Interest Expense portion of a debt payment.)

If you look at your transactions for the month and think you may have one or two of these items, send me a quick email (katie@thelazysource.com) and I’ll help you determine how best to categorize them!


Classify Revenue & Expenses

Finally, the part you’re used to! Once you clear out the other items, the only ones remaining should all be tied to actual business revenue or business expenses!

Your “Chart of Accounts” (the list of categories you use, essentially) is personal to you, but I do recommend taking a look at Form Schedule C for the current tax year to give you a base line. You’re also going to be pretty safe if you use the default accounts that your bookkeeping program started you off with.

This is the part that YOU can do best! It doesn’t take an accountant to do this - you know what types of income streams you have from which source, and what your different purchases were for! So categorize accordingly (and try to be consistent from month to month).

Pro Tip: Bank Rules in Quickbooks Online can speed up this process!


Step 3: Enter “Out-of-Bank” Transactions

One last thing that many people forget to consider are the activities that occur outside of your business bank account. We try to keep these to a minimum for paper trail purposes, but sometimes, it’s just not that easy! The best way to input these is with an Accountant’s Journal Entry.

We discussed the background behind how these work (debits and credits!) in Part 1 of this Bookkeeping 101 Series, so in this section, I’m simply going to tell you what the journal entry should look like if you’re entering any of this information in your records.


Enter Payment Processing Fees

A commonly missed deductible business expense is payment processing fees! My best example for this is with Stripe, since that’s what I use, but many payment processors work the same way.

When a client pays me through Stripe, I receive the full invoice amount. However, when Stripe puts that money into my bank account, I receive that amount with their fees netted out. So I may have earned $100 in revenue, but I only received $95.80. But when I mark that deposit as Revenue in my books, it’s going to look like I only earned $95.80!

Now, if you’re a math person, you may realize that, sure, I missed the $4.20 expense, but I also reduced my reported income by the same amount. And you’re right - ultimately, my bottom line (profit or loss) will remain unchanged.

However, when you start adding up hundreds of dollars in processing fees over time, wouldn’t you rather see the whole picture? To have your ACTUAL revenue number and see where that revenue went to?

If your answer is yes, the solution is simple! Just add a monthly journal entry to your to-do list. All you’ll need to do is go into your payment processor account and look at a report for the previous month. They’ll have a place for you to total up your fees for the month. Then you’ll create a journal entry that looks like this:

(This is an example from Quickbooks Online)

(This is an example from Quickbooks Online)

Pro Tip: Importing your Paypal data through an integration will make this easy; they input the fees as separate transactions, which makes categorizing the fees super simple!

Pro Tip 2: If you accept different types of income within your payment processor (for example, service revenue AND digital product income), you’ll want to split the CREDIT based on which fees were for which type of income. In the above example, if $2.00 of those fees were from Digital Product sales, Line 2 would say Service Revenue is credited for $2.20 and I’d add Line 3 to say Digital Product sales is credited for $2.00. The total credits would still equal the $4.20 debit, but my income will be properly recorded.

Record Business Expenses Paid Personally

What about that time that you paid for that coaching session with your personal funds? This, too, is pretty easy once you learn the journal entry! And, it’s even easier when you break the habit of mixing your business and personal activities. ;)

(This is an example from Quickbooks Online)

(This is an example from Quickbooks Online)

Step 4: Reconcile Accounts

Finally! By this point, all your information should be input into your records. If you did everything right, you should have no problem reconciling your accounts!

You’ll need to reconcile every bank account you have in your books - checking, savings, additional bank accounts, and even Paypal, if you’ve added it. Also, if you use a credit card, you’ll want to reconcile that balance as well.

This is where those PDF statements we saved come in handy! The official statement ending balance on there are the numbers you’ll need to match. And remember! Use the exact statement end date!

For more on what it means to reconcile your accounts, check out this introductory post here!

Step 5: Review Your Financial Reports

Once you’ve reconciled, you’re a total hero! You made it through the bulk of the work!

But, don’t celebrate yet! If there’s one thing I learned about bookkeeping in a public accounting firm, it’s the importance of the review stage. No matter how long you’ve been doing this, or how simple that month’s books seemed to be, you HAVE to review.

Even with reconciliations, it’s so easy for something to slip through the cracks. So take just a couple more minutes at the end of your routine to run through a few simple checks before you call it a day!

Review Your Profit & Loss Statement

Here’s the easiest one to check! Pull up your Profit & Loss Statement (or Income Statement, if that’s the terminology your program uses), and take a look at each line item.

First, you can do a quick glance to see if any of the amounts seem wrong for the month. In most programs, you can even set up a Comparison P&L where you can add a column for a previous time frame! So if you’re reviewing your November books, you can compare next to October to see if there were any weird jumps.

You could also do a Year-to-Date comparison to see how much November factored into the full year’s totals. So if you look into your Education & Training expense category and see you spend $300 in November, but your total for the year is only $350, you can ask yourself: Is November the only month I spent on educational materials? Did I miss something earlier in the year?

I’d also recommend clicking into the individual reports for specific categories, if you think they’re worth a look. That way, you can see every transaction that went into that category, and you’ll easily be able to find any duplicates or incorrectly classified items!

Review Your Balance Sheet

The Balance Sheet is often overlooked by creative solopreneurs, but it’s important to take a look at this report every now and then!

The Balance Sheet is essentially showing, at a single point in time, the VALUE of your business. The Asset section show everything your business HAS (cash in the bank, equipment, etc). The Liabilities section shows what your business OWES (credit card balances, outstanding loans, etc.), which reduces your business’ value. And the Equity section shows what your business is worth to YOU (what you’ve invested into it, what you’ve taken out, and your cumulative profit or loss).

Knowing this, you can see how it may be important to double check a few of these figures. The quickest checks will be:

  • Verify the bank balances shown on your balance sheet (as of the last day of the month) match your bank statement’s reported balance for the same day.

  • Verify your loan and credit card balances match your statements as of the same day.

  • Review the Owner’s Investment and Draw account(s) to verify that everything in there is related to your personal contributions or uses.

Step 6: Analyze Your Financial Reports

Once you’ve checked for errors, you can move forward into the LEARNING aspect! This is where you look more closely at the numbers you’re seeing on those same two reports to make sure you understand how your business is operating.

  • What’s your bottom line? Profit or loss? How does it compare to last month? Or last year?

  • What’s your largest source of income? Is this something you can capitalize on in the future? Or does this make you want to diversify?

  • What’s your smallest source of income? Is this worth focusing on more in the future, or removing from your business model completely?

  • What’s your largest expense category? Is there a way you can reduce this number to increase your profit margins?

  • Was there a large jump in an expense between this month and last month? What about this year and last year? Can you explain and/or justify this increase?

  • How much of your business’ value is lost in the liability section of your balance sheet? How can you create a plan to pay down these debts ASAP?

  • How much of your business’ value is reflected in its total assets? Are you relying on last year’s profits (in your retained earnings section) to value your business, or do you have cash in the bank today to show your operating power?

Apply some critical thinking skills and really allow yourself to get to know your own business! This is the best part of bookkeeping!

Wrap up: Putting it all together

So! That sounds like a lot, but I keep promising that this gets easier, so let’s review:

  1. Import Your Transactions

  2. Classify Your Transactions (including transfers, personal use, personal contributions, balance sheet items, revenues, and expenses)

  3. Enter “Out-of-Bank” Transactions (such as processing fees and business expenses paid personally)

  4. Reconcile Your Accounts

  5. Review Your Financials

  6. Analyze Your Financials

And you’re done! Doesn’t look quite so bad anymore, does it? So go try out your new routine!

For simple questions, you can always send me an email (katie@morewithmoney.com)

Until next time!

- Katie Scott

Check out the full Bookkeeping 101 Series!