Bookkeeping Basics for Beginners: The Definitive Guide

Bookkeeping basics can take you far. 

If you’re someone who’s involved with finance or business, a foundation in bookkeeping will either directly benefit you in your role or give you a better understanding of what others around you are doing (and what they need from you).

But where do you start, and how? This can be the hardest part of learning any new skill.  Well, I’m here to help!

Together, we’ll dive into the basics of bookkeeping, including:

• What bookkeeping is and how it differs from accounting
• Terms and definitions used in bookkeeping.
• Common mistakes, quick tips, and practical applications

Key Takeaways

• Bookkeepers are responsible for day-to-day financial transactions, and anybody can become a bookkeeper.
• Bookkeeping is the process of recording the financial transactions of a business and is used in order to prepare final account statements.
• You should understand all of your business’s account types in order to keep accurate books.
• Keeping accurate books will help you when it comes to taxation and other financial interactions.

What is Bookkeeping?

Bookkeeping refers to the basic process of keeping track of a business’s operational financial transactions.  

Very loosely, it is the process of listing expenses, income, liabilities, and assets (definitions we will dive into later!) without preparing final account statements.

Importance of Bookkeeping

Having a good understanding of your income and expenses is always beneficial for any business, whether you’re a self-employed content creator or the owner of a large chain of stores. 

Bookkeeping means you have everything in one easy-to-access document (or an actual book), which has obvious benefits.

Additionally, most end-of-year accounting statements are prepared from your books; without proper data, you might risk filing incorrect tax information – which can mean an expensive fine or even jail time.

Bookkeeping Terms & Concepts You Should Know

Assets: An asset is something that you own or something that a customer or client owes you.

This could include a business car, technology (e.g. computers and smartphones), stock (if you are a retail business), cash, money owed to you by a customer, and more.

Liabilities: A liability is something you owe to somebody else.  This might be a loan you have taken out from the bank or another creditor, or an overdraft.

Revenue/Income: Revenue or income are terms you have likely heard before.  Just in case you haven’t, this is money that you earn from running your business (clients paying you for your services, customers purchasing items from your store, and so on).

Expenses: are costs that you must pay in order to run your business. Fuel, travel, wages and salaries, and any other business costs all fall under this category.

Equity: is the investment you (or the business owner(s)) have in the business.  

Balance Sheet: A balance sheet accounts for your assets and liabilities over the course of the previous year (these are typically prepared annually, although there is nothing to stop you from doing so more frequently).  

Essentially, it’s a place to write down your asset and liability values.

Chart of Accounts: A chart of accounts is a single document displaying all of a business’s accounts – note that this does not necessarily mean bank accounts, but rather a full and detailed breakdown of all the financial transactions a business makes.

This can include income from customers, expenses for transport to customers, expenses for purchasing stock, cash assets/bank account assets, and more. It should be well-organized so that it is easy to see all the different kinds of accounts.

Trial Balance: A trial balance is a sheet showing the closing balances of all of a business’s accounts  – that is, the balance of all the accounts at a certain point in time.  

Typically this will be at the end of a financial/business year, as this is the first step in preparing a business’s accounts in full.

Profit & Loss: Profit and loss is essentially a balance sheet for your income and expenses.

How Bookkeeping Works

Below I will cover how bookkeeping works in steps.

Step 1: Recording transactions

Without recording transactions, we would have no books!  Luckily, recording transactions isn’t too hard.

While you can record all the transactions your business has manually, this is time-consuming and can often introduce mistakes.

Instead, you will often have a bookkeeping or payment platform that will log most transactions for you.

Recording a transaction is as simple as noting down the money exchanged, the item or service received or given, and the day on which this happened.

Step 2: Classifying transactions

You will need to classify the transactions you enter into the books.  For a start, you’ll need to identify whether the money is debited (taken out) or credited (put in).  

From there, you should specify which accounts are involved. Where has the money come into? Where has it left from?

If you are using double-entry bookkeeping, you will also need to make sure you are balancing the books correctly. 

This essentially comes down to properly explaining how the money is flowing. In double-entry bookkeeping, you have two columns on your spreadsheet: debit and credit. 

Money in each column can have differing effects depending on what class of payment (income/expense/asset/liability) it refers to.

Account	Credit	Debit
Asset	Decreases balance	Increases balance
Liability	Increases balance	Decreases balance
Expenses	Decreases balance	Increases balance
Income/Revenue	Increases balance	Decreases balance
Equity	Increases balance	Decreases balance

Let’s look at some quick examples:

Suppose you receive $250 of income from a client who has paid an invoice you sent them.  In this case, you would have had an “Accounts Payable” (asset) account with at least a balance of $250.

As the customer has paid $250, you will decrease the balance of accounts payable by $250 – that is, credit it by $250.  

You will then have an increase of $250 in your cash account, so you will increase the balance of cash – that is, debit it – by $250.

Account Type	Credit	Debit
Accounts Payable	$250	N/A
Cash	N/A	$250

Notice that the columns balance out!  This is the idea of double-entry bookkeeping. Suppose you must pay a bill to a supplier of $400 for some products that you will be selling. 

In this case, the actual transaction is an expense and should be filed under stock or stock expenses. You also owe $400, so you want to increase your accounts payable by $400.

Account Type	Credit	Debit
Stock (expenses)	N/A	$400
Accounts payable	$400	N/A

When it comes time to actually transfer the money, you’ll want to debit accounts payable and credit cash:

Account Type	Credit	Debit
Accounts payable	N/A	$400
Cash	$400	N/A

Related: Learn about what single-entry bookkeeping is

Step 3: Posting to ledgers

While your books serve as a good record of each individual transaction, you’ll want to make sure that you are aggregating everything in a summary form in your general ledger.

This means totaling the transactions from a particular day and entering them into the general financial ledger in aggregate (i.e. combining all expenses/revenue/etc).

Step 4: Balancing ledgers

You should make sure that the totals of the debit and credit columns in your ledgers are equal. 

If they are not, you should check to ensure you have entered all the transaction data correctly.

Step 5: Creating trial balance

Create the trial balance by placing the total credit and debit amounts for each account in a spreadsheet together and totaling the credit and debit columns. 

If these match, you can close the trial balance. If not, you will need to locate the error!

Step 6: Adjusting entries

If you have changed any details around a particular transaction (say you billed a customer for $1000, but they rang up and asked for a 15% discount and you granted it), you’ll want to make a new entry for the adjustment.

Do not edit the old entry! Entry adjustments typically include things that are long-term expenses, such as depreciation.

Step 7: Creating financial statements

At this point, you should pass the books and all other financial documents to your accountant, who will file the final financial statements and/or tax documents for you.

Step 8: Closing the books

You should zero your revenue and expense accounts and transfer any net change to equity, representing the fact that you have either made a profit or loss for the period and are now beginning the next one.

Step 9: Preparing post-closing trial balance

Preparing a post-closing trial balance ensures that the remaining balance sheet accounts are balanced and the books have been closed properly.

This is prepared in the same way as the initial trial balance.

Step 10: Reporting and analysis

File the appropriate financial documents with your local authorities and spend some time looking over what your documents say and thinking about how this impacts your business.

Types of Accounts

• Cash – bank accounts, actual hard cash, and any other liquid asset or form of cash.
• Accounts receivable: money owed to you by customers, clients, and any others you have charged who have not yet paid.
• Accounts payable: money you owe to suppliers or anybody else you have not yet paid for a service or product.
• Loans payable: money you owe to creditors, like banks or other loan providers.
• Inventory: stock or product assets that you have.
• Sales: income from sales – products, services, and so on.
• Purchases: expenses from buying stock or product assets.
• Payroll expenses: money you use to pay your staff.
• Retained earnings: the amount of profit you make after paying all your various obligations.

Bookkeeper vs. Accountant: What’s the difference?

Essentially, a bookkeeper can be anybody involved with the business who manages the day-to-day tedium of business finances and keeps these accurate.

Meanwhile, an accountant makes financial recommendations, prepares final statements and tax returns, and typically has an accounting degree or other relevant qualification.

The diagram below provides a few more details about the principal differences between bookkeepers and accountants:

Practical Applications of Bookkeeping

While the practical applications of bookkeeping are likely quite obvious to you by now, let’s look at a couple of examples!

Real-Life Examples

Bookkeeping will help you with:

• Filing accurate tax returns and preparing accurate financial statements.
  Helping your accountants give you accurate financial advice.
  Understanding the cash flow of your business (and therefore whether you need to change any habits).

Case Studies

Proper bookkeeping can help you:

• Avoiding overpayments on tax
• Support your income if you are audited
• And more!

11 Bookkeeping Best Practices

Here are 11 bookkeeping best practices that I highly recommend when doing bookkeeping for your business or organization.

Maintain organized records

Ensuring your books are properly organized is key to having a successful bookkeeping process; after all, if you cannot find receipts and other payment records, you will certainly find it difficult to enter these into your books!

Separate business and personal finances

Your business books should be solely for your business finance, not your personal finances. If you mix the two, it will become very difficult to determine what to list in your end-of-year financial statements.

Ideally, you should have separate bank accounts entirely.

Regularly reconcile accounts

Ensuring that you regularly reconcile your accounts will prevent any sudden surprises at the end of the year when you realize your accounts are unbalanced.

Keep digital and physical copies of receipts

Having multiple copies of receipts allows for easy checking of your books and easy evidence should you require it (for example for an audit).  

Additionally, it provides a layer of redundancy in the case of a physical (e.g. fire, theft) or technological (e.g. hard drive failure, lost password) failure.

Categorize expenses accurately

Ensuring that you accurately categorize your expenses is also important, as this is key to determining which accounts are balanced and which are not.

Set up a consistent filing system

A consistent filing system will make your bookkeeping life significantly easier, as it will become much faster to find the documents that you need at any point.

Track and record all income

While you may be tempted to skip small transactions, it is very important to record and track every single one. Otherwise, your books will likely become unbalanced.

Implement reliable accounting software

Using a reliable software platform can significantly reduce the chance of making an error in your bookkeeping, and also speed up the process considerably.

Monitor cash flow closely

By making sure that the cash flow you see across your business’s accounts is consistent with what is recorded in the books, you are much more likely to keep accurate and correct records.

Generate and review financial reports regularly

Ensuring that you review and generate financial reports regularly means that you will be making sure everything is on track for your business and confirming that your bookkeeping is correct and accurate.

Consider hiring a bookkeeper

If you are not confident in your bookkeeping skills, consider hiring a professional to do it for you! This way, you will be able to continue running your business as normal.

Tips for Getting Started with Bookkeeping

If you are ready to get started with bookkeeping, here are 8 simple tips to help you get started.

1. Organize all financial documents and receipts

Start by making sure that you have all financial documents and receipts in a safe and logical location so that you can easily access them while updating the books.

You should put all new receipts and documents in this location as you get them.

2. Choose reliable accounting software or tools

Using reliable accounting software or tools will accelerate the process of bookkeeping and reduce the chance of error.  Find a tool that will work best for you or your business.

3. Set up separate business and personal bank accounts

Separating your personal finances from your business finances is of paramount importance to keeping accurate and relevant books.

4. Categorize expenses and income accurately

Ensure that you are categorizing your expenses and income in their respective correct categories (i.e. as expenses or income but also by what kind of expense or income they fall under).

5. Create a chart of accounts for different expense categories

Creating a full chart of accounts for the various expense categories your business has is something that will allow you to easily allocate expenses to the correct account, rather than having to comb through a variety of documents to determine which account an expense belongs to.

6. Record all financial transactions promptly

Although it can be tempting to delay, the longer you wait to record a transaction the more likely you are to forget to do it. 

Ideally, you should be recording every transaction as soon as it occurs.

7. Reconcile bank statements regularly

Your bookkeeping records should agree with your bank statements if you have correctly recorded your transactions. 

Hence, you should check your bank statements regularly to ensure that your records are accurate.

8. Generate and review financial statements monthly

Similarly, you should generate and review financial statements monthly to ensure that you are effectively and accurately recording your transactions in your books.

8 Common Mistakes to Avoid

Here are 8 common bookkeeping mistakes that you want to avoid at all costs in order to maintain the financial well-being of your company.

Not seeking professional help when needed

While it can be tempting to power ahead by yourself, sometimes you need to step back and recognize that you are ill-equipped for a particular task.

If you find yourself having trouble, it is always better to seek professional help.

Inaccurate data entry and recording

Inaccurate records are one of, if not the, leading cause of poor bookkeeping. Make sure that you are accurate in your data entry and recording to avoid problems down the line.

Forgetting to record small transactions

Along the lines of inaccurate recording, forgetting to record small transactions, while a small error, will still lead to unbalanced books at the end of the financial year.

Neglecting to track reimbursable expenses

Without tracking reimbursable expenses, you will either leave your employees short of money or be unable to claim back on your expenses in your taxes at the end of the year.

Relying solely on manual calculations

While manual calculations can be reliable for very small quantities of data, they typically fail as you increase the number of transactions. 

For large numbers of calculations (pretty much anything more than five), you should be ensuring that you are checking things regularly with a calculator or software tool.

Not updating financial records regularly

If you do not update your financial records regularly, you will find that this is a much longer and harder task than it would otherwise have been.

Not only that, you are more likely to miss things and make mistakes!

Misclassifying income or expenses

Misclassifying the category of income or expense – or even getting the two mixed around – is a common cause of error for beginner bookkeepers.

Make extra sure that you are filing things under the right accounts!

Ignoring reconciliation discrepancies

Reconciliation discrepancies are an indication that something has gone wrong – do not just ignore them!

Final Thoughts

Congratulations on making it to the end of this guide!  Hopefully, you now have a better idea of what bookkeeping is and how to go about it.

Remember that continued learning and putting it into practice is key to mastering bookkeeping, just as it is for any subject!

So, always try to keep your eyes and ears out for further information, workshops, training, or anything else that you think might help you with your bookkeeping journey.

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