Now that we’ve flown over this bookkeeping concept at the 10,000 foot level, let’s turn this theory into practical, basic bookkeeping steps you can take to get it done! So let’s go over some of the first steps to take, before a deeper dive into the basics of bookkeeping.

STEP 1: CHOOSE ACCOUNTING SOFTWARE

The days of keeping your books outside of a computer program are long gone. Accounting software is not only very cheap, but will be necessary to keep you on track with your bookkeeping. A spreadsheet is the next best alternative, but unless you are extra “spreadsheet savvy” — and are willing to put in a lot of extra time developing your own system — you won’t get the functionality or reports you need. So, search the market for accounting software and you’re sure to find something that fits your needs. But next up, you’ll have to actually learn how the software works.

As a typical small business owner, you have an unfortunate disadvantage… you’re not only facing the accounting/bookkeeping learning curve, but

the accounting software learning curve too! But rest assured, the curve associated with learning the principles of bookkeeping are much steeper than the curve with the software, especially if you’re somewhat capable on a computer.

Just one word of warning however: accounting software is notorious for lulling you into a sense of security and assurance that you’re doing everything correctly, when in fact you’re often not! They’ve made it so “user friendly” that you feel like it’s all going fine, only to find out when you send it over to your tax professional that it’s all wrong. This is another thing that makes understanding the basics of bookkeeping valuable.

All that said, find a software that has a free trial and see how it goes. If it doesn’t go well, look for an affordable outsourced accounting service that will take care of it for you.

STEP 2: SET UP YOUR CHART OF ACCOUNTS

As you recall from our demonstration of putting together a profit and loss statement, you need to specify “accounts” that you can categorize your transactions within. Your accounting software will most likely have a default chart of accounts all ready for you to use, but you should tailor these to your own needs. Remember, these are the labels you’re going to see on your profit and loss and balance sheet statements — they should be labels that make sense to you, and give you the understanding you’re looking for.

Feel free to create your own accounts, but don’t get too detailed. Your own custom accounts can be very helpful, but they can get out of hand very quickly. For example, a few different accounts to isolate sales from various marketing channels might make sense, such as:

Google Income

Amazon Income

Subscription Customers

One Time Sales

However, it’s easy to go overboard, especially when tracking expenses. It’s very common to see overly complex charts of accounts in new businesses because they start out wanting to track every little thing, but they end up not being able to step back and summarize the results. For example, the following accounts may be too detailed:

Office Supplies – Paper

Office Supplies – Envelopes and Stationary Office Supplies – Printer Ink

Office Supplies – Stamps

Office Supplies – Other

Travel – Rental Car

Travel – Flights

Travel – Parking

Travel – Other

Hopefully you see how that begins to be unnecessary detail. Combining all the office supplies together is probably more beneficial than knowing how much you spent on stamps during the month. So a word to the wise: summarize as much as your management style is willing to allow for. Doing so not only helps you comprehend your reports quicker, it also saves time when coding transactions; it’s a lot quicker to pick from a list of 15 accounts than it is to pick from a list of 100 accounts.

STEP 3: UNDERSTAND THE TYPES OF ACCOUNTS

So far, all of the accounts referred to in this article were profit and loss accounts. However, as you will come to find out, balance sheet accounts are an important piece of the puzzle. We will go into the differences between a profit and loss statement and a balance sheet in detail soon, but for now, just know that income and expense accounts belong to the profit and loss statement, while assets and liability accounts belong to the balance sheet. So you won’t ever see the following accounts on a profit and loss statement:

• Cash (Asset)

• Inventory (Asset)

• Credit Card (Liability)

• Loan (Liability)

These balance sheet accounts all represent balances for an amount owned by you (an asset) or an amount owed by you (a liability). You will need to set up a cash (representing your business bank account) or a credit card account in order to begin entering transactions. The default chart of accounts will most likely contain these accounts already, you can rename the defaults to reflect the actual name of your account.

STEP 4: SET UP VENDORS AND CUSTOMERS

Most accounting software allows you to setup vendors and customers as you go, but it may be more convenient to add all the details about your customers and vendors at the beginning. As you recall from our Nine-Transaction Example, there was a “Payor/Payee” column, or in other words “Customer/Vendor” column. The software likes you to preset the customers and vendors so it can report on them, and so it can remember what account you categorize their transactions to.

If you’ve got a list of customer or vendor information in a spreadsheet, for example, you’ll probably be able to import it into the software and save them all at once.

STEP 5: START ENTERING DATA…SLOWLY

Once the chart of accounts is set up, you can go ahead and begin entering transactions. Most modern accounting software allows you to “link” your bank accounts and begin automatically downloading your transactions…DON’T DO THAT YET! It is smarter to enter your first transactions by typing them in yourself. This is an extremely valuable learning opportunity, so take it slow. Enter in 5 transactions, then view your profit and loss statement. Enter in 10 more transactions, then view your profit and loss statement. View the balance sheet also and see what’s happening to your bank balance as you go along. This process will allow you to really connect the dots between what you enter in the system and how it shows up in your reports.

By taking it slow and understanding what’s happening as you take the first baby steps, you allow the basic bookkeeping concepts to sink in. If you link your bank account and import a hundred transactions all at once, you’re likely to be confused right off the bat and not understand what’s going on. Also, sometimes the bank linking and transaction importing process can be complicated in itself — no need to put your brain through that. Get at least the first month done by hand, and then if you’re feeling great about everything, go ahead and find more efficient ways to get the data in the system.