What this lesson covers
The daily and weekly financial recordkeeping that keeps a small business solvent and legal. This lesson covers bookkeeping fundamentals: setting up accounts, recording transactions, reconciling bank statements, managing what you’re owed and what you owe, and organizing records for taxes. This is the operational counterpart to Reading Financial Statements — those statements are only as accurate as the bookkeeping behind them.
Prerequisites
Reading Financial Statements. You need to understand the income statement, cash flow statement, and balance sheet to understand what bookkeeping produces.
Separate business and personal finances
This is rule one. It is not optional.
- Open a business bank account. All business revenue goes in; all business expenses come out.
- Get a business credit card (or dedicated debit card). Use it only for business purchases.
- Never pay personal expenses from the business account and never pay business expenses from your personal account.
Commingling funds creates three problems: you can’t calculate profit accurately (is that $200 restaurant charge a business meal or a personal dinner?), your tax records become a nightmare to sort out, and if you’re an LLC or corporation, commingling can “pierce the corporate veil” — allowing a court to treat business debts as your personal debts, destroying the liability protection you formed the entity to get.
Choose your bookkeeping method
Cash basis vs. accrual basis
Cash basis: Record revenue when cash is received, expenses when cash is paid. A catering invoice sent in March but paid in April is March revenue under accrual but April revenue under cash.
Accrual basis: Record revenue when earned (regardless of when paid) and expenses when incurred (regardless of when paid).
| Cash basis | Accrual basis | |
|---|---|---|
| Simplicity | Simpler — matches bank account | More complex — requires tracking receivables and payables |
| Accuracy | Can misrepresent timing of profit | More accurately matches revenue to the period earned |
| Tax timing | Can defer income by delaying billing | Income recorded when earned regardless of receipt |
| Required when | Businesses under $25M revenue (IRS threshold) | Businesses over $25M, or any C-Corp with inventory (generally) |
Most small businesses start with cash basis because it’s simpler and their accountant can handle the difference at tax time. If you do catering, wholesale, or anything with invoiced sales (payment comes weeks after service), accrual gives a more honest picture.
Set up a chart of accounts
The chart of accounts is the list of categories into which every transaction is sorted. It maps directly to your financial statements.
Basic chart of accounts for a small food business
Assets (what the business owns)
- 1000 — Checking account
- 1010 — Savings account
- 1100 — Accounts receivable
- 1200 — Inventory
- 1500 — Equipment
- 1510 — Accumulated depreciation (contra-asset)
Liabilities (what the business owes)
- 2000 — Accounts payable
- 2100 — Credit card payable
- 2200 — Sales tax payable
- 2300 — Payroll liabilities (taxes withheld but not yet remitted)
- 2500 — Loan payable
Equity (owner’s stake)
- 3000 — Owner’s equity / capital contributions
- 3100 — Owner’s draws / distributions
- 3900 — Retained earnings
Revenue
- 4000 — Food sales
- 4010 — Beverage sales
- 4020 — Catering revenue
- 4030 — Event revenue
- 4100 — Other income
Cost of goods sold
- 5000 — Food cost
- 5010 — Beverage cost
- 5020 — Packaging and supplies
Operating expenses
- 6000 — Wages and salaries
- 6010 — Payroll taxes
- 6100 — Rent
- 6110 — Utilities
- 6120 — Insurance
- 6200 — Marketing and advertising
- 6300 — Repairs and maintenance
- 6400 — Office and administrative
- 6500 — Professional fees (accounting, legal)
- 6600 — Depreciation
- 6700 — Interest expense
- 6800 — Licenses and permits
- 6900 — Miscellaneous
Most accounting software (QuickBooks, Wave, Xero) comes with a default chart of accounts that you customize. Don’t create more categories than you need — too many accounts makes categorization harder and reports noisier. You can always split a category later if you need more detail.
Recording transactions
Daily
- Record all sales: If your POS integrates with your accounting software, this happens automatically. If not, enter daily sales totals by category (food, beverage, other) from the POS end-of-day report.
- Record cash deposits: When you deposit cash to the bank, record it. Match the deposit amount to the cash portion of POS sales.
- Record expenses paid by card or cash: Every purchase — supplies, ingredients, a $4 roll of tape — gets recorded and categorized. Keep the receipt.
Weekly
- Enter supplier invoices: When a food distributor delivers on credit (pay in 15 or 30 days), enter the invoice as an accounts payable entry. Categorize the items (food cost, beverage cost, supplies).
- Record bill payments: When you pay an invoice, record the payment and close the payable.
- Review uncategorized transactions: Most bank feeds in accounting software pull in transactions automatically but can’t always categorize them. Review and categorize weekly — don’t let them pile up.
Monthly
- Reconcile bank accounts: See below.
- Reconcile credit card statements: Same process as bank reconciliation.
- Review accounts receivable: Who owes you money? How old is the invoice? Follow up on anything over 30 days.
- Review accounts payable: What bills are due? Pay on time to maintain supplier relationships and avoid late fees.
- Generate financial statements: Run your income statement and balance sheet. Compare to your financial projections and to the prior month. Investigate significant variances.
Bank reconciliation
Bank reconciliation verifies that your books match your bank. Do it monthly, without exception.
Process
- Print or download your bank statement for the month.
- Open your accounting software’s reconciliation tool (every major platform has one).
- Enter the statement ending balance.
- Check off each transaction in your books that appears on the statement. Mark deposits and withdrawals.
- Identify discrepancies:
- In your books but not on the statement: Outstanding checks (written but not yet cashed), deposits in transit. These are normal if recent.
- On the statement but not in your books: Bank fees, interest, automatic payments you forgot to record. Add these to your books.
- Different amounts: Errors — either in your records or the bank’s (rarely the bank’s). Find and correct.
- When the reconciled balance matches the statement balance, you’re done.
Why it matters
Reconciliation catches errors (you recorded 530), fraud (an unauthorized charge you didn’t notice), and omissions (a subscription you forgot to cancel). It also forces you to review your finances monthly, which is how you spot problems early.
Managing accounts receivable
Accounts receivable (AR) is money customers owe you. For businesses that invoice (catering, wholesale, event hosting), AR management is critical — you did the work but haven’t been paid yet.
- Invoice promptly: Send the invoice the day the work is done or the product is delivered. Every day of delay is a day further from payment.
- State terms clearly: “Net 15” (due in 15 days) or “Net 30” (due in 30 days). Put the due date on the invoice in bold.
- Follow up systematically: At 7 days past due, send a reminder. At 14 days, call. At 30 days, send a formal notice. At 60 days, assess whether to pursue further or write it off.
- Require deposits for large orders: For catering or events, require 50% up front and 50% on delivery. This reduces AR risk and improves cash flow.
Managing accounts payable
Accounts payable (AP) is money you owe suppliers.
- Track due dates: Enter every invoice with its due date. Most accounting software shows upcoming payables in a dashboard.
- Pay on time: Late payments damage supplier relationships and may trigger late fees or loss of credit terms. Your supplier may stop extending credit if you’re consistently late.
- Don’t pay early (unless there’s a discount): If terms are Net 30 and you pay on day 5, you’ve given up 25 days of cash. That cash could be earning interest or covering other obligations. Exception: some suppliers offer a discount for early payment (e.g., “2/10 Net 30” means 2% discount if paid within 10 days). Calculate whether the discount is worth the early payment.
Tax preparation
Good bookkeeping makes tax preparation straightforward. Bad bookkeeping makes it expensive.
What your accountant needs
- Accurate income statement for the year (revenue by category, expenses by category)
- Balance sheet as of December 31
- All 1099 forms received and issued (for contractors paid $600+ during the year)
- W-2 information (from payroll software) for employees
- Records of major asset purchases (equipment over $2,500)
- Mileage log if you claim vehicle expenses
- Home office documentation if applicable
Quarterly estimated taxes
If you’re a sole proprietor, LLC member, or S-Corp shareholder, you likely owe quarterly estimated tax payments (federal Form 1040-ES, plus state equivalent). These are due January 15, April 15, June 15, and September 15. Underpaying triggers a penalty. Your accountant can calculate the amounts; your bookkeeping provides the data.
Sales tax
If your state has sales tax and your business sells taxable goods, you must collect, track, and remit sales tax. Filing frequency (monthly, quarterly, or annually) depends on your sales volume and state requirements. Your POS should calculate and track sales tax automatically — but you’re responsible for remitting it on time.
Choosing bookkeeping software
| Software | Cost | Best for |
|---|---|---|
| Wave | Free | Sole proprietors and very small businesses; basic features |
| QuickBooks Online | 200/month | Most small businesses; strong ecosystem, payroll integration |
| Xero | 78/month | Businesses with many invoices; clean interface |
| QuickBooks Desktop | One-time purchase | Businesses that prefer offline software |
| Spreadsheet | Free | Not recommended beyond the first month — error-prone, no audit trail |
Pick one and use it consistently. The best software is the one you actually update every week.
Guidance
- Set up a chart of accounts for a business you’re planning. Map each account to the line it would appear on in your financial statements.
- Record one week of a hypothetical business’s transactions: daily sales, two supplier invoices, a utility payment, and payroll. Categorize each one.
- If you already have a business, reconcile your bank account for last month. How many discrepancies did you find?