Bookkeeping 101: A Beginner’s Guide On Where To Start

As a freelancer, I’d take cold-calling prospects over managing my books any day.

‍I’m sure I’m not alone in this. In fact, my gut tells me that these dusty old books complex spreadsheets make your head spin, too.

But annoying as it may be, bookkeeping is a non-negotiable part of your business.

It gives you an in-depth look at your expenses and revenue. More importantly, it gets you on the path to transform your business into a money-making beast.

So… how does one begin?

Great news, this bookkeeping 101 guide will help you get started.

What Are The Basics Of Bookkeeping?

It’s overwhelming trying to master a dull topic like bookkeeping. To make it as painless as possible, I’ve kept it short, sweet, and to the point. Here’s what you need to know when it comes to the fundamentals:

What Is Bookkeeping?

Think of bookkeeping as an accountability buddy — it tracks your daily income and expenses and holds you accountable at managing your money. That way, you’ll always know what’s happening in your business and make the best financial decisions.

Bookkeeping vs Accounting: What’s The Difference?

Many beginners often mix up bookkeeping with accounting, but these two fields couldn’t be more different. The greatest distinction between these two lies in its goal.

Bookkeeping records financial transactions, whereas accounting analyzes the financial health of a business based on those records. Simply put, one’s administrative, the other’s analytical.

Why Bookkeeping Matters?

This we know: Bookkeeping gives us a clear picture of where our money is going to and coming from. But what are the other benefits of maintaining our books? Here are three additional reasons why you should make bookkeeping a habit.‍

1. Catch Tax Deductions

‍Did you know that you can deduct tax from the software you bought for your business? #mindblown Every little counts. Without recording these transactions in your books, you’d forget to reclaim that hard-earned money.

‍2. Get Business Loan

‍Need a business loan to expand your business? Banks tend to look at your income statement, cash flow history, and income tax returns when reviewing your application. You’d want to get on their good side. No bookkeeping, no financial statements, no loan.

‍3. Catch Financial Mistakes

‍Are you paying for unnecessary products or services? Look at your books and start canceling those subscriptions. (Psst… Wish there’s an affordable alternative for your favorite tool?We may have what you’re looking for — browse AppSumo’s lifetime deals here.) Maybe it’s a focus music app that you rarely use, or an expensive web hosting service that you can do without. Bookkeeping alerts you to these financial boo-boos.

Bookkeeping 101: What Are The Basic Accounting Terms?

Don’t let bookkeeping and accounting jargon let you down. Here are ten important terms to help you stay in the know:

• Income statement (a.k.a. profit and loss statement): A report that shows your revenue and expenses in a given time.
• Revenue: Income generated from your business (e.g., sales, interest income).
• Expenses: The money you spend on your business (e.g., software subscriptions, business events).
• Cost of services sold: The cost involved in selling services to clients (e.g., printing brochures, hiring contractors).
• Gross profit: The profit you make after deducting the costs associated with providing services. How to calculate: Gross profit = Revenue - Total cost of services sold
• Net profit: The actual profit you make after deducting your gross profit and expenses. How to calculate: Net profit = Gross profit - Expenses
• Debit: An entry that increases asset or expense accounts (e.g., equipment, building).
• Credit: An entry that increases liability (e.g., salary), revenue, or equity accounts.
• Cash flow statement: A report that shows the amount of cash entering and leaving a business. It’s mostly useful for agencies that incur costs at a different rate than they collect revenue.
• Balance sheet: A statement that reports a business’ assets, liabilities, and shareholders equity in a given time. It’s rarely used by freelancers, sole proprietors, and small agencies.

“The balance sheet is often less useful for agency owners because they tend to be very ‘asset light’. But it can be helpful to hire a bookkeeper to create one if you have a lot of customer deposits and/or debts.”Abir Syed, Digital Marketing Consultant and CPA at UpCounting

What Are The Types Of Bookkeeping Systems?

There are two types of bookkeeping systems: Single-entry and Double-entry. Which methods you use will depend on the stage of your business. Let’s find out which suits you best.

‍Single-entry: Records transactions (e.g., revenue, expenses) in a single ledger. Best for freelancers and sole proprietors in the early stage of business.

A freelance copywriter working from home might have a bookkeeping system that looks like this:

Double-entry: Tracks where money is coming from and going to. Each financial transaction will receive two entries (“debit” on the left and “credit” on the right) to indicate if money is transferred to or from an account.

This is best for bigger agencies with complex accounts, employees, and multiple inventories.

A marketing agency that just bought a printer might have a bookkeeping system that looks like this:

How Do You Manage Bookkeeping?

Now that we’ve got the basics out of the way, here comes the big question: Should you do your bookkeeping yourself, or hire a qualified expert to take it off your plate? Well, it depends. Let’s find out which method works best for your business.

1. DIY Using Spreadsheets

If you just launched your business and you don’t have a lot of transactions, I recommend you to do bookkeeping on spreadsheets.

Now… which financial statement should you prioritize on?

When I put out a request on HARO what the most important financial statement for freelancers and agencies was, the income statement (a.k.a. profit and loss statement) came out on top.

Ellen Griffiths from Blue Swan Bookkeeping says:

Joshua Strawczynski, Managing Director of JMarketing Agency, credits the income statement for the massive growth of his agency. He even shares a story that fellow agency owners will relate and envy:

I was almost ready to call quits. Instead, I sat down and examined the income statement in detail and discovered I could fire most of our clients, downsize the staff, and make a lot more money.Fast forward just six months, we had restructured the agency across the world. We'd broken into new markets and were concentrating on only larger clients. My stress levels were at about 10% of what they had been, and money was flooding the bank account.

The key takeaway: No matter how much you dislike bookkeeping, you should, at the very least, prepare an income statement.

‍This quick tutorial will walk you through how to create a monthly income statement.

Step 1. List your revenue for the month. This can be from new client work or even interest from your business bank account. Next, calculate the total amount and put it under Total Revenue.‍

Step 2. Go through the invoices you’ve paid to your contractors and suppliers for the month. Add them up and list the total amount under Total COSS.

‍Step 3. Calculate Gross Profit — subtract COSS from Total Revenue.

‍Step 4. List your business expenses for the month. Calculate the total amount and put it under Total Expenses.

‍Step 5. Calculate Net Profit — subtract Total Expenses from Gross Profit.

And voila, you just created your first income statement for the month. Give yourself a pat on the back!

2. Use Bookkeeping Software

Here’s the rub.

As your business grows, you will come to realize that spreadsheets aren’t the best option when it comes to maintaining your financials. Just picturing the number of tabs I’ll accumulate in three years fills me with dread.

‍What’s more, you’ll find yourself looking for advanced features like getting an overview of your financials or an estimation of your tax — spreadsheets, awesome as they were in the beginning, can’t do that.

At this stage, you will want to invest in a quality bookkeeping software. Yes... this software would require you to spend more money, but the features easily make up for it.

Take Bench, for instance.

Its simple, elegant layout keeps your business finances crystal clear.

I don’t know about you, but Bench actually makes bookkeeping feel less intimidating.

‍A heads-up: Bench is one of the priciest bookkeeping software in the market as its plan includes an in-house bookkeeper.

Prefer to do it yourself? Here’s a handy list of tools for reference:

• Bonsai. Starts at $19 per month with a 14-day free trial.
• Bench. Starts at $159 per month with a 1-month free trial.
• Wave. Offer a free forever plan with processing charges when you use it for transactions.
• Xero. Starts at $9 per month with a 30-day free trial.
• Freshbooks. Starts at $15 per month with a 30-day free trial.
• Quickbooks. Starts at $15 per month (50% discount if you sign up for three months) with a 30-day free trial.

3. Outsource Bookkeeping

This is the easiest and priciest, as you’ll have a professional bookkeeper with ongoing support.

How do you know it’s time to ditch the DIY route and hire a bookkeeper on retainer? Keep your eyes peeled for these signs:

• You need a bank loan to expand business. To get approval from the bank, you’d need to present all your financials. This tends to be an overwhelming process, so hire a qualified bookkeeper to handle this for you.
• DIY bookkeeping eats up too much of your time. Is bookkeeping affecting your productivity? It may be time to delegate, so you can focus on doing what you love.
• You want to pivot your business. An accountant would require additional financials like the balance sheet and cash flow statement to advise you on the next best course of action. Hire a bookkeeper to prepare all the necessary statements so you can move forward on optimizing your revenue.

Top 3 Bookkeeping Best Practices

Now that you’ve mastered the basics of bookkeeping, let’s move on to the best practices. By the end of this section, you'll learn how to smoothly manage the business side of things without spending a fortune.

1. Keep Personal Finances Separately

You want to keep your business and personal finances apart so you’ll be able to deduct tax. How do you differentiate personal and business expenses? This example might help:

In a nutshell, if it doesn’t help with your business, it’s a personal expense.

2. Save for Tax Season

Are you hitting your income goals? That’s great, but there’s slight bad news. You may still end up owing taxes at the end of the year.

Freelancers who work from home, take note. Your low overhead means your deductions are limited (there’s only so much a laptop and work desk can deduct…), so make sure you set aside enough money for tax season.

Kaleigh Moore, a content writer with over six years of freelancing experience, recommends keeping at least $2,000-$5,000.

3. Track Monthly

Don’t leave things to the last minute… This adage certainly rings true in the tax season.

It’s extremely tedious trying to go through 365 days worth of invoices in your inbox. To avoid this annoying hassle, set a date every month to do your bookkeeping and COMMIT to it.

‍As you record these transactions, make it a habit to assess them. Is there a trend? Which advertising expenses brings you the worst ROI? For example, if you're making a loss in Facebook ads, it may be time to stop spending it and explore other marketing channels.

Another example: While reviewing your income statement from January to February, you discover the majority of your revenue comes from your freelance coaching services.

With this insight, you could hit pause on less profitable services, and focus on freelance coaching to make more money.

Ready To Do Your Bookkeeping?

If you want to know what’s happening in your business and make the right financial decisions, bookkeeping should be a non-negotiable part of your business.

I hope this guide answered your biggest questions and gave you the confidence that will make it easier for you to create your first income statement.

If you’re expanding your business and you require more complex statements, or you’re looking to delegate so you can free up time for more projects, hire a bookkeeper and accountant.

If you just started your own business, DIY with spreadsheets or invest in bookkeeping software like Bench, Freshbooks, or Xero. Block a date in your calendar every month and commit to it.

The insights you get from your bookkeeping will help you reap the rewards of your business for years to come.