Module 02 of 09
Bookkeeping basics
Bookkeeping is how you track what comes in, what goes out, and what's left. You don't need an accounting degree — you need a consistent habit and the right categories. This module shows you what to track, how to track it, and how to make sense of the numbers.
What bookkeeping actually is
Bookkeeping is the ongoing process of recording your business's financial transactions — every dollar you receive and every dollar you spend. It's not the same as accounting (which involves analysis and tax filing), but it feeds everything accounting does. Good books mean accurate tax returns, clear cash flow visibility, and the ability to answer "how is the business actually doing?" without guessing.
At the most basic level, bookkeeping tracks two things: income (money coming in) and expenses (money going out). The difference between them, over a period of time, tells you whether the business is profitable.
THE MOST COMMON MISTAKE
Not doing it at all. Most small business owners who run into tax-time chaos, missed deductions, or cash flow surprises got there because they stopped tracking — or never started. 20 minutes a week is enough to stay current. A month of ignored receipts takes an afternoon to reconstruct.
In this Module
What bookkeeping is
The four things you track
Cash vs. accrual
Expense categories
Reconciliation
Real examples
Related Modules
Small business taxes
Cash flow
Setting up finances
The four things you track
Every business needs these four things in place from day one. They're not optional for any business type — retail, service, market vendor, or trades.
Income
Every payment received. Sales, service fees, tips, marketplace payouts. Record the date, amount, and source.
Assets
Things the business owns. Cash in the bank, equipment, inventory, vehicles. Relevant for growth planning and taxes.
Expenses
Every dollar spent on the business. Supplies, software, fuel, advertising, contractor pay. Categorize each one.
Liabilities
Money the business owes. Loans, unpaid invoices from suppliers, credit card balances.
For most small businesses starting out, tracking income and expenses accurately is the essential foundation. Assets and liabilities become more important as the business grows or takes on debt.
Cash vs. accrual — choose a method
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Cash basis bookkeeping records income when you actually receive the money, and expenses when you actually pay them. You invoiced a customer in March but they paid in April — you record the income in April.
This is the right method for most small businesses. It's simpler, it matches your bank balance, and it reflects the cash reality of your business accurately. The IRS allows it for businesses under $27 million in annual revenue.
Who this fits
Retail shops, market vendors, service businesses, trades businesses, and most sole proprietors. If you're paid at the time of sale or within a few weeks, cash basis is the right choice.
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Accrual basis records income when it's earned (when the work is done or the invoice is sent) and expenses when they're incurred (when you receive the bill), regardless of when money actually changes hands. You completed a job in March and invoiced the customer — you record the income in March even if they pay in April.
Accrual gives a more accurate picture of your financial position over time, but it requires tracking accounts receivable and accounts payable — which adds complexity. Most bookkeeping software handles this automatically.
Who this fits
Businesses that regularly invoice clients and wait weeks or months for payment, businesses with significant inventory, or businesses that want to track profitability by project rather than by cash flow. If your accountant recommends accrual, follow their advice.
Common expense categories
Organizing expenses into consistent categories lets you see where your money is going and claim the right deductions. These categories cover most small businesses:
Cost of goods sold
Materials, inventory, wholesale products you resell
Software & subscriptions
POS systems, design tools, scheduling apps
Rent & utilities
Storefront or market booth rent, electricity
Vehicle & travel
Business mileage, fuel, parking, tolls
Contractor labor
Payments to subcontractors or 1099 workers
Advertising & marketing
Social ads, print, signage, website costs
Professional services
Accountant, attorney, bookkeeper fees
Meals (50%)
Business-related meals — only 50% deductible
Supplies & tools
Office supplies, small tools under $2,500
Insurance
Business insurance premiums
The reconciliation habit
Reconciliation means comparing your bookkeeping records against your actual bank statement at the end of each month to confirm they match. Every transaction in your books should appear in the bank statement, and vice versa.
This step catches errors (a charge you forgot to record), fraud (a charge you didn't authorize), and timing differences (a check you wrote that hasn't cleared yet). It takes 10–30 minutes monthly for most small businesses and is the single most important bookkeeping habit.
MONTHLY RYTHM
First week of the month: download last month's bank statement. Match each transaction to your records. Investigate anything that doesn't match. File the reconciled statement. Done.
Real-world examples
A furniture market vendor tracks every sale in a Square POS that auto-exports to a spreadsheet. At month end she downloads her bank statement, matches every deposit, and exports her expense receipts from a folder on her phone. Her books are current in under an hour per month.
A landscaping business owner uses Wave (free software) and photographs every receipt with his phone the same day it happens. His accountant can access the books remotely and prepares his quarterly tax estimates directly from them — no end-of-year scramble.
A bakery owner tried to keep a manual spreadsheet and fell two months behind. She switched to QuickBooks Simple Start, connected her business bank account, and now spends 15 minutes each Friday categorizing the week's auto-imported transactions. Her books have been current for two years.