How to do

bookkeeping
 Bookkeeping
tasks explained
Bookkeeping includes everything from basic data entry to tax
prep. Let’s look at the core jobs and see how they’re done.

This guide is intended as general information only. Always check with a professional for advice.
 Contents

1 8
Pages 1–4
Pages 22–24
Bookkeeping for
How to do payroll
small businesses

2 9
Pages 5–8 Pages 25–27

How to set up a How to prepare

chart of accounts tax returns

Pages 9–11 Pages 28–31

3 How to do
bookkeeping
data entry
10 Using
bookkeeping
software

Pages 32–36

4 11
Pages 12–13
Using professional
How to do bank
bookkeeping
reconciliation
services

Pages 14–15

5 How to manage
accounts
receivable

6
Pages 16–18

How to manage
accounts payable

Pages 19–21

7 How to create
monthly financial
reports
 Bookkeeping for
small businesses
1
Small businesses often do a lot of their own bookkeeping
at the beginning. As they grow, they offload more and more jobs to
professionals. We look at how you can find a balance.
 Bookkeeping for small businesses

How to handle bookkeeping in your

small business
You may want to do some bookkeeping jobs yourself and get an expert to help with others. Perhaps you’re still feeling
your way with double-entry bookkeeping, or you’re afraid of getting payroll wrong, or you’re not cut out for chasing
invoices. You can outsource any or all of those things.

We’ll look at how businesses commonly break up bookkeeping jobs between themselves and professionals.

Common DIY bookkeeping jobs

Many small businesses look after their own:

Data entry Bank reconciliation

Nowadays, software can pull transaction data from Most business owners take on bank reconciliation.
banks and read photographs of receipts, so this has While still not necessarily a favourite job, apps that
become a much smaller job. allow you to do it on your phone have sped things up.

Accounts receivable Accounts payable

Preparing and sending invoices is straightforward If a business has just a few suppliers and cash in the
if you have good templates and processes. You can bank, paying the bills is simple enough. But professionals
always get professionals to help to chase overdue can really help if cash flow starts to become an issue.
invoices.

! Small business owners may also keep payroll in-house if they have
just a few employees and the capacity and skills to manage it.

2
 Bookkeeping for small businesses

Outsourced bookkeeping jobs

Even business owners who are comfortable with numbers will get outside help with:

Quality control and fix-it jobs Financial reports

Bookkeepers can check your ledger for mistyped Profit and loss reports, balance sheets and the
or misplaced entries, and generally make sure your like determine your taxes and inform big decisions.
books are reconciled. You don’t want to make mistakes here.

Tax returns Payroll

Simple returns may be easy enough for a business Payroll gets hard fast, so it’s a good idea to involve
owner to prepare but it’s good to use a professional an expert at some point and perhaps outsource it
if there’s any complexity. They may also find ways to altogether if staff numbers grow or your payroll is
lower your tax bill. complex.

Understanding what all this

stuff means
A bookkeeper can interpret financial reports for you, and
tell you what they mean for your business. They can help
you troubleshoot problems as well as plan for the future.

3
 Bookkeeping for small businesses

Hiring a bookkeeping service

Bookkeepers often allow you to choose from different service levels depending on your budget. That means you can
start out with basic bookkeeping at a modest cost and add on more advanced services as your business grows.

Learn more about professional bookkeeping services.

What does software do?

For most small businesses, the choice between DIY and outsourcing comes down to time versus money: Which can you
afford to give up? Software lessens the blow on both sides. It automates or streamlines time-intensive tasks like data entry,
bank reconciliation, invoicing and some tax prep jobs. That cuts back labour which either saves you time, or lowers the fees
that you pay to professionals.

Learn more about bookkeeping software.

4
 2
How to set up a
chart of accounts

If you’re stepping up to do the bookkeeping in a new business,

you may have to set up the chart of accounts. Done right, it will
make all your other jobs so much easier.
 How to set up a chart of accounts

What is the chart of accounts?

The chart of accounts sits just under the five main accounts in the general ledger. You can learn more about the main
accounts in our chapter on double-entry bookkeeping.

Figure 1, The five main accounts that make up a general ledger.

A business can create as many sub-accounts as it needs to categorise its transactions. However there are some
standard accounts that are typically used across most businesses.

6
 How to set up a chart of accounts

What is the purpose of a chart of accounts?

A chart of accounts groups together transactions of a certain type. This allows you to produce detailed reports into
specific areas of the business and its finances.

Standard chart of accounts

A standard chart might look like this:

! Liabilities may be organised into current liabilities and non-current liabilities.

Current liabilities are amounts owed in the current year. Non-current liabilities
are amounts owed next year and beyond.

7
 How to set up a chart of accounts

How is a chart of accounts used in

accounting software?
The five core accounts are part of any accounting software and they’re the same for every business. The categories
that sit beneath them in the chart of accounts can be customised to suit your business. For example, you might create
several accounts for sales revenue – one for each region you trade in, or one for each department of your business.

When you enter a transaction into your software, it may ask you where to record the opposing credit or debit. Or you
can teach the software where to make the opposing entry and it will happen automatically.

8
 3
How to do
bookkeeping
data entry

Data entry is the foundation of everything else in bookkeeping

and accounting. You need to enter the right numbers into the right
accounts to truly understand how the business is doing.
 How to do bookkeeping data entry

What is data entry? Why does it matter?

As the name implies, data entry is the process of If you’re not keeping a close eye on money in, money out,
recording financial transactions – money coming into and things like debt, you’ll soon lose sight of how viable
and going out of the business. and profitable your business is.

How to do data entry

For each sale or purchase, you generally want to:

1. Record details such as:

– the value and date of the transaction

– who it was with (though that’s not always necessary for retail sales)

– what was bought or sold

2. Assign that transaction to the right account in your ledger.

Purchases and sales data are often lifted from places like point-of-sale systems,
business bank statements, invoice records, and receipts. You’ll probably need
multiple sources to get all the information you need.

10
 How to do bookkeeping data entry

Modern bookkeeping data entry

Nowadays you can bypass a lot of the manual data entry by linking all your business systems together so that
information flows directly into your books from sales systems, bank accounts, and receipt scanners.

Figure 2, Data flows into accounting software from systems that are used to process sales or purchases.

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 4
How to do bank
reconciliation

Humans aren’t great at punching numbers. In fact, up to 90% of

spreadsheets have keystroke errors in them. Bank reconciliation is a way
to check and do quality control on your books.
 How to do bank reconciliation

What is bank Modern bank

reconciliation? reconciliation
When you compare your record of transactions against Accounting software speeds up bank reconciliation by
your bank’s, you’re doing bank reconciliation. Your pulling transaction data directly from your bank
entries should match up with their records. through a secure online connection. That removes
keystroke errors for a start.

Why does it matter? The software then presents the transactions on a

screen, asking you to verify them and assign each one
Bank reconciliation helps you find and fix data entry to an account. The fields are often pre-filled based on
mistakes or missed transactions. It’s also good for past transactions or exact matches to sales invoices,
detecting wrong payments or fraud. As you run through purchase bills, or bank rules that have been set up for
the transactions, you can also assign them to the speed and consistency. You just have to click to confirm
correct business account (if you haven’t already) and what’s suggested.
flag tax deductible expenses for when you file a return.

How to do bank
reconciliation
Figure 3, Modern software makes bank reconciliation a
Bank reconciliation isn’t complex. Many people open click-to-confirm job.
their business ledger on one screen and a bank
statement for the same period, then cross-reference. You can still manually enter things like expenses that
If you can’t find a match for a transaction, you need to aren’t captured by the business bank account. And you
figure out why and make adjustments so that both can have the software retrieve transaction data from
records mirror each other. point-of-sale and invoicing systems, or receipt scanners.

13
 How to manage
5
accounts receivable

Many businesses issue invoices, which are requests for payment

at some future time. If that’s you, then you have accounts receivable
and the money you’re owed needs to be closely managed.
 How to manage accounts receivable

What is accounts Modern accounts

receivable? receivable
Accounts receivable involves invoicing customers and Invoices can be created quickly on apps and sent with
tracking payment of those invoices. It often requires immediate payment options like credit and debit cards.
you to follow up on overdue payments. Smart software can even check your bank for payments
and keep a watchlist of unpaid invoices for you.

Why does it matter?

You’re not a charity. You need to get paid. Fail to
manage accounts receivable correctly and your
business will rapidly run out of money.

How to manage
accounts receivable
• Decide how long customers will have to pay your
invoices and commit it to writing

• Share and agree on those payment terms before

doing business with anyone new

• Create and send invoices as soon as a sale is

agreed (include the agreed payment terms on
the invoice)

• Watch your bank account for payment and follow Figure 4, What’s involved in managing accounts receivable.
up immediately if they miss the due date

You can get more tips on accounts receivable in our

Invoicing Guide.

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 6
How to manage
accounts payable

Many businesses issue invoices, which are requests for payment

at some future time. If that’s you, then you have accounts receivable
and the money you’re owed needs to be closely managed.
 How to manage accounts payable

What is accounts How to manage

payable? accounts payable
If you have bills, you have accounts payable. It’s the Bills from vendors are first recorded as money owed.
opposite side of accounts receivable and the aim is to They’ll then go through an approval process, to make
pay bills on time, without running your bank balance sure the goods or services were received. Once
too low. approved, payment is scheduled according to the
vendor’s payment terms.

Why does it matter? The longer your payment terms are, the better for your
cash flow. On the other hand, it’s nice to take advantage
You want to maintain good terms with suppliers – if of early payment discounts if they’re on offer. When
you’re slow paying them, they may stop your credit or payment is made, the books are updated to show the
delay deliveries. You also need to think about cash flow. bill isn’t owed anymore.

Your bank balance could take a beating if you paid Remember your balance sheet? It’s also called your
everyone at once. And that would leave you with little statement of financial position. It’s best to ensure the
cash to cover other expenses, unexpected costs, or to amount of money owed to you as accounts receivable is
fund business growth. more than what’s owed by you as accounts payable.

17
 How to manage accounts payable

Modern accounts payable management

You can enter bills into your ledger by typing them in or by emailing them to your accounting software. There are also
clever software apps that read and extract data from bills and automatically send it to your accounting software. The
accounting software creates the book entry and helps you schedule payments, then updates your ledger when the bill
is settled.

Figure 5, What’s involved in managing accounts payable.

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 7
How to create
monthly financial
reports

There are dozens of different financial and accounting reports that you
could create. But there are a few favourites that bookkeepers like to check
every month or two to make sure the business is performing.
 How to create monthly financial reports

What are financial reports?

Figure 6, Reports that may be produced on a monthly basis to keep an eye on the financials.

Why does it matter? Who creates

Taken together, these reports tell you what your financial reports?
business is worth, how profitable it is, and if it has
enough money coming in to keep trading. Monthly reports are traditionally created by a
bookkeeper to help keep tabs on the business.
The results can affect everything from your spending The end-of-year reports tend to be created by an
plans to pricing, forecasts, and customer payment accountant, with a view to minimising tax and setting
terms. And, of course, the year-end versions of these financial strategies for the year ahead.
reports show how much income tax you need to pay.

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 How to create monthly financial reports

How to create financial reports

If you were creating reports manually, here’s what you’d need to do.

Modern monthly financial reporting

Bookkeeping software has made it possible for anyone to generate these reports at the press of a button. However,
you first need to make sure all the numbers have been entered, coded to the correct account, and reconciled.

Some of these reports can be shown on a live dashboard in real time, which updates every day.

The year-end reports are generally prepared by an accountant, who may make some final adjustments to ensure the
business doesn’t pay more tax than required.

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 8
How to do payroll

If all you had to do was pay staff, payroll would be easy. But employers are
responsible for taking out deductions such as tax as well as managing leave
entitlements and other human resource issues. Here are the basics.
 How to do payroll

What is payroll? Why does it matter?

Payroll involves calculating employee pay, deducting Payroll is critical to keeping employees happy, but it’s
things like tax and retirement contributions, then also important to keep the government happy. There are
distributing money to all the right people by the right lots of regulations, and failure to comply can result in fines.
dates. You also have to show all your workings to the
government so they can make sure you’re doing
everything correctly. How to manage payroll
You start by calculating pay for each employee,
according to the terms of their contract. And then you
set about making deductions in the right order.

Figure 7, How employee pay is calculated each payday.

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 How to do payroll

It’s up to you to channel the money to all the right recipients by the agreed dates. Make sure you understand when
the money is due to each party, and transfer it on time.

Learn more about how to manage pay runs.

Modern payroll management

Payroll software can automatically calculate pay and deductions, create payslips and generate reports for the tax
office. If you pay by the hour, you can get employees to clock in and out of shifts on their phone and set up the app so
the data flows into an online timesheet.

Because the tax status of individual employees can change for all sorts of reasons, payroll can become an admin
headache. It’s common for businesses to outsource payroll.

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 9
How to prepare tax
returns

Tax can be tricky for small business owners. There are lots of deadlines to
make, and even more rules to follow. Let’s take a look at what it involves.
 How to prepare tax returns

What is tax filing?

Businesses generally have to file three main types Income tax
of tax return. This is calculated as a proportion of your profits.

GST Employee-related taxes

This is a tax that you may have to add to your prices. You’re expected to withhold income tax from your
The government expects you to collect that cash on employees’ wages and hand it over to the tax office.
their behalf and send it their way at set times.

Why does it matter? How to file taxes

Paying too much tax is like giving money away. Paying too Filing taxes is the easy part. It can generally be done
little can get you in trouble. Getting it right greatly online, which is a huge step up from the days of paper
increases your chance of running a profitable and relatively returns. Preparing those returns is the trickier part.
trouble-free business.

GST returns
These are often handled by a bookkeeper
throughout the year. They’ll keep tabs on what
you’ve collected and make adjustments for the GST
you’ve paid on purchases, then put together a report
for the tax office. Any taxes due are generally paid
when the report is filed.

This is calculated on profits. The higher they are,

the more tax you pay. But there are ways to
legitimately lower your profits in the eyes of the tax
office. This is where things get technical, and the
stakes are high because your returns will be
checked by government tax experts. That’s why
most businesses get an accountant to prepare their
income tax return.

These are calculated and collected from employee

pay at every pay run. You’re required to file reports
with the tax office saying how much you paid your
employees and how much tax you withheld. They
will tell you when to turn over the money to them.

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 How to prepare tax returns

Modern tax filing

Tax time isn’t the ordeal it used to be. Accounting software can do a lot of the grunt work so filing time is easier for
your accountant or bookkeeper. For example, accounting software can estimate taxes owed and quickly produce the
reports needed to finalise a tax return. These efficiencies make tax season less stressful and less expensive.

Figure 8, Data flows into your accounting system which then produces reports showing what tax you owe.

Because accounting software has a record of all the money coming and going
from your business, it can quickly run the maths to estimate your taxes.

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 10
Using bookkeeping
software

Whether you do a lot of your own bookkeeping or outsource it all,

software can help. It automates a lot of the time-consuming tasks,
so you’re not wasting time or budget.
 Using bookkeeping software

What is bookkeeping
software?
Bookkeeping software – also commonly called Many bookkeeping products can also usually handle
accounting software – is designed to record and (or help with) tasks like billing, payroll, accounts
process business transactions. Think of it as a smart payable, tax filing, and financial reporting.
electronic ledger that automates double-entry
bookkeeping.

Online bookkeeping
software vs desktop
Bookkeeping software comes in two forms. There’s the •T
 ransaction data can flow into the ledger from
type you install on your computer (or local network other online locations such as your bank.
server) and the type you use online. As with most
software services, online comes with some built-in • Real-time reporting allows collaboration between
advantages: you, your bookkeeper and your accountant.

• Data lives online, so there’s no need to back it up. Online bookkeeping software also works well with other
business apps. For example you can use third-party
• You can view or work on your books from any point-of-sale software to ring up a sale and the data will
location or device. flow straight through to your online accounts.

• You don’t have to email your ledger to your

bookkeeper — you can both log in.

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 Using bookkeeping software

What to consider before

buying bookkeeping
software
If you’re going to invest in bookkeeping software,
you need to think about the following:

Can you start off slow? How easy is it?

What tasks are a priority for you? If you only need a few Software should make your life easier. See what
functions, then that’s all you should pay for. Make sure reviewers say about the products you’re considering.
there’s some pricing flexibility. You don’t want to trade one problem for another.

Can it grow with you? Do you get customer support?

Will it still be the right system for you in two, five or Is there somewhere to get help with queries? What’s the
10 years? You may eventually want to add inventory, availability of support? Do you have to pay for ongoing
payroll, or ecommerce functions. Check it gives you support on top of the software?
room to grow.
What’s the return on investment (ROI)?
Is it secure and trustworthy?
Work out how many hours it will save you each week,
You’re required to keep some accounting records for month, or year. A smart system should pay for itself
years so make sure your software provider can keep and many times over.
protect your data for the long haul.

Does it fit with other business systems?

Can it work with other business systems such as
point-of-sale, time-sheeting apps, inventory control,
or ecommerce? Can it accept data from your bank,
and receipt scanners? Does your external accountant
or bookkeeper know how to use it?

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 Using bookkeeping software

Bookkeeping software features to expect

Not sure what to look for when shopping for bookkeeping or accounting software? Here’s a checklist
of useful capabilities to keep in mind.

Bank connections Accounts receivable

Your business transactions will stream straight into Get notifications when customers open or pay your
your accounts. invoice, or if they go past the due date.

Online ledger Accounts payable

It’s easier to work with partners and accountants when Enter bills into the system simply by emailing them to
there’s one single version of the books. your software.

Dashboards Tax tools

Get a visual summary of things like money due to come Using smart reporting features can speed up tax prep
in, bills due to go out, and more. and filing.

Mobile notifications Payroll

Get alerts for things like overdue invoices or payments Automatically calculates pay and deductions,
received. and produces payslips.

Quotes Inventory
Send professional quotes with an ‘accept quote’ button Keeps you informed about the volume and value of
to make customers’ lives easier. inventory and cost of goods sold.

Online invoicing and payments Integrates with other systems

Complete and send invoices with online payment Check that it integrates widely with other time-saving
options. financial and business apps.

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 11
Using professional
bookkeeping
services

If you don’t have the time or confidence to take on bookkeeping,

a professional can help. Let’s look at what they do, how they charge,
and how to choose one.
 Using professional bookkeeping services

Why would you hire a professional bookkeeper?

There are many good reasons to hire a professional A bookkeeper can also offer support to business owners
bookkeeper. Here are three of them: who feel like they’re working alone.
• They save you a ton of time.
• They help you understand your business finances.
• They can take a lot of stress out of managing
things like cash flow.

What will a professional bookkeeping service do?

Bookkeepers will ensure all a business’s accounts are • recognise and begin to deal with recurring financial
accurate and up-to-date. And they’ll report on those issues such as poor cash flow or mounting debt.
accounts regularly, so the owners and managers know
• identify the things that drive performance in your
where they stand financially. Plus well-maintained books
business (key performance indicators) and set up
make it easy for accountants to step in and do their
ways to measure and monitor them.
thing at financial year end.
Bookkeepers increasingly use software to take care
A bookkeeping service may also help you:
of recurring tasks. They will help implement these
• fix up neglected accounts and build systems that sorts of technologies, often taking care of setup and
help you from falling behind again training your staff.

33
 Using professional bookkeeping services

What does a bookkeeper cost?

You can find bookkeepers operating at all sorts of price points, and delivering all sorts of results. But there are now
some very interesting pricing models that allow you to hire a consultant without taking a huge financial risk.
Three pricing models:

Flat rate
It’s common for practices to charge a flat rate for a specific
service, or combination of services. The cost stays the same
regardless of the amount of time taken to perform the task.
It eliminates some of the traditional uncertainty around
hourly billing.

Subscription based
Other practices package services and deliver them for a
flat monthly charge. It makes it much simpler to budget
for bookkeeping. The service packages are often tiered,
so you can start with a lower-priced subscription and
move your way up if you like.

Hourly-based billing
Many bookkeepers charge by the hour. It’s hard to
anticipate what sort of value they’ll deliver when you first
start working together, but it can still be a good deal if
you find an efficient operator.

Get prices
You can check out bookkeepers in your region and your industry in the Xero advisor directory.

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 Using professional bookkeeping services

What should you consider when hiring a

bookkeeper?
You need to know your requirements before you can What type of software do you use?
go looking for a bookkeeper. Have a think about the If you’re committed to a certain type of software you’ll
following: want to find a bookkeeper that also uses it.
What type of business do you run?
What type of relationship do you want?
Service businesses and retailers have different book-
Are you looking for an advisor, a trainer, or just a doer?
keeping challenges to a manufacturing business. Look
for someone with relevant experience.

What type of services do you need?

You may decide to keep some tasks in-house for now.
But maybe you also want to have the flexibility to give
them everything if you’re too busy.

How to find a bookkeeper?

Once you know your needs you can begin searching for • Do you want face-to-face interactions or will you
a bookkeeper who’ll be the ideal fit for your business. be happy with remote service? The services can be
You’re going to be sharing your financial data with them delivered remotely but you might want someone to
so you need to be comfortable and trust them. To narrow come in to your business regularly.
down your choices, here are some tips.
• Decide if you want a sole operator, a small
consultancy or a larger company. Do they have
enough personnel to deal with your needs?
• Do they offer general bookkeeping services,
specialise in your type of business or industry,
or offer more advanced services and solutions?

Go to your networks
Talk to your friends, acquaintances and social
networks – they may recommend someone. Your local
business association may also give you some leads.
Check if there is a bookkeepers association or something
similar listed in your area.
If you already have an accountant, talk to them about
who they currently work with. If you can find someone
they’re familiar with, it can make the relationship
between the three of you even stronger, especially if you
all use the same software.

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 Using professional bookkeeping services

Making the final decision

Once you’ve found some likely candidates, ask them some questions:
• To what stage do they take accounts: month-end management reports, trial balance, ready for year end?
• What are their qualifications and experience?
• Are they members of a professional body and do they undertake continuing professional development (CPD)?
• Do they have liability insurance?
• Have they worked with similar businesses to yours or know about your industry?
• How many clients are they handling and can they give you the amount of time and level of assistance you need?

If you’re happy with their answers, then:

• contact their referees and talk to them about their experiences with them
• ask your accountant to meet with them and check they’re up to the job

We can help get you connected with an experienced bookkeeper through the Xero advisor directory.

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xero.com