What Is Bookkeeping and What Does a Bookkeeper Do?

They say accounting is a necessary evil. Businesses, regardless of the size, can benefit from accounting as it helps explain how you make money from selling goods and services. All of this starts with bookkeeping, the first two steps of accounting. Bookkeeping is the process that enables businesses to record daily transactions and track inflows and outflows of resources. The bookkeeper looks at and analyzes information from receipts and other source documents to record them properly as official transactions in the books.

In this article, we discuss small business bookkeeping and why it’s necessary, especially for small businesses. We also tackle important bookkeeping responsibilities that will provide you with insights into how each responsibility affects the financial statements.

Bookkeeping in a Small Business Setup

Small business owners like you should have a bookkeeping system to keep transactions organized, track cash flows, assess business performance, and gather data for tax compliance. Without a proper bookkeeping system in place, it’s hard to know where you’re making or losing money, and it’ll be more challenging to pull data when preparing your tax returns

In setting up bookkeeping for your small business, you need to assess if you can do it yourself (DIY) or have another person do it for you. You also need to choose between single-entry or double-entry bookkeeping but, in most cases, double-entry bookkeeping is more favorable.

DIY Bookkeeping

Setting up a bookkeeping system doesn’t mean that you need a bookkeeper right away. If you’re up to do the task as the owner, DIY bookkeeping by using accounting software programs that are easy to use—even for nonaccountants. But as your business grows, hiring a dedicated bookkeeper or outsourcing one can lift some burden off your shoulders.

Planning to DIY bookkeeping? You can save hundreds of dollars if you DIY bookkeeping, but it takes more time and learning if you don’t have accounting knowledge. But if you’re up for the challenge, our bookkeeping tips and accounting basics guide will help you get started.

With the rising popularity of small business accounting software like QuickBooks Online, bookkeeping has become more straightforward. Your banking transactions can be imported directly from your bank account and, after you assign each transaction to an account, the software does the rest.

It will also record transactions automatically anytime an invoice is created or a bill is paid. Entering transactions is like filling up a form and, once you save it, the accounting software posts it to the accounts affected automatically. Learn more through our review of QuickBooks Online.

Double-entry vs Single-entry Bookkeeping

Simply put, double-entry bookkeeping means that every accounting journal entry should affect at least two accounts. It tracks assets, liabilities, equity, revenues, and expenses, which provides a more comprehensive system of tracking all business transactions. On the other hand, single-entry bookkeeping only tracks revenues and expenses and, more likely than not, this bookkeeping method uses cash-basis accounting.

The advantage of a double-entry bookkeeping system is completeness. By tracking all of the assets and liabilities, you are guaranteed to pick up all the revenue and expenses incurred by the company. A double-entry system does not rely on receipts to record transactions but rather on bank and credit card statements. By performing a reconciliation between your books and bank statements, you are guaranteed to pick up all the activity.

For example, if you pay an electric bill with your credit card, a double-entry system will record both the utility expense and the credit card liability, whereas a single-entry bookkeeping system will record only the utility expense without regard to how it was paid.

The easiest way to distinguish a single-entry system from a double-entry system is that a double-entry system will always be able to print a balance sheet, whereas a single-entry system will not.

We highly recommend all businesses use a double-entry accounting system as they have become easy to use even for nonaccountants. These accounting software products simplify the bookkeeping process by using easy-to-understand interfaces and forms. If you want to learn more about accounting platforms, we evaluated the best small business accounting software that we believe is suitable for DIY business owners.

Bookkeeping Responsibilities

A bookkeeper’s main responsibility is to gather, analyze, and record data into the company’s accounting system:

  1. Gather data from source documents, such as receipts, purchase orders, invoices, and bank statements: These documents help vouch for accounting records. In accounting, if it wasn’t documented, it didn’t happen. Hence, ensure to document every transaction and save them electronically using receipt scanning software.
  2. Analyze data: This involves understanding how the data affects the accounts. The bookkeeper uses their accounting expertise to determine the accounts affected and correct accounting treatment.
  3. Record the data into the accounting system: Modern small business bookkeeping software makes this step easy by allowing the user to fill out common business forms and then the software determines the correct accounting treatment.

Below, we cover the bookkeeper’s responsibilities in greater detail as we look into invoicing, billing, cash tracking, inventory tracking, and fixed asset accounting.

Bookkeepers must issue invoices, track unpaid invoices, and then record customer payments. This process is called accounts receivable (A/R) management. An invoice is a request for payment for products and services that you have provided to customers. It is a document saying that your customers owe you a certain amount and it needs to be paid before the due date. See our invoice examples and best practices for helpful design tips.

As a best practice, always send invoices within 48 hours after completion of the work or attach them to the goods before delivery. Always remember to state the payment term on the face of the invoice so that your customers know the due date, discount period, and discount rate. For more tips and tricks, read our A/R best practices.

Invoice Customers (Accounts Receivable).

When setting payment terms, try to base them on the payment terms of your competitors so that you don’t lose customers. With the use of invoicing software, you can speed up invoicing, send timely payment reminders via email, and grant early payment discounts for prompt payment.

There will be cases when some customers won’t pay on the due date. When this happens, always assume that the customer might’ve forgotten about the payment and reach out to them via call or email. Give them a few days to respond before doing anything. When it becomes evident that the customer is not responding, send collection letters as written requests for immediate payment of overdue amounts.

In accounts payable (A/P) management, bookkeepers receive invoices from vendors, make sure the invoices get approved for payment, and then schedule their payment. You should strive to track all vendor invoices so that you don’t miss a payment, as missing payments will hurt your credibility with suppliers and they may not grant a longer credit term if you keep on paying after the due date. To avoid this, you should immediately enter vendor invoices into your A/P software for easier tracking.

A/P management is also about paying vendor invoices at the right time. Sometimes, it’s best to delay payment until the due date rather than paying earlier, especially if there are no early payment discounts. In some cases, you could forgo the early payment discount if you are tight on cash and would like to utilize the credit period to pay at a later date.

Track & Pay Bills (Accounts Payable).

To top it all off, generate a monthly A/P aging report to monitor all your outstanding bills. Pay the most attention to bills from your most important vendors, especially if they’re approaching 90 days past due. However, we don’t want to have bills that go unpaid for as long as 30 days. If you can’t pay early, strive to pay two to three days before the due date. Read our A/P best practices guide for additional tips.

Recognize that not all vendors are of equal importance to your company. Prioritize vendors that give you generous terms and outstanding service. You can do all of these with the right software. See our roundup of the best A/P software to find a solution that suits your needs.

While bookkeepers generally should not be in charge of handling cash or checks, they are responsible for monitoring cash flow. Bookkeepers should record cash and checks received from customers, verify the amounts are deposited, record cash payments and, finally, reconcile the bank accounts to ensure all activity has been recorded. Managing cash effectively and efficiently lies in your ability to understand how cash moves in and out of your business.

Graphic showing cash management.

Cash Receipts

Cash receipts from customers include both physical cash and checks. In this day and age, it is rare to receive check payments, especially for small purchases. However, businesses that sell luxury or high-value goods like vehicles will almost always see payments in the form of checks. E-wallet payments can also be considered as cash receipts.

You should keep cash and checks in a safe place to protect them from theft or loss. In a small business setup, you can use lock boxes, cash registers, and vaults as a place to store cash. You’ll also want to deposit cash and checks on a daily basis to reduce the risk of theft or loss.

Better yet, encourage customers to pay using credit cards and via e-wallet. You will no longer have to handle physical cash with electronic payments and therefore, reduce the risk of theft or loss of cash.

Cash Payments

When managing cash payments, you―the business owner―should have an active role in reviewing, approving, and signing checks. This practice is only applicable to small businesses with small admin teams. But if you have an established accounting and finance team, you delegate this responsibility to the chief accountant, chief financial officer, or treasurer.

Cash payments are made for large and small purchases. Large purchases must always go through the standard review and approval process. However, small purchases need not go through the process. Instead, establishing a petty cash fund for small and incidental expenses speeds up the reimbursement process for expenses.

As much as possible, pay vendors on time to avoid late payment penalties. If you don’t have enough cash, try utilizing a line of credit to borrow quick cash. The availability of cash also depends on how efficient you are in collecting receivables from customers. Hence, always maximize and prioritize customer collections before borrowing money.


Payroll is another source of cash payments. Every pay period, your business must have enough cash for salaries and wages. As much as possible, you must have a separate payroll account to avoid mixing transactions. We also recommend that you pay employees electronically via bank transfers to avoid handling physical cash. Read our article about payroll accounting for detailed explanations.

Bank Reconciliation

The meat of cash management is bank reconciliation. Due to the timing difference between when a check is written and when it clears the bank, the bank and book balances of cash seldom agree. Bank reconciliation is an important process that a bookkeeper should perform monthly. It is a tool that helps you detect the existence of fraud and accounting errors and reveals the existence of irregularities, such as stale checks and nonsufficient (NSF) checks.

Are you having trouble managing cash flow? Read our cash management tips for small businesses to solve the most common small business problems in managing cash.

Tracking and managing inventory involves keeping enough inventory on hand, tracking its per-unit cost, and accounting for the cost of goods sold (COGS). Inventory tracking is essential for retail and merchandising businesses because inventory is their main source of revenue. In inventory management, we look at purchases and sales.

Tracking and managing inventory.


Once goods have been received, the bookkeeper should record the purchase in the books, which affects the inventory and accounts payable account. To ensure that the goods received pertain to the goods ordered, the bookkeeper should perform a three-way match (purchase request vs purchase order vs receiving report) to validate the purchase.

After this, the bookkeeper will account for all the costs related to the purchase, such as freight, insurance, and taxes. These costs are essential for computing the per-unit cost of inventory.


In the course of selling goods to customers, your business should adopt a cost flow assumption, such as first-in, first-out (FIFO), last-in, first-out (LIFO), or average cost (AVCO) method. These cost flow assumptions determine the ending balance of inventory and the COGS reported in the income statement. To compute COGS, you should know the per-unit cost of inventory based on the calculations of your chosen cost flow assumption.

On the contrary, cost flow assumptions aren’t useful for businesses that sell high-value goods, such as jewelry. They can opt for the specific identification method, which specifically tracks the item’s specifications and cost. This method doesn’t use assumptions or rules but requires a lot of paperwork.

Overall, knowing the correct amount of COGS can help you determine the gross profit and evaluate if it’s enough to cover operating expenses.

If your software doesn’t allow you to enter both the cost and units of inventory purchased, you’ll need to track the COGS manually. We recommend QuickBooks Online if inventory is a major component of your business as it’ll calculate your COGS automatically. Our review of QuickBooks Online can help you decide if it fits the bill.

Fixed asset accounting involves recording the cost of fixed assets, accounting for depreciation, and recording its disposal. However, most of the work here is in depreciation accounting since it is not every day that businesses purchase new fixed assets or sell old ones.

Fixed asset accounting inventory cycle.

In recording fixed asset costs, you must capitalize the purchase price of the fixed asset and all directly attributable costs necessary to bring the fixed asset to its intended use, such as taxes, freight, and insurance. In other words, all charges you had to pay in relation to the purchase of the fixed asset should be included in the fixed asset cost.

Subsequently, you may pay for repairs or maintenance of the fixed asset. Always remember that not all repairs are expensed as incurred. There are repairs that can be capitalized to the fixed asset if it meets certain conditions. Read our guide about when to capitalize or expense fixed asset costs to learn how this works.

Depreciating fixed assets is the second component of fixed asset accounting. It is the allocated cost of the fixed asset over its useful life. Since fixed assets are used every day in the business, their usability and efficiency decrease over time. Hence, depreciation aims to provide a value to how much of the fixed asset’s value decreases as you use it in your business. You should select a depreciation method that matches the fixed asset’s usage pattern.

Fixed assets that are used relatively stable or uniformly can use the straight line method. For example, office desks and chairs often have uniform and single use. This method reports equal depreciation throughout the asset’s useful life.

Fixed assets that are exposed to the elements, used in stressful activities, or highly susceptible to obsolescence will have a rapid decline in value. These assets are more suited to the double-declining balance method as it reports higher depreciation to compensate for the asset’s extreme usage. Another popular declining balance method is the sum-of-the-years depreciation, which also reports higher depreciation in the earlier years than in the later years.

Another method specifically for manufacturing companies is the units of production method. It computes depreciation based on the units produced. This method uses the number of units produced to determine the fixed asset’s usage cost.

All of the depreciation methods discussed above are the traditional methods. Another more important thing you need to consider is modified accelerated cost recovery system (MACRS) depreciation, which may differ from your traditional accounting depreciation. It is for tax purposes only, but you may use it for book depreciation.

Who Should Do Your Small Business Bookkeeping?

Business owners can assign themselves to handle bookkeeping, but this is inefficient since they would not have 100% attention to important business processes. Since bookkeeping requires hours of data entry and management, it’s best to delegate the task to somebody else and focus on essential business processes that add value to the company’s products. There are two options to consider in hiring a dedicated bookkeeper:

  1. Hire an internal bookkeeper: You should consider this if you need a readily available bookkeeper at your disposal and have enough activity to keep them busy. They can look closely at your business’s finances, accounts, and practices as part of the job description. If the bookkeeper is a certified public accountant (CPA), they can also handle your tax compliance and provide management advice in terms of cost management and control. However, hiring a bookkeeper entails salaries and benefits that you need to shoulder. Read our tips on how to find a bookkeeper to help you find the most qualified person for the task.
  2. Outsource bookkeeping to an online or local bookkeeper: If your business isn’t large enough to justify an internal bookkeeper, outsourcing can be a more affordable option as you don’t have to shoulder employment costs like benefits and insurance. The only downside is that an outsourced bookkeeper won’t be readily available in case you need something done. We’ve evaluated the best online bookkeeping services that can help you find a bookkeeper with expertise in catch-up bookkeeping, payroll, and tax filing.

Aside from a bookkeeper, businesses with enough capital can hire a managerial accountant to provide expert advice about the business’s internal operations and overall profitability. Having a managerial accountant isn’t mandatory, but managerial accounting for a small business can help provide additional insights about the business’s operations and activities and how these activities impact the overall growth and profitability of the business.

Bookkeeping Basics

While good accounting software will make bookkeeping easier without an extensive knowledge of bookkeeping, understanding the basics will help—especially when something goes wrong in your software and you need to problem solve.

To get you started learning in your quest for bookkeeping knowledge, here’s a list of commonly used bookkeeping terms:

  • Accounting equation: It’s a fundamental formula in accounting showing that a company’s total assets are the sum of its total liabilities and equity.
  • Accrual vs cash accounting: Accrual basis of accounting recognizes income and expenses in the period in which they earned or incurred. On the contrary, the cash basis of accounting recognizes income and expenses only when cash is received or paid.
  • Profit and loss (P&L) statement: Also known as the income statement, the P&L statement is a report that shows the business’s revenues, expenses, and net income. It’s also the report used to evaluate company performance.
  • Balance sheet: It’s a year-end statement that shows the ending balances of assets, liabilities, and equity for a given period. It’s called a “balance sheet” because the total assets reported must be equal to the total liabilities and equity.
  • Cash flow statement: It’s a financial statement that shows the actual cash inflows and outflows in the operating, investing, and financing activities of the business.
  • Journal entry: It’s the primary mode of recording transactions. A journal entry should be equal to at least one debit and credit entry.
  • Assets: These are resources owned and controlled by the business for the purpose of generating revenues.
  • Liabilities: These are financial, such as A/P, salaries, loans, and nonfinancial, such as warranties, unearned revenues, or obligations that make a company liable to pay cash, deliver goods, or perform services in the future.
  • Owner’s equity: It’s the residual amount of assets in excess of liabilities. Equity is a combination of contributed capital and net income retained in the business.
  • Revenues: These are the total amounts earned as a result of providing goods and services to customers at a marked-up price.
  • Expenses: These are the total amounts incurred that can be directly or indirectly traced to revenue-generating activities. Direct expenses include the costs of goods or services sold while indirect expenses pertain to general and administrative costs in conducting business, such as professional fees, rent, and utility bills.
  • Chart of accounts: It’s a complete listing of all accounts in the general ledger (GL). Each account has a unique numbering system that describes its classification, category, and function.

Bookkeeping vs Accounting

Bookkeeping is only the first two steps in the accounting process. It includes making invoices, entering bills, reconciling bank accounts, receiving and sending payments, and managing customer and vendor accounts.

Meanwhile, accounting is the process of analyzing, recording, summarizing, and reporting the financial information of a business for its owners. It involves analyzing financial statements and other output of the accounting system to help make business decisions.

Frequently Asked Questions (FAQs)

A bookkeeper is only responsible for entering and categorizing data into the accounting system. Meanwhile, an accountant is a professional who can also perform bookkeeping responsibilities but is mostly focused on preparing and analyzing financial statements.

A bookkeeper should be comfortable with crunching numbers and processing data using spreadsheets. They should also have accounting expertise to properly account for all transactions using accounting principles. On top of that, they should have a sharp eye for details and a curious mind to ensure the accuracy of accounting information.

Bookkeeping is not hard to learn since it mostly focuses on data entry and categorization. It does require accounting knowledge, but an accounting degree is not required to be recognized as a bookkeeper.

Bottom Line

Bookkeeping is an important function of a business. Even if you do it yourself, the information you get from bookkeeping can help in assessing the business’s performance, usage of resources, and ability to deliver the best products to customers. With the help of small business accounting software, you can do the bookkeeping yourself or let a professional bookkeeper handle the books while you focus on more important business processes and aspects.

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