Bookkeeping for Freelancers: How to Handle Your Finances | Emily Simcox | Skillshare

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Bookkeeping for Freelancers: How to Handle Your Finances

teacher avatar Emily Simcox, Training Team Lead @ Bench

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

    • 1.



    • 2.

      Why Bookkeeping Matters


    • 3.

      Personal vs Business Expenses


    • 4.

      Single-Entry Bookkeeping


    • 5.

      Cash vs Accrual Accounting


    • 6.

      Hiring vs DIY


    • 7.

      Categorizing Transactions


    • 8.

      Organizing Your Documents


    • 9.

      Final Thoughts


    • 10.

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About This Class

The secret to becoming a successful freelancer? It all starts with bookkeeping — and it’s easier than you think!

You don’t have to be a math wiz or budding accountant to better understand and manage your business’s revenue and expenses. In this easy-to-follow class, Bench’s Emily Simcox demystifies bookkeeping and provides you with the tools you need to take control of your finances. Emily’s straightforward, step-by-step process will help you understand your options and plan your next steps with ease.

You’ll learn how to:

  • Choose the right bookkeeping method for your business
  • Easily categorize and track your expenses
  • Stay organized throughout the year

Whether you’re a freelancer getting ready to invoice your first client or a small business owner looking to organize your business’s spending and expenses, you’ll gain an arsenal of tools to help you streamline your finances and optimize your bookkeeping. After taking this class, you’ll be better positioned to make decisions with confidence, grow your business, and focus on the work that matters.


Bench is North America's largest bookkeeping service for small businesses. We give you a team of bookkeepers to do your books, and intuitive software to monitor your financials. It’s everything you need to do your bookkeeping—without actually having to do your bookkeeping.

Skillshare users receive 20% off your first 6 months of bookkeeping with Bench. CLICK HERE to redeem.

Meet Your Teacher

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Emily Simcox

Training Team Lead @ Bench


I started with Bench as an Accounting Associate three years ago. Since then, I’ve helped hire and educate 300 people about the foundations of bookkeeping. I’m thrilled to teach you about bookkeeping too!

Bench has changed a lot during my time, growing from a tiny startup to America’s largest bookkeeping provider for small businesses. Training is essential at Bench, we are constantly challenged to stay current and update our skill-sets as technology and client needs evolve.

The most rewarding part of my role is helping people learn, watching them develop their skills, and witnessing the confidence that comes with mastering a skill. My nickname in the office is "Goose" because you can often find me walking around with a team of new hires trailing behi... See full profile

Level: Beginner

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1. Introduction: Hi, my name is Emily Simcox, and I'm the Training Team Lead at as small business bookkeeping firm, the largest one in North America. Today's class is about figuring out your small business financials and how does that with bookkeeping when you're new to the business. Bookkeeping is the process of recording all of your financial transactions. It helps you track your expenses. It helps you track your sales revenue, and it also helps you understand to which tax deductions that you can take at the end of each year come tax time. This class is probably most suitable for freelancers, entrepreneurs, e-commerce, just people who are starting out. You don't need to be good at math. You certainly don't need to be a physics wizard or anything like that to get this done. During this class, we're going to talk about personal and business transactions and how to separate the two. We're also going to look at the different methods of bookkeeping including single entry, double entry, cash, and accrual bookkeeping. Then later on in the class, we'll talk about whether or not you should decide to do it yourself or if you should welcome some help. Bookkeeping might be a non-negotiable part of your business, but more than anything, it provides you a freedom. It provides you financial freedom and understanding your business. It gives you insight and it will help you grow your business. If you're going to take anything away from this class, I hope you take away confidence and knowing what steps to take next. I'm really glad that you've decided to take this class with us. Let's jump right in. 2. Why Bookkeeping Matters: In this first session, we're going to talk a little bit more about Why Bookkeeping Matters. First as a reminder, bookkeeping is that process of tracking all of your financial transactions. It is recording them in the book, your books. It's tracking your expenses as they go out, it's tracking your revenue as it comes in, it's tracking the liabilities that you owe, and it's tracking all of your assets as well. It helps you strategize for your business and it also helps you file your taxes at the end of each year. Bookkeeping is a non-negotiable part of running a business. Just remember that you're in good company, everybody has to do it. You've probably already had some exposure to bookkeeping, either through business experience or maybe in a simpler form through personal budgeting. Before we really dive in, I'd love to talk a little bit more about what is like to be a small business in the US. First of all, there are 29 million small businesses in the US according to the Small Business Association from about 2016, that makes up 99.7 percent of all businesses in the US. That's a lot. According to the Small Business Association, over 20 percent of those small businesses are going to fail in their first year. In the next five years of business, 50 percent of those more businesses are going to fail. That is 5.5 million of small businesses that are not going to make it pass their fifth year of business. The primary reasons cited for the failure of these small businesses are mostly financial. In fact, economic uncertainty is one, and the rest of them come down to things like not knowing how your expenses are going to rise, not being able to figure out where your clients are going to come from, and losing sales, and perhaps also not being able to secure loans or capital. Bookkeeping provides the transparency into your business's financial situation and alongside a good business plan, is exactly what you need to set yourself up for success. So, let's jump into it. Why does bookkeeping really matter? First of all, bookkeeping matters for stress management. Doing bookkeeping consistently and doing it right the first time absolutely helps reduce the stress that you will experience at the end of the year come tax time. There is nothing worse than holding yourself up in a room with the door closed and the lights low at the end of the year during tax time trying to figure out where are those receipts been that you spent? Trying to figure out where your sales revenue came from? What that verbal agreement you made with your buddy was for some loan that you took out? Bookkeeping, helps you plan ahead, consistently, organized, and you'll be good to go at tax time. No stress, no mess. The next reason that bookkeeping is so important is for tax time in tax filing. Having organized financials means that you should have no trouble at the end of the year organizing which deductions you can take. As a small business owner, you have a few extra options especially if you use a home office, personal vehicle or pay your own health insurance. Being organized also helps with any of those one-off expenses that you might have missed throughout the year. Big purchases especially. The last reason that an organized set of financials is really useful to you at the end of the year, is to respond to any changes in IRS laws or tax reform. It's important to be able to respond to these changes because oftentimes, they can really impact your business, and especially small businesses. The next reason that bookkeeping matters so much, is because it can help you secure a loan, funding or capital. Whenever you go into a bank to ask for a small business loan, they're going to want to see your financials. Organized financials can really make you a stronger candidate for securing a loan. When you're looking at your big banks, they tend to only approve about one-quarter of small business loan applications. When you're looking at your smaller banks, they tend to look a lot more at character as well as the financial statements, and so have a tendency to approve up to 50 percent of those small business loans. Having organized financials and having good clean financial reports really strengthens your position. When you're talking to a loan provider, they're probably looking for two things. They are going to scrutinize your books for one, your ability to repay your loans, and two, the ability for the bank to recoup their loan if you were to go bankrupt. Next, bookkeeping matters because it helps you catch financial mistakes. To be human is to make mistakes, and it's not inconceivable that someone might make a mistake in your books. It is much better for you to catch your mistakes when you're able to fix them rather than leaving them too late and not being able to fix them at all. Sometimes, that's a 24-hour turnaround, sometimes that's within the same year. If you're like most small businesses, it's probably your own money that you've invested, better not to take any chances that all. Financial mistakes can be any number of things, all of which can be caught if you're doing your bookkeeping regularly. Firstly, bank errors, perhaps you were charged a fee that you shouldn't have been and you can fix it if you get in touch with the bank. Secondly, payroll errors perhaps someone put in some overtime that wasn't actually due and you've been overcharged for payroll expenses. Next, it might even be in the form of invoicing errors. Perhaps a zero was put in the wrong place or a decimal was put in the wrong place making your $100 bill $1000 bill. You might be able to catch subscriptions that you had completely forgotten about and thought you'd canceled six months ago. Subscriptions are sneaky. It's better to be able to review your transactions month over month and make sure that you're paying what you're expected to be paying. Lastly, fraud insecurity. You're probably already familiar with credit card fraud and card skimming and perhaps having your card used online. But in worse circumstances, it can also be wired transfer fraud which is really, really hard to reverse as soon as you're past the 24-hour turnaround. Being super on top of your bookkeeping and organizing your transactions will help you avoid this and fix it if it does happen. Good bookkeeping gives you really good clear business insight. It'll help you optimize your spending and expenses. Perhaps you can learn that there's a place that you're spending too much and can move it to a different kind of expense to optimize your business. Next, it will help you understand your cashflow. If you're like a number of small businesses, you probably have a couple of really big months in a year and expenses throughout the entire year. Knowing how much you can pay and when you can pay it is really important to the success of your business. Lastly, you'll be able to look at your books year over year, see your growth, see your success, and plan accordingly. Nothing more exciting than seeing your business grow. In this class, we're going to talk about the bookkeeping process and the choices you have for your business. We're also going to talk about the steps you can take next to get the ball rolling. 3. Personal vs Business Expenses: One of the very first things you can do to support your business is to diligently separate your personal transactions, from your business transactions. First and foremost, it gives you clean financial data, is going to give you an idea of your business financial health not your personal financial health. Secondly, is to protect you from liability. Lastly, is to prepare you for company growth. It's not uncommon to want to change your business structure as your company grows and expands, having good personal business separation helps facilitate those changes. Before, we get going, I'm going to explain a little bit more about business structure to add some context to the rest of this information. If you're new to business, chances are you've set yourself up as a sole prop, Single member LLC, partnership or a multi-member LLC sole props are actually structuralists is kind of like you started selling some necklaces to your friends and family and bam, now you're a sole prop, you're in business. The nice thing about that is that you have complete ownership of your own business decisions. The tricky thing about that though is that there's no legal distinction between business and personal, which means if there's ever a legal dispute then your personal assets and your business assets are entirely the same thing and all up for grabs. While there is no legal reason to have your personal and business transaction separated, it is best practice to do it and it will also help you scale if you ever choose to change your business structure. An LLC has limited liability, what this means is that your business could lose the value of the capital that you invested, this is where personal and business transactions become really important. Because you might have to demonstrate the business capital and personal capital. If you haven't made a good distinction between personal and business, how can you demonstrate what was exclusively invested into your business and what is really personal still? The long story short is that in the worst-case circumstance you might lose more than the capital you invested, because you were unable to demonstrate what was exclusively for business use. Just a quick note about C corps, if you have started your business as a C corporation then having any personal business crossover is a big no-no and actually can have tax and legal ramifications. So, let's go over a few examples of what some personal transactions are and what some business transactions are. Because to be honest, for a lot of businesses that can be quite tricky, and it also depends quite a lot on what kind of business you run and what kind of expenses you need to make, and I'm not going to give you advice here that is tax advice or financial advice but I am going to give you a couple of guiding principles to help you understand when you're spending something personally and when you're spending something for the business. My first example is, is your expense ordinary and necessary,? An example of necessary perhaps is a flight to another city for a meeting, ordinary though is flying in economy not in first-class. The next example is the straight face test and this is my favorite example because it really helps put the power in your hands deciding what a business transaction is and which one's a personal transaction. The theory is that if you can sit down in a room with an IRS agent, and they can say to you, ''Is this expense for business?'' And you can answer yes with a straight face, then it's probably for business. An example of this perhaps is taking your brother out for dinner because you've decided to go into business together. You could absolutely reasonably say that you were at a dinner with your brother to discuss business needs and it wasn't a family dinner. The last thing you should really familiarize yourself, are the kind of personal expenses that can also be business expenses. Again, most of you are probably sole props or single-member LLCs, you probably work from home off the side of your desk. Did you know that you can make home office deductions, you can make personal vehicle deductions, you can also actually account for your family working for you? It's also good to understand which kind of expenses are just not deductible at all. Things like some clothing, things like the interest expense of personal credit cards even if you've used them for business, and also things like client entertainment which are not the same as business meals. So, practically speaking how do you do this? If you're a sole prop there's actually no legal distinction between you and your business, which means that if you wanted to, you could actually just open up a second checking account and try and keep all of your expenses and all of your sales revenue coming in and out of that one account. Which means that you can keep it separate from your personal stuff. If you're any other kind of business structure then opening a business checking account is the way to go. Oftentimes, this is different from a personal account because it's opened in the business name and banking institutions will also offer different options depending on your business's needs. Those needs might include checking accounts, merchant accounts, and options for lending. So, loans, lines of credits, credit cards. When you're looking for a business bank account you actually have a couple of choices that you can make. The first thing you should do though is figure out what you need your bank account to do for you, and then you should start shopping around for the best deals. Most accounts have different options depending on business needs, it might be high transaction volume, it might be high wire transfer volume, it might be minimum value in your account and it might also be minimum daily deposits. Think about how you're going to be running your business and what applies most to you. When you go into the bank to open a business account, you can expect that they'll ask you for a couple of things. At a minimum, they're going to ask you for your social security number, two pieces of ID, your EIN and any partnership or business agreements that you've already established. They might also want to see any licenses that you have, to be honest it's probably a good idea to give the banker call before going in. This is one of those topics that is going to change for each business because each business is unique. If you want to do more reading about what you can expect opening a business banking account, you can take a look at ventures online syllabus and blog. There's a couple of great articles there that were published this year and provide much more information. 4. Single-Entry Bookkeeping: In this session, we're going to start out by talking about single-entry versus double-entry bookkeeping, which is the first choice you have to make when thinking about how you're going to do your own bookkeeping. You can keep track of your books using either single-entry bookkeeping or double entry bookkeeping. Let's start by talking about single entry bookkeeping. Single-entry bookkeeping, is a simplified version of bookkeeping, often is done in Excel or literally a book. Transactions are recorded just one time, as expenses leave your cash book or as revenues enter your cash book. For the most part, this is a simplified version because only one half of the transaction is recorded. As a result, it's an incomplete method of bookkeeping, and if you're ever looking for financing or to share your documents and your financial reports with any kind of financial institution, they often won't accept it because of that incompleteness. Single-entry bookkeeping is usually most suitable for very small businesses who have very simple needs. Think sole prop, single-member LLCs. So remember what I said about single-entry being entered just one time, as revenue enters or as expenses leave. What this also means is that if you have more complex bookkeeping needs like credit cards, or loans, or capital, or shareholders, or payroll, chances are these exclude you from using single-entry bookkeeping. However, if you are a sole prop or a single member LLC with very simple bookkeeping needs, it's a really good place to start to get a hang of what bookkeeping feels like. So let's take a look at a few examples of what single-entry bookkeeping looks like. Here, I'm going to be using Bench's free income statement generator. It allows you to enter your transactions, it allows you also to see an income statement at the end. I'm going to be using Bench's income statement generator, but you don't have to. There are also options to use, Excel or like I said earlier, quite literally a book. Single-entry does not rely on having good technology to do it. If you're good at balancing your cheque book, chances are you'll be really good at doing single-entry bookkeeping. The conditions of single-entry bookkeeping are just this; You need to enter the date, you need to enter a description, you need to enter the amount, and then you need to assign a category. We're going to talk about categories later, but let me show you an example now of how to enter that transaction. Today, I'm going to have lunch with Disco Share Crew. I enter my date, I enter my description, I enter an amount and then last but not least, I enter the category, and that's it. That's recording a single-entry transaction. Like I said, it doesn't always come with an income statement to go with it. Oftentimes, you'll have to be organizing this for yourself which does make single-entry bookkeeping a little bit more time consuming when you want the insight to go with the recording of transactions. In this case, I can show you what the income statement will look like as well. Here you can see that I have my sales revenue, my expenses, and everything recorded underneath in an organized fashion. Recording your transactions in this manner throughout the year consistently is all you need to be doing in order to be prepared for tax time. At the end of each year, you can use this information that you've tracked the entire year to organize yourself when it comes to filing taxes. 5. Cash vs Accrual Accounting: In this session, we're going to talk about cash versus accrual bookkeeping, which is the second choice you have when deciding which system you're going to use. The choices you have here are, whether or not to do cash bookkeeping or accrual bookkeeping and for the vast majority of businesses, it is actually a choice. There are very few limitations on whether or not you can do cash or accrual bookkeeping, particularly for small businesses. Having said that, let's talk about a couple of the considerations you should be aware of. Firstly, if you've decided to do single entry bookkeeping, then you're going to be doing cash bookkeeping by default. Easy peasy, no problems there. The second consideration to keep in mind, is that for some businesses, you actually need to file on the accrual basis according to the IRS. For the most part, these are businesses that have really high sales revenue or really high inventory. By high, I mean you're probably looking in the millions on both accounts. If you think this might apply to you and your business, I would actually check in with your CPA or a financial adviser, because this tends to change a way, but between years. The third consideration, is that once you choose a bookkeeping method, you need to stick to it. In order to change your bookkeeping method, you actually need to apply to the IRS and have permission to change to a different method. Last but not least, if you are going to use the cash method of bookkeeping, then you do have a little bit more choice than that. You can use something called the hybrid method, which uses cash bookkeeping techniques, but also some accrual techniques. Let's start with talking about cash bookkeeping. Cash bookkeeping can be most simply defined as recording transactions when the money moves hands. So, that's for the most part, recording transactions as they enter or leave your bank account. As an example, you might remember going back to single entry bookkeeping. We recorded each of those transactions as the money changed hands and we only recorded one side of that transaction, just the expense or just the revenue. For cash basis bookkeeping, we can also use the single entry system or we can use the double entry system. The easiest way to get a real sense of cash basis bookkeeping, is to actually go and take a look at your bank statements. Your bank statements should match almost everything that is happening in your cash basis bookkeeping. If you're just starting out on your new business, chances are, you'll be most comfortable with cash basis bookkeeping. The clarity and cash flow, can be really helpful when you're really tied up with how much money you have and how you're earning it and when you need to be able to spend it. Another perk of doing the cash method first, is that it's much easier to move from cash to a accrual, then from accrual back to cash. Accrual accounting on the other hand, is a system where you record transactions when they are earned or spent, not necessarily when the money changes hands. Reconciling your books on the accrual basis, means that you should be able to match your expected outgoing payments and your expected incoming payments and understand the difference between your bank account and your expectations. Most familiar to you with accrual accounting, will be things like accounts payable and accounts receivable. You'll also come across things like prepaid expenses, like paying your rent for a year in advance, or perhaps, like sales revenue not yet earned like a lawyers retainer, or perhaps, even your inventory where you have inventory on site, but you haven't sold it yet. So, to recap, let's talk about the pros and cons of cash and accrual. The pros of cash. It's really easy to proofread, you should be able to reconcile your cash books against a bank statement. Second of all, your cash books should also give you a really clear sense of cash flow. You know exactly how much is in your bank account and you know exactly how much you're spending on the out. The last thing about doing your books on a cash basis, is that the income is taxed as it hits your bank account. This means that, it's all getting taxed in the same year that you literally earn the money. A con with using the cash method, is that it can actually be a little bit misleading as to which months are your most profitable. You might have built hundreds and hundreds in one month, but might not have been paid until six months later, totally belying when your busiest season was. A pro of accrual bookkeeping, is that you have a much clearer sense of your expenses and revenues over a particular period in time. You get to see when you invoice something or when you spend something, rather than when it enters or leaves your bank account. Another pro to keep in mind, is that you are actually taxed on your income as you earn it, not when it enters your bank account. You might have noticed that, this is a pro for cash bookkeeping and is also a pro for accrual bookkeeping. That's because really, the way you want to pay your taxes depends on how you operate your business, perhaps, you're already super profitable and you are able to pay your taxes as you earn them. I would prefer to do that, because it changes your tax here. Perhaps, you're in cash basis and you'd rather do it when you have the money in the bank, because you know you'll be able to afford it. A con of accrual bookkeeping, is that cash flow may not be easily understood. You might have invoiced to really large job, but that money might not be in your bank account yet, totally misleading you on how much you actually have available to you to spend. If you're working with accrual bookkeeping and don't have a clear understanding of your cash flow, you may appear highly profitable, but have pennies in the bank. If you're new to business and you're in your first couple of years, chances are, you'll be more than happy with the cash method of bookkeeping. Having said that, if you're working with inventory or large amounts of money, then it would be worth investigating accrual bookkeeping too. Certainly, if it's something that you anticipate needing to use in the future. Up next, we're going to talk a little bit about doing it by yourself or when to hire someone to help you out and when to make that decision. 6. Hiring vs DIY: In this session, we're going to talk a little bit about the decisions you'll have to make when deciding if you're going to do it yourself or hire someone to help you out with your bookkeeping. If you're going to do DIY books, there's a couple of things you should consider. One, it's the absolute most attractive option for people who are on a budget. Essentially, all you need is Excel or some accounting software to set yourself up, and then you're ready to go. The second thing you should remember though, and you might have already recognized as from the class so far, is that it does take some time to learn how to do it. It can be pretty complex, very time-consuming if you're not sure what you're doing, and the output of your books is only as good as the person doing them. If you are going to do a DIY, the best thing you can do for yourself is get educated. Reach out for more resources, you can do this through your public library, the Small Business Association, the Better Business Bureau, your small banks, things like that. You could also even take a look at the Venture Blog where we have small business guides for young entrepreneurs. Things that you'll need to be able to recognize are how to categorize your expenses, how to understand your balance sheet and income statement, and also how to do single entry or double entry bookkeeping. You're also going to want to understand how to use the tool that you're using either Excel and figuring out how to use the macros or how to use the sum features and things like that or perhaps even a learning curve for the accounting software that you're going to use. There's no hard and fast rule for when you should move from a DIY solution to hiring someone, but there are certainly a couple of places and a business's life where it makes more sense to. The first time you might recognize it's time to bring in some help is that your CPA is always correcting your books come tax time. A CPA doing your bookkeeping is really expensive. The next thing to consider is that 39 percent of you are already working 60-plus hours a week. It typically takes a small business owner about a day a month to do the bookkeeping when you're doing it yourself. Is it really worth your time? The last thing to consider is that maybe your bookkeeping is never up to date, this results in things like struggling to estimate your quarterly taxes, perhaps you're struggling to keep up with your bills, perhaps you've got really unpredictable cash flow. All of those can contribute to being one of those 20 percent of businesses that fail in your first year. The last thing to consider when moving from a DIY method to hire help method is that you're growing. As your bookkeeping needs become more and more complex, it might be out of your range to do it yourself and you really do need some help. Now, that we've talked about cash versus accrual and single entry versus double entry, let's take a look at some ways that you can do it yourself. If you're going to use single entry bookkeeping, then lucky for you, Bench's free income statement generator is already there for you to use. Grab a copy of that, sit down with your bank statements, engineer transactions and see where it gets you. If you've decided that you're going to use the double entry accounting system, cash or accrual, it doesn't matter, then you have a couple of options here as well. The first one is to invest in an accounting software. First of all, you're going to have to learn how to use the software, but a good software should make entering transactions really straightforward for you and it should be able to produce all of your financial reports in the same software. If it doesn't, make sure it's what you actually need and maybe keep looking. A couple of options here are Quickbooks, Xero, and Wave. To use an accounting software you do need to be bookkeeping savvy, so you'll need to understand the whole debits and credits thing and you'll need to understand how your income statement and balance sheet work, but you shouldn't have to be math savvy. The other option you have is to use Excel. Excel is like the trickier version, but if you're really onto it is probably exactly what you need to get what you need done. For most small businesses, this is definitely not what you need because it's way more complicated than it's worth. You need to be using Excel, you need to know how to use the formulas, you probably also have to figure out the macros and things like that and be a little bit math savvy to be able to proofread your own work. When you're looking at hiring someone, you also have a couple of things to consider. If you are going to hire someone, you can expect to pay for the service, this is usually on a monthly or hourly charge, naturally not every business can afford that. But, if you do hire someone, you can trust the output, you can trust that at tax time your books are correct and throughout the year your books will be up to date. Just a quick note about keeping inside your own books here. Having someone do your books is great, but don't take it as an opportunity to step away from your financials. Remember, your books are only as good as the information you provide the person doing them. It's way better if you act collaboratively with your bookkeeper and stay in touch, use it as an opportunity to learn about your financials and they can give you good information too. Hiring someone doesn't have to be an all or nothing approach, some businesses will hire a bookkeeper to set them up the right way first time and make sure they're aligning with best practices, others might just hire a part time bookkeeper every quarter to make sure they're caught up in accurate. When you are hiring someone, it's also important to consider the seniority of the bookkeeper you're working with. If you're a new business and your bookkeeping needs a pretty simple, it might be that you only need a junior bookkeeper, they tend to charge hourly and you can expect to pay between $20 and maybe $80 an hour depending. If you've got really complex needs you might be paying much more than that for a senior bookkeeper and someone who knows how to handle your books. As soon as your bookkeeper is spending more than three days a week doing your bookkeeping, it might be worth investigating an in-house bookkeeper. Bookkeepers don't require a certification, but there are certainly some things that you can look out for to make sure that you are getting the best bookkeeper for your business. The first thing to look out for is experience and reviews. Do you need a highly experienced bookkeeper? Or will you make do with a junior bookkeeper? Do they have positive testimonials from previous clients? The second thing that will probably be really important to you is responsiveness. Are you able to get in touch with them when you need to? The third thing to consider is location. Do you need to be in the same place at the same time as them to get things done? Or is it okay to work remotely? Next, are they up to date on changes, you'll need to trust that your bookkeeper has the most up to date information and is remaining compliant. Lastly, is the accounting software they use easy to understand, accessible and easy to share. The accounting industry is one of those industries that has been a little bit slow to respond to the digital age. Some CPAs and accountants are still using desktop software that's hard to share, some of them are in fact, God forbid, using pen and paper still. If what you need, is a very responsive up to date, easy to download, find it yourself kind of solution, perhaps consider that when you're looking for your bookkeeper This is actually what Bench does best, we specialize in bookkeeping for small businesses. Hook you up with a bookkeeper you can work with from anywhere and make it simple to start and maintain your bookkeeping. Up next, we'll be talking about how to organize your documents effectively. 7. Categorizing Transactions: In this session, we're going to talk about categorizing your transactions accurately. First of all, let's talk about something called the chart of accounts. The chart of accounts is a list of ledgers that are commonly used in bookkeeping. This includes things like assets, liabilities, equity, revenue, and expenses. These five types of accounts are used to make up your balance sheet and your income statement. Your balance sheet is a snapshot of now or a certain point in time. Three of these belong on your balance sheet. Assets are what you have, liabilities are what you owe, and equity is what you've invested in your own company. Your income statement is a collection of expenses and revenues throughout an entire year or over a certain period of time. Under the revenues heading, you're probably very familiar with sales revenue, but you might be less familiar with cost of goods sold or cost of service, which are contra revenue accounts. The way to describe contra accounts are expenses that are necessary to be made in order to even make a sale. So, for instance, let's imagine that you are a omelet maker. In order to even sell an omelet, you have to buy eggs. Your eggs are cost of goods sold. Last but not least are your expenses. Expenses are broken out into different ledgers to help you organize and keep track of different kinds of expenses. Because at the end of the year, you can take different rates of deduction on them. Some that you might already be really familiar with are things like marketing, rent expense, office supplies, business meals, entertainment, travel, all sorts of things. These can be super unique to your business, but it's also good to keep it simple. There are two primary reasons that we track our expenses and revenue separately. Firstly, is to help track your profit and loss. Essentially, this is your income statement. At the end of the year, you should be able to tell how much you made or how much you lost throughout the year. Secondly, is to help you understand what your expenses have been throughout the year so you can understand the tax deductions that you can take. Lastly, categorizing your transactions really well gives you greater insight into how you're spending your money as a business. It might be that you can identify that you're spending a lot in one area where you could be better utilizing it somewhere else. The best piece of advice that I have for you is to keep track of your expenses and make sure that at the end of the year, you can easily translate those ledgers and the expenses in them into one of the categories on the schedule C form 1040, which is the tax filing form for sole props. This just ensures that you are not over complicating your books throughout the year and making it harder for yourself at tax time. Let's walk through a few examples of how you can do that using Schedule C now. Schedule C asks you to separate your income from your expenses. Firstly, it's going to ask you for your gross income, that's your sales revenue. It's all of your sales revenue. Is also going to ask you to categorize your returns and allowances separately, your cost of goods sold, and any other income. Other income is code word for income you earned that wasn't from your primary sales. Secondly, you should be able to translate your expenses from your income statement to the schedule C list of expenses. Ensuring that your expenses line up with the expenses on Form 1040 help you keep things really simple. Here's a couple of examples of the ones that do line up with 10 form 40. Business meals and entertainment, gas and auto for your truck and car expenses, your insurance payments and your interests paid, your professional services, your rent, lease, and supplies, and your travel and transportation. You'll notice over here on this document that I've actually outlined a couple more in orange instead of yellow. That's because these have multiple different ways that you can deduct them, and are opportunities that you can have different ledgers to track each expense. For instance, here you have rent or lease, that could mean your house or your office, but it could also be a vehicle that you lease. Another example is travel meals and entertainment. Travels meals and entertainment have different rates of deduction depending on who you had that meal with and where you traveled. So, tracking them separately can be really handy. If it's your first time filing taxes, I would highly recommend that you loop in your CPA the first time you do it. That way, you'll learn how to make adjustments for the deductions you can take, and how to make sure you fill in the forms correctly the first time. Another thing that you can do by correctly categorizing your transactions is actually track some expenses that you can split between personal and business. Being a small business owner, chances are you're using your home office or maybe you're using a personal vehicle or perhaps you're paying your own health insurances and other things like that. There are certain deductions that you can take when the expense feels personal, but a certain portion of it can be deducted as a business expense. Up next, we'll be using some of this information to talk about single entry bookkeeping and double entry bookkeeping. 8. Organizing Your Documents: Your bookkeeping is essentially a copy or a transcript of all of your supporting documents. Organizing and keeping these documents is required by the IRS. These kinds of documents include things like receipts, bank statements, all of your tax returns, loan documents, bills to be paid, invoices you've paid, and all sorts of other things. Literally, anything that you've written down in the process of doing your bookkeeping. Keeping them organized and in a place that you can easily access them makes it much easier to proofread later in the year or if you ever need to revisit them for any auditing purposes. Your bookkeeping and your document management don't have to happen in the same place. Things like inventory tracking, invoice tracking, or payroll tracking can actually happen in an entirely different software or an entirely different place to your bookkeeping. Having said that, your bookkeeping will need to use the information provided by those services. So, having them available to use and keeping them in a place that you can find them means that your bookkeeping will be accurate and if you are ever called upon to provide those documents, you'll be able to. There's a couple of important rules when you think about what kind of documents you should be keeping. One, receipts. The best case scenario is that you keep receipts for literally everything. There's a smaller rule in there that anything over $75 needs to have a receipt to prove the expense. Again, best practice is just to keep everything The second condition is how long you should keep your documents for. To be honest, there's about six or seven different conditions about how and when you should get rid of your documents or keep them. So, to be safe, let's just assume that if you're filing your taxes every year, you should be able to keep your documents for seven to eight years. The next choice you have is how to store your documents. One of the options you have is to store your documents digitally. A couple of options that you have for softwares are things like Evernote, or Expensify, or Shoeboxed. An alternative is to literally keep all of your documents in a shoebox under your bed. Whichever option you do choose, there's a couple of things that you can do to stay more organized and efficient in your document keeping. Let's first talk about the different kinds of documents you have to keep. First of all, you've probably got receipts. Both business expenses that you've spent yourself or perhaps that your employees have spent on behalf of the business. For your business expense receipts, always make sure that you can read the name, the date, and the amount, and perhaps, sometimes, it's useful to even write on the back of the receipt any additional information that was relevant to that particular expense. A good example would be writing down the names of the people you had lunch with at a business lunch. When you're doing digital records, you should be able to do this in the software that you're using. For anything that's particularly ambiguous, like one off big expenses, it might be worth adding some additional context into why that was spent and for what purpose. When you're organizing these documents, consider organizing them chronologically. You do your books day-by-day, you should probably organize your receipts day-by-day to. It makes proofreading and cross-checking much more straightforward. In a digital system, you'll be able to do this by tagging your receipts with the date on which you made them. In a physical version of this, it might be worth having your shoebox full of receipts and separating them out using envelopes for month over month. Lastly, if it was an employee who made the expense for the business, consider writing the employee's name on their receipt. That way, if you do need more information, you know who to follow up with. Instead of tracking these chronologically, you're more likely going to want to track them per employee. This is going to help you understand how much to reimburse your employee for and when to do it. If you're using a paper version, consider writing on the back of their receipt the date that you actually reimburse your employee for it. Next, you have client reimbursable receipts. Those are the ones where you've spent something on behalf of a client and you expect your client to pay you back. Chances are, your client is going to want to see the expenses that you paid and ensure that they are being billed correctly. Writing on the back of their receipt or adding a digital tag for what the expense was and why you purchased it on behalf of the client will go along way to proving the expense was legitimate. Then, lastly, you have supporting documentation. Supporting documentation are things like your loan agreements, your partner agreements, invoices, billing, and things like that which support expenses and support business behavior, but perhaps, don't directly apply to a singular expense. Chances are, you won't need these documents in the day-to-day running of your business. The level of organization that you choose to use will depend on how you want to use those documents on an ongoing basis. However, a highly organized set of books is going to organize the receipts separately from their statements, separately from their tax returns, separately from their billable receipts. The key to documentation is being able to produce it when you're asked to, either by the IRS or perhaps, by your CPA at the end of each year. You don't need receipts to file your taxes, but you do need to be able to produce them should you ever be audited. 9. Final Thoughts: Thank you so much for joining me in this class, a crash course on bookkeeping and how to get the ball rolling for your small business financials. I hope that you've learned enough about the options available to you to make the best decision and an informed decision about next steps when it comes to bookkeeping and your small business. Bookkeeping is not an exciting topic nor a sexy one, but you are in very good company with every other business owner ever who has also had to do bookkeeping. My parting words to you. If you take nothing else away from this class, take this away. Make bookkeeping a habit. Consistency is key. It is much much harder to catch up your books than it is to stay on top of them in the first place. Consider doing your books at least monthly. If you let it fall any further behind, as falling into that ketchup phase and it's hard to keep up to date. If you have very high transaction volume or you're a bigger business, consider doing it weekly while the information is fresh in your mind. Consider doing it by setting time in your calendar or doing it in a place where you feel like you're being rewarded. You can actually do your bookkeeping in a cafe, with a latte, and a chocolate biscuit. The next thing that's really important is to stay in the loop. Remember that the information you provide your bookkeeper is what they use to build out your financial information for you. Stay in the loop, give them what they need, and stay in touch. Where possible, make life easier for yourself. Automate the things that you can and get help when you need it to set you up right the first time. Good luck everybody. I'm sure you've got this. 10. Explore More Classes on Skillshare: