Bookkeeping basics for a small business

business.gov.au's definition of bookkeeping is short: the process of recording the financial transactions of a business. In practice, it is three things done over and over: recording each transaction, keeping the paperwork that proves it, and checking that your records agree with the bank and other outside records.

business.gov.au notes that keeping certain records is a legal requirement, and that which records you need depends partly on your business structure: sole trader, partnership, company or trust. It points to the ATO's record keeping evaluation tool, which helps you work out what records your business needs and how well you are keeping them.

Every sale, purchase, payment, refund and bank fee belongs in the books. The ATO's first record-keeping tip is to keep accurate records of all cash and electronic transactions.

Cash needs the most care, because a small cash purchase leaves no trace in your bank account. Keep the receipt, or write down the details at the time.

Timing matters too. The ATO says to keep accurate and complete records as transactions occur, and to make record keeping part of your daily business activities. Entries made the same day, or on a set day each week, are far easier to get right than a pile of receipts sorted months later.

The ATO lists the minimum information a record generally needs. It includes:

• the date of the transaction
• the amount
• a description, such as a sale, a purchase or rent
• what the transaction was for
• the relationship between the parties, where that is relevant.

Every figure in your books should trace back to a document: a sales invoice, a supplier's bill, a receipt or a bank statement. A filing system works only if you keep it up, so make it simple:

• Keep one place for incoming paperwork, such as a tray or an email folder, so nothing is lost before it is entered.
• Once a document is entered in the books, file it by month, or by month and type, such as sales, purchases and bank.
• Name digital files the same way each time, for example with the date, the supplier and the amount, so you can search for them. The ATO asks that stored records be identifiable, labelled or indexed.
• If you scan or photograph paper receipts, check each image is clear and complete. business.gov.au says the ATO accepts electronic images of paper records if they are a true and clear reproduction of the original and follow record-keeping rules.
• Back up digital records and, if you can, keep a copy in secure off-site storage, such as cloud storage.

Whichever way you file, business.gov.au says records must be stored in a way that prevents any change or damage to them.

Some costs are partly business and partly private, such as a phone used for both work and family calls. The ATO says that where an expense relates to both, you need clear documents showing the business portion, and its tips say to work out and record that portion accurately.

business.gov.au defines drawings as personal expenses paid for from a business account. Record them apart from business expenses, and ask your accountant how they are treated for your business structure. business.gov.au says a partnership, company or trust must have a separate business bank account, and that for a sole trader one is not required but is a good idea.

Recording is only half the job. Regular checks catch the missing receipt, the entry made twice and the payment put in the wrong account before they build up.

• Reconcile each bank account by matching every line on the statement to an entry in your books.
• Reconcile cash and EFTPOS sales. The ATO suggests making sure the payments you have recorded match external records, then entering the amounts in your main accounting system, daily, weekly or monthly depending on the business.
• Review who owes you money and who you owe. The ATO says accurate records help you keep track of both.
• Look into anything that doesn't add up, as the ATO's tips suggest. A difference you can't explain usually points to an entry that is missing or wrong.

How often you do each task depends on how many transactions you have. A business that takes cash every day needs a daily habit, while one that sends a few invoices a month may manage with a weekly session.

The ATO says that as your business changes or grows, you may need to review what records you keep. Taking on employees or contractors, holding stock or selling on credit each brings records you may not have needed before, such as employee and contractor records, records of stock, or a list of debtors.

If you move to a different bookkeeping system, such as from spreadsheets to accounting software, keep the old records. The ATO says you need to be able to reconstruct your original data if your record-keeping system changes, and to keep information about how your system works.