How to set up your bookkeeping

business.gov.au says a partnership, company or trust must have a separate bank account. A sole trader doesn't have to, but it is a good idea.

A separate account makes it easier to track and control the business's income and expenses, keeps business and personal finances clearly apart, and gives your accountant the information they need. If you do use one account for both, you must clearly identify every personal payment or expense in your cash book.

business.gov.au describes four kinds of system. Which suits you depends on how many transactions you have, how comfortable you are with software and what you can spend.

• Manual books or ledger accounts: cheaper to set up, less likely to have data corrupted, and simpler if you are not used to accounting software.
• Spreadsheets: a digital option if you are confident with a computer but don't want to pay for an accounting package.
• Accounting software: records transactions, updates the ledgers, produces financial statements and invoices, and makes reports easy to generate.
• Web-based or cloud systems: let you update the books from anywhere and store them off-site automatically, though they carry security risks to manage.

The ATO is moving towards digital records and recommends them where possible. Before you choose software, check what your accountant or business adviser recommends.

Your accounting method decides when a sale or a cost goes into the books.

Accrual accounting gives a truer picture of the business's financial position but takes more work. business.gov.au suggests weighing the size of the business, how complicated its transactions are and whether you have the resources to manage accrual accounting, and talking to a professional if you are not sure.

A chart of accounts is the list of accounts the business uses to classify its transactions, grouped into assets, liabilities, owner's equity, income and expenses. Accounting software comes with a default chart that you can change to suit the business.

Keep it short enough to use consistently. An account for each kind of income and each main kind of expense is usually enough to start, and a new account is worth adding only when you want to see that figure on its own in your reports.

With the account, the system, the method and the chart of accounts decided, a few practical steps remain before the first entry:

1. Pick the date the books start from. The first day of a month keeps the first reconciliation simple.
2. Enter the opening balances as at that date, as set out in the next section.
3. Connect the bank feed, or choose the day each week when statement files will be downloaded and imported.
4. Add your regular customers and suppliers, with the details needed to invoice and pay them.
5. Set up an invoice layout. business.gov.au suggests including a unique invoice number, your contact details, and when and how you want customers to pay.
6. Create one folder for each month, on paper or on screen, so every statement has its documents beside it.
7. Set up backups before the first entry, with a copy kept securely off-site. business.gov.au mentions cloud storage as one option.
8. Decide who does each task, who approves payments, and who holds the main login to the software and the bank.
9. Put the routine further down this page into your calendar, with a set day for each weekly task.

Opening balances record what the business owns and owes on the day the books start, so the first reports begin from its real position rather than from zero. For a brand new business, that may be no more than the money paid into the bank account. A business that has already been trading needs more lines.

Working through the example:

1. The bank balance is the figure on the bank's records at the close of 31 July 2026. It is also where the first reconciliation starts.
2. Unpaid customer invoices and supplier bills are entered one by one, so each can be matched when it is paid. Under cash accounting they stay out of the books until the money moves, so keep them as a list beside the books instead.
3. The tools and equipment go in at the amount your accountant gives you, and the loan at the balance on the lender's statement for 31 July 2026.
4. Owner's equity is the balancing figure: what the business owns less what it owes. Here 16,210.00 less 10,740.00 (the bills and the loan) leaves 5,470.00.
5. Check that debits and credits agree in total before the first transaction goes in.

The ATO says each record should generally show the date, the amount and a description of the transaction, its purpose and, where it matters, the relationship between the parties. Keep the document behind every entry, such as the invoice, receipt or bank statement.

Most records must be kept for 5 years, and a company's financial records for 7. Records must be in English or easy to convert to English, and stored so they can't be changed or damaged.

The ATO's record-keeping tips are to keep accurate records of all cash and electronic transactions, to reconcile cash and EFTPOS sales regularly, daily, weekly or monthly depending on the business, and to check for mistakes when figures don't add up. Where an expense is partly business and partly private, work out and record the business portion.

A simple routine might look like this:

The weekly tasks keep the month small. By the time the statement arrives, most of its lines are already entered and matched, so the reconciliation is a check rather than a catch-up. business.gov.au suggests comparing estimated and actual income and costs regularly, and giving the business a financial health check at least once a year, which is where the quarterly and yearly rows come from.

The bookkeeping cycle is the loop every transaction goes through, from its document to the reports, repeated each period:

1. A document arrives or is created: an invoice, a bill, a receipt or a line on a statement.
2. The transaction is recorded in the right account, with its document kept behind it.
3. Each bank, card and loan account is reconciled against its statement.
4. Reports are produced for the period, such as the profit and loss statement and the balance sheet.
5. The figures are checked, open questions are answered, and the period is closed off before the next one begins.

Setting up the books is really setting up this cycle. The bank account and the system decide where documents come from, the chart of accounts decides where each entry goes, and the routine above decides how often the loop turns. Your accountant's work for the year then starts from the records the cycle produces.

A spreadsheet can carry the books of a business with few transactions, as long as it is set up with the same discipline as software. In general terms:

• Keep one sheet for each bank account as a cash book, with a column each for the date, the description, the document reference, the account the line belongs to, money in, money out and the running balance.
• Keep a separate list of your accounts and pick from it for every line, so the same cost is always named the same way and the totals add up by account.
• Add a monthly summary that totals each income and expense account. As long as transfers between accounts, money borrowed or repaid on a loan, money the owner puts in or takes out, and equipment bought to keep are recorded in other accounts, it gives a simple profit and loss for the month. Loan interest still goes in an expense account.
• If you sell on credit, keep one sheet of unpaid invoices and another of unpaid bills, and clear each line when it is paid.
• At the end of each month, tick each line against the bank statement and check that the running balance agrees, allowing for anything not yet through the bank. That is your bank reconciliation.
• Save a copy of each month once it is reconciled and leave it untouched, because records must be kept so they can't be changed.

Spreadsheets have limits. A formula can be overwritten by accident, nothing stops the same entry going in twice, and there is no bank feed. When the transactions outgrow what you can enter and check in one weekly session, that is the time to look at accounting software.

It depends mostly on how many transactions pass through the business and how often you keep up with them. The main things that change it are:

• the number of transactions each month, in and out
• how many bank accounts, cards and loans have to be reconciled
• whether a bank feed brings transactions in, or every line is keyed by hand
• whether you sell on credit and have invoices to follow up
• whether you hold stock
• how far behind the books are when you start.

Small, regular sessions are easier than a quarter's catch-up, because documents are still to hand and the answers to questions are still fresh. To get a figure for your own business, time the weekly session through the first month. That shows whether the routine fits the time you have, or whether some of it would be better handed over.

• Starting without a start date. Transactions from before and after the books began get mixed together. Pick a date and enter everything from that date on.
• Skipping the opening balances. The first reconciliation can't agree, and the balance sheet starts from nothing. Enter them before anything else.
• Copying a long chart of accounts from another business. Accounts the business never uses clutter every report and invite entries in the wrong place. Remove or hide them before the first entry.
• Running the business through a personal account for now. Every month on a shared account adds personal lines to pick out later, so open the business account first.
• Choosing software before knowing what it must do. List how you invoice, how customers pay and whether you hold stock, then check the software handles each one.
• Leaving backups until later. A lost laptop or a damaged file can take months of entries with it, so set up the backup before the first entry.
• Switching between cash and accrual partway through. Mixing the two means some sales are counted when invoiced and others when paid. Choose one method at the start and keep to it, and talk to your accountant before changing.