Bookkeeping Guide

Bookkeeping Guide

Want to learn about bookkeeping for your small business? Browse our guides to find information on bookkeeping for freelancers, when to hire a bookkeeper and more.

Chapter 1: Bookkeeping for freelancers

Working as a freelancer can be a juggling act. You have to be able to manage lots of different tasks – including basic bookkeeping. Here are some tips to help you keep control of your daily accounts.

Value the importance of bookkeeping in your business    

One of the most common concerns of freelancers is getting paid. As a freelancer, you may have many different clients. It can be hard to keep track of who owes you money, when, and how much.

That’s why it’s important for freelancers to understand basic bookkeeping and use bookkeeping tools. You’ll be able to keep track of outstanding invoices so that you can collect payment. You won’t miss out when billing your clients. And you’ll be able to see the state of your cash flow quickly.

You probably already have an accountant. If you don’t, you should hire one now. But an accountant might only review your finances once a year. Bookkeeping gives you a more immediate view, especially when you make updates every day. If you find you run out of time to maintain your accounts regularly, then investing in a bookkeeper will free you to spend more time doing what you love. Here’s how to make bookkeeping work for you.

Create an organised system    

The organisation is vital for good bookkeeping. Without it, you’ll struggle to manage your finances. So start as you mean to go on:

  • Begin right away as soon as you start freelancing. Don’t put it off, or you’ll find it hard to remember every past transaction.
  • Talk to a bookkeeper and seek their advice. Ask them which software they use. It makes life much easier if you both use online accounting software. That way, you can share data easily and securely, from anywhere.
  • Use a recognised accounting system. Good accounting software guides you through standard bookkeeping steps. All you have to do is fill in the details and, in the beginning, have it checked over by bookkeeping or accounting professional.
  • Set aside time to do the books every week – if you fall behind, you may struggle to catch up. Hiring the right bookkeeper can make all the difference to your business.

Keep records of key parts of your business    

Parts of your business you should record include:

  • your hours spent working, or the jobs completed, for each client
  • the cost per hour or job for each client
  • your business expenses (and keep all receipts)
  • all payments you make, including bank transfers
  • all payments you receive from clients.

Record all of this in your accounting software. Modern accounting software can use this information to:

  • generate accurate invoices
  • produce cash flow reports
  • keep track of money owed to you (accounts receivable)
  • keep track of the money you owe to others (accounts payable)
  • identify your best clients – and your worst.

Accurate bookkeeping has other benefits. For example, it means you are prepared if the government ever audits you. It can also act as proof of income when you’re applying for a home loan or other credit.

Offset your expenses against tax    

If you’re a freelancer, you can offset many of your expenses against tax. Rules vary from one country to another, but usually, you can offset things like:

  • travel expenses, though not to and from a regular workplace
  • office rent, including a room in your home
  • power and utility bills
  • capital expenditure on items such as a computer, printer and phone
  • internet and phone bills
  • vehicle maintenance if you use your car for business purposes
  • client entertainment expenses, though some restrictions apply.

So make sure you record all of these details when doing your bookkeeping.

In most cases, you can only offset a proportion of your expenses. For example, you could offset a room’s rental cost in your house, but not the whole house. And you could claim fuel costs, but only for the distance driven on business.

Talk to your bookkeeper to find out what you can offset, and beware of pitfalls. Let’s say you bought your home with a loan. You might be able to offset part of the interest payments against tax. But if you do, you may find you have to pay that amount back when you sell your home.

Get paid faster    

One of the big benefits of having up-to-date accounts is getting paid faster. Collecting payment is a real issue for many freelancers, but bookkeeping can help.

  • Invoice promptly and regularly
    It only takes a few minutes to create and send invoices via email. Since you’ve already input the necessary information, there’s no need to do it all again. Just click and send.
  • Identify late payers at a glance. With up-to-date accounts, you can quickly identify late payers. An ageing summary report will show you who owes what, and how overdue each invoice is. You’ll soon discover which clients are problematic.
  • Set reminders – for your clients as well as for yourself
    You can set reminders that notify you when an invoice is approaching its due date. With modern accounting software, reminders can also be sent to the client – automatically.
  • Chase – politely but firmly
    If you’ve completed your work to the agreed standard, your client is legally obliged to pay you. So don’t be embarrassed about chasing payment. After all, it’s your money.

Put money aside for your tax bill.    

Unlike a regular employee, your tax isn’t deducted from your pay packet. That means you need to plan to put money aside for your tax bill and you need discipline. It’s important to get into the habit, so you don’t get caught out at tax time.

Some freelancers set up separate bank accounts just for tax payments. Using reports from their accounting software, they can estimate what their tax bill will be. They put aside the appropriate percentage of their income each month. Then they know they’ll have enough money to pay the bill.

You have to take this seriously. The government is unlikely to be lenient if you fail to pay your tax bill. So put the money aside and record it when doing your bookkeeping.

Make bookkeeping work for you.    

If you’re a freelancer, bookkeeping is a vital part of your business. It helps you plan your tax payments, keep track of expenses, and manage late payers. But above all, it gives you a clear view of the state of your business.

This is vital since it’s easy to lose sight of the big picture when you’re constantly working for multiple clients. With good bookkeeping, you’ll have a clear idea of cash flow, income, expenses and business growth. Without it, you’ll be struggling along in the dark.

So take control of your bookkeeping. With the right software, it’ll give you invaluable insights into your freelancing business.

Chapter 2: When you should hire a bookkeeper

Bookkeepers can help your business with day-to-day accounts – recording sales and other transactions. But they can do a lot more too. So when does it make sense to hire a bookkeeper?

The tasks of a bookkeeper    

A bookkeeper is someone who records the financial transactions of your business. They also:

  • keep track of sales, purchases, payments and receipts
  • work on the design maintenance and review of internal business processes
  • organise, collate and record financial data on a day-to-day basis and store this information in general ledgers
  • record your business’s financial information in a standard way so that accountants can also access it.

In this guide, we’ll look at what a bookkeeper can do for you, and when you might hire one for your business.

Why do you need one?    

If you started your own business, it’s likely that you’re passionate about running it and concentrating on the tasks you love doing. But if you’re like most business owners, you’re not so interested in recording all the details of every financial transaction.

For example, imagine you’re a hair salon business owner. You might have:

  • a simple business model
  • a high transaction rate with lots of customers
  • many sales a day – perhaps dozens or more
  • supplier invoices for hair products
  • sales recorded through cash registers or other POS (point of sale) systems
  • staff wages to record and pay.

That’s a lot of information to track and record. And bookkeeping might not be something you enjoy or have time to understand.

Without proper bookkeeping, it would be easy for transactions to go unrecorded, left to pile up until the end of a financial period. Mistakes could be made, and essential details could be lost or forgotten.

That’s where bookkeepers come in. They can lighten the load on the business. They can take away the day-to-day recording of receipts, invoices and other transactions.

What do they actually do?    

Bookkeepers are trained and use the same financial recording methods as accountants. They do this so that your accountant can quickly and easily process your financial information. They will:

  1. Take all your receipts, invoices and other transaction details.
  2. Record the information in accounting software using proper accounting methods.
  3. Work with you to make sense of the numbers, for example assigning costs to specific clients.

But there’s more to bookkeeping than recording daily transactions. People who do this work are usually highly skilled at using accounting software. They will be able to advise you on:

  • add-on solutions to streamline your business workflow, such as POS tools
  • payroll services to simplify the way you pay your staff
  • bookkeeping rescue work, tidying up mistakes made by inexperienced staff
  • training for small business using accounting software.

They can also offer day-to-day support for small business owners. A good bookkeeper is your partner in keeping things running smoothly within your business.

How are they different from accountants?    

Bookkeeping is a vital service. But how does it differ from accounting? The two services are often compared, but actually, they are complementary:

  • Bookkeepers do the day-to-day work and bring the accounts up to a high standard of detail and accuracy. They can also advise you on issues that might affect you in the near future, such as cash flow problems or late invoice payment.
  • Accountants will look at the accounts that have been created, often on a quarterly basis. They will make any minor adjustments required. They will use the information in the accounts to file tax returns and other official reports. They will also provide high-level business advisory services.

For your business to run smoothly, ideally you need both people. You’d hire a bookkeeper to look after the day-to-day work. And you’d hire an accountant to handle official reporting and high-level business advice.

A detailed view of your business    

Bookkeepers and accountants work with the same financial information from your business. They can share that information using cloud-based accounting software. That means they can access your financials securely online, from anywhere. It lets them share reports about the financial status of your business.

So both of them can both give you advice about where your business is right now – and where it’s heading.

It’s often the case that your bookkeeper will be the constant accounting contact for your business. They’ll be best placed to answer questions about where the money is coming from, and where it’s going.

When should I hire a bookkeeper?    

The sooner, the better. If you haven’t already hired one, you should do it soon. Ideally, you’d hire one soon after starting your business.

Otherwise, you could end up with several months’ worth of receipts and invoices to be processed. That will take time and may be difficult to do because you’ll have forgotten which client to bill for a particular expense.

For example, you may ask yourself, “What was this train ticket for? Who did I visit on 13 July?” A bookkeeper would know which client you visited and why. They would then account for the travel expense in the correct way.

Finding the right person    

Whoever you hire needs to be trusted with the everyday details of your business finances. So you should be very careful when you hire a bookkeeper.

There are many bookkeeping businesses, so you’ll have plenty of choices. You could contact one directly or ask if your business partners or clients have any recommendations.

If you have an accountant, ask them too. It’s best if you can find someone who uses the same accounting software as your accountant. That way, they can share accounts information easily.

Ideally, the accounting software should be cloud-based, which means it’s accessed online. Then all of you will be able to share access to the financial data for your business. You can do it remotely and securely – from anywhere.

Once you’ve narrowed down a short-list of bookkeepers, you can:

  • check their past work record
  • contact their referees and talk to them
  • ask your accountant to have a meeting with your proposed bookkeeper.

Trusting the financial details of your business with anyone is a big step. So do your research carefully before you hire a bookkeeper.

Get the best out of your business.    

Bookkeepers offer a vital business service. They save you time by handling all the daily financial work and allowing you to concentrate on your business’s running. The real-time information they collect can help them offer you new insight into your business.

That’s important when you’re trying to differentiate your business from your competitors. Real-time information is also vital if you want to make sound business decisions.

As we’ve covered in this guide, a bookkeeper is highly valuable to a small business and can provide more services than just financial recording and compliance. Often a bookkeeper will specialise in a particular industry, so it pays to ask them about this to add even more value. Ensure that you get the best out of your business by hiring a bookkeeper to help you along your journey.

Ready to make that decision? We can get you connected with an experienced bookkeeper through our Xero advisor directory.

Chapter 3: Bookkeeping to run your business

Accountants help keep your finances in order, but bookkeepers play an essential role too. So what’s the difference between a bookkeeper and an accountant? And how can a bookkeeper help you run your business?

Bookkeepers and accountants are not the same.    

If you’re a small business owner, you’ll be familiar with juggling several tasks at once. As well as keeping things running, you need to generate income, keep your customers happy and look after financial information. Tracking the financials can be a chore, though, and one of the biggest questions you might have is who you get to help with your accounts. Do you need an accountant, a bookkeeper or both? Let’s demystify things.

Accountants and bookkeepers have various jobs and responsibilities. An accountant’s primary focus is:

  • the preparation and lodgment of statutory returns
  • advising on legal entity structures
  • giving general business and financial advice.

Accountants are usually members of a statutory association. Qualified and registered accountants might call themselves CPAs (Certified Public Accountants), CAs (Chartered Accountants) or other titles, depending on the country they’re working in.

Bookkeepers can manage lots of various responsibilities within a small business. But the main focus is the organisation, recording and reporting financial transactions as part of a small business’s operational life. In more recent times, some bookkeepers have extended their range of duties to include:

  • training clients to use accounting software
  • implementation of document management and inventory control processes to create efficiencies within the business
  • implementation of POS (point of sale) systems that capture the daily transactions in a retail environment.
  • Develop, implement, maintain and review internal business processes.

You will often find that a bookkeeper has an area of specialisation and it’s a great idea to ask them more about this when you are looking at hiring them for services.

What do bookkeepers do?    

Here are some of the tasks of bookkeeper that will help to keep your business running smoothly:

  • Keeping track of daily transactions, A bookkeeper can handle the recording of day-to-day bank transactions. If the accounting software you use has daily automatic bank feeds, this is an excellent tool for your bookkeeper to use. When your bank statement lines are fed into your accounting software, it’s much easier to keep an eye on cash flow, and it also saves on data entry time.
  • Sending out invoices and managing the accounts receivable ledger
    Preparing invoices and sending them to clients is usually the bookkeeper’s responsibility. Managing the accounts receivable ledger – and chasing late payment – is also likely to be done by a bookkeeper.
  • Handling the accounts payable ledger
    Up to a specific dollar amount, it’s usually bookkeepers who will make payments on behalf of the business. This includes payment of supplier invoices, expenses and petty cash.
  • Keeping an eye on cash flow
    One of the most essential tasks for a bookkeeper is making sure the company doesn’t run out of day-to-day money. They can do this by watching the balance of revenues to expenses. Then they can take action or offer advice if it looks like the company needs more ready cash.
  • Preparing the books for the accountant
    It’s the bookkeeper’s job to ensure that the accounts are valid and up to date when the accountant needs them. This allows the accountant to use their skills and knowledge to make business recommendations, report to the board and complete company tax returns.


In summary, it’s the bookkeeper who does the day-to-day work so that the accountant can concentrate on strategic financial operations. So bookkeepers play an important role – without them, accountants can’t do their jobs.

Bookkeepers and accountants working together    

A well-run business is likely to make use of both accountants and bookkeepers. The division of labour is essential. Here’s how it might work:

  • Company formation
    As noted in our guide about hiring an accountant, you should use an accountant to help you set up your business. Accountants can help you create your business plan and set up a company structure that best suits your business.
  • Accounting systems
    An accountant or bookkeeper can also help you choose the right accounting software and set it up to work well for you and your employees – especially your bookkeeper.
  • Bookkeeping work: After completing the above tasks and keeping a bookkeeper, you can focus on keeping your company’s accounts up to date daily.
  • Accounts reconciliation
    The accountant and bookkeeper will get together regularly, perhaps once a month. They might meet in person, or they might work remotely, using cloud accounting software with shared access. Either way, the accountant will look at the figures in the accounts, and the bookkeeper will explain any numbers and decisions that aren’t clear.
  • Reporting
    The accountant will report to the business owner and the board members. The accountant will report on the accounts’ state so that the board and owner have a clear picture of the business’s financial health. A bookkeeper can also provide reporting, but in a less formal way on a more regular basis with what is called management accounts. The business owner often uses these reports as checkpoints to see where the business is usually going every week.
  • Strategy
    Armed with up-to-date figures, the accountant will make recommendations to the business owner and the board. The accountant will offer advice about any planned expansion and investment. They will also advise whether the business can afford to move into new markets and other financial strategies.
  • Legal compliance
    The accountant will use the information prepared by the bookkeeper to write the company reports. These reports will include information about income and expenses, net profit, assets, liabilities and tax. The accountant will also file the company tax return forms and arrange for tax payments to be made.

This is a sensible way of sharing the workload. The accountant does the work they have been trained to do, while the bookkeeper provides the necessary financial data.

Five ways that a bookkeeper can help your business    

If your business is small, you might be the bookkeeper – at least until you can afford to hire someone to do the work for you. Once your business reaches a certain size, it makes sense to have someone do the bookkeeping for you. Here are five ways that a bookkeeper can help:

  1. Concentrate on your business strategy
    Bookkeeping involves tracking the fine detail and recording it in accounts software. Working with these numbers can sometimes make it hard to see the big picture. So it’s often better to have someone else do this work.
  2. Reduce your accounting costs
    Are you using an accountant to manage your daily transactions and run your monthly payroll? If so, you could save a lot of money by having a bookkeeper do this work instead.
  3. Be an extra pair of eyes, watching your cash flow. If you want to avoid running out of money, suddenly, you need to keep an eye on your cash flow. We’ve discussed this in our guide to managing cash flow. It helps to have someone else checking the numbers here, making sure your cash keeps flowing. A bookkeeper can do that.
  4. Get quick access to essential figures. Having an accountant manage your monthly business reconciliation and reporting is essential. But what if you need some financial information part-way through the month? Bookkeepers can give you the information you need quickly, without you having to wait for your accountant to respond.
  5. Keep control of your financial data. Few small businesses can afford to hire their own accountant, so most accountants work on a part-time basis for their clients. If they use quality online accounting software to manage your financials, it makes collaboration much easier. Quality software means that your bookkeeper can work on the same set of data as the accountant. They can both work together to give you the best outcome and help your business grow.

Bookkeeping helps your business run smoothly.    

Bookkeeping is a vital job in any business. This is true whether you do the work yourself or hire someone to do it for you.

Without proper bookkeeping, your accounts will not be accurate. That means your accountant won’t get a clear picture of your company’s finances, and you can’t make strategic business decisions.

Just as importantly, your business has a legal obligation to record its accounts accurately, and file company reports to the tax office. So it pays to get this right.

Bookkeeping will help you do all of this and provide you with useful insights into your businesses’ financial health.

Get connected with an experienced bookkeeper from the Xero advisor directory.

Chapter 4: Small business bookkeeping for beginners

Bookkeeping lets you know how your small business is doing, and it helps keep you onside with the tax office. So what does it involve and how do you make it less boring? We break down bookkeeping for beginners.

What is bookkeeping? 

Bookkeeping involves recording and classifying all the financial transactions in your business. It’s keeping track of what your business spends and what your business receives.

These tasks used to be managed using books and ledgers, hence the name ‘bookkeeping’. Originally the transactions would be recorded in daybooks, cashbooks, or journals and then transferred to a ledger.

Bookkeeping software has now pretty much replaced the need for physical books.

Why do small businesses need bookkeeping?    

An accurate, well-kept set of books is a great start to running a successful business. Here’s why:

  • You can check that you’re making more money than you’re spending.
  • You’ll have reliable financial information for planning and budgeting decisions.
  • You can see if a cash crunch is coming and take steps to avoid it by watching when you need to pay suppliers and expecting payment from customers.
  • You’re more likely to find incorrect payments (or even fraud) that might cost you money.
  • You can complete accurate tax returns.
  • Having your financial information organised makes it easier for you to work with other parties such as lenders, investors, and accountants.

How to do bookkeeping    

The two most important tasks of inaccurate small business bookkeeping are recording and reconciliation. Let’s break them down.

Recording every transaction

Record your sales. This was traditionally done by writing them into a cashbook or punching them into a spreadsheet. Business owners are now more likely to download sales data directly into their books from point-of-sale or invoicing software.

Record your transactions. Every business-related purchase needs to be noted. You should also hold onto the proof of purchase if you plan to claim that expense as a tax deduction. Again, you can write these details into a book or spreadsheet. Or you can automate the task so all the debits from your business bank account stream into your bookkeeping software.

You can record income and expenses at different times, depending on whether you do cash or accrual accounting.

Reconciling every transaction

Reconciliation involves regularly cross-referencing your business books against your bank statements to check that the transactions and balances match – and identifying the reasons if they don’t. Often bank fees, interest payments, deposits, and payments that haven’t yet hit your bank accounts will need to be accounted for.

You might do bank reconciliation daily, weekly, monthly, or less often, depending on the number of transactions going through your business. However, you will probably be required to reconcile your books before submitting tax returns at the very least.

The sooner you reconcile transactions, the sooner errors can be found and corrected. It’s better to do it often – even daily – so the work doesn’t pile up. You can learn more in our guide on how to do bank reconciliation.

Other minor business bookkeeping duties

If you’re acting as bookkeeper for a small business, you may also be responsible for:

  • accounts receivable (issuing invoices and making sure they’re paid)
  • accounts payable (paying bills on time)
  • payroll (paying employees)

Professional bookkeepers also provide other services, like helping with financial reports (profit-and-loss, balance sheet, cash flow report), and measuring business performance. Bookkeepers are also often BAS agents and can help file your taxes.

How software can help    

Many small businesses use online bookkeeping software to speed up these jobs and cut down the chances for human data-entry errors. These tools can:

  • pull transaction data straight from point-of-sale (POS) system, invoicing software, and banks
  • dramatically speed up bank reconciliation
  • automatically pay bills
  • send automated invoice reminders to people who owe you money
  • tell you when sales invoices have been paid
  • allow you to check the cash flow from your phone

Outsourcing small business bookkeeping    

If you’re too busy to do the bookkeeping for your small business, then you can find someone to do it for you. Bookkeepers often allow you to choose different service levels depending on your budget. That means you can start with basic bookkeeping at a modest cost and ladder up to more advanced services as your business grows. You can find bookkeepers in the Xero advisor directory.

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