What Is Bookkeeping?

Bookkeeping is the ongoing process of recording every financial transaction in your business — every dollar that comes in and every dollar that goes out. It's the foundation everything else in your finances is built on. Without it, you can't know if you're profitable, you can't file your taxes accurately, and you can't make good decisions about your business.

How Bookkeeping Works

Every time money moves in your business, it gets recorded in your books:

• A client pays an invoice — recorded as income
• You pay a supplier — recorded as an expense
• You move money between accounts — recorded as a transfer
• You take out a loan — recorded as a liability

These records feed into your financial statements — your Profit & Loss, Balance Sheet, and Cash Flow Statement — which tell you how your business is actually doing.

Bookkeeping vs. Accounting

People often use these words interchangeably, but they're different.

Your NCO team handles both — bookkeeping keeps your records current, and your accountant uses those records to file your taxes and advise on strategy.

Cash Basis vs. Accrual Basis

There are two ways to record transactions.

Cash basis  — you record income when money hits your account and expenses when you pay them. Simple, but it can misrepresent your real financial position if you have outstanding invoices or unpaid bills. This is typically best for businesses making <$1m yer year. 

Accrual basis — you record income when it's earned (invoice sent) and expenses when they're incurred (bill received), regardless of when cash moves. More accurate picture of your business, required for most corporations and businesses above certain revenue thresholds. This is typically best for businesses making >$1m per year.

Your NCO team will set your books up on the right basis for your business. 

Common Bookkeeping Problems

Mixing personal and business finances.

Using your personal account for business purchases (or vice versa) creates a significant cleanup problem. Every mixed transaction has to be reviewed manually. Keep them completely separate from day one.

Falling behind on categorization.

Transactions pile up fast. Bookkeeping done weekly is straightforward. Bookkeeping done quarterly is painful. Bookkeeping done once a year at tax time is very expensive.

Missing transactions.

Cash purchases, personal card expenses paid for the business, and bank fees are commonly missed. These create gaps in your records that distort your Profit & Loss.

Losing receipts.

The IRS can audit back 3 years under normal circumstances, or 6 years if substantial underreporting is suspected. Keep digital copies of all receipts — a phone photo is sufficient. Your NCO team will advise on how to store and submit them.

FAQ

Do I need a bookkeeper, or can I do it myself?

You can do basic bookkeeping yourself using QBO. Many business owners do. That said, most find that as the business grows, the time cost isn't worth it, and errors made during the year compound into larger problems at tax time. Your NCO team handles this for you.

How is bookkeeping different from tax filing?

Bookkeeping is ongoing - it happens all year. Tax filing is periodic, it happens once a year and uses the records your bookkeeper maintained. Accurate bookkeeping is what makes tax filing straightforward.

How far back does the IRS require me to keep records?

Generally 3 years from the date you filed the return, but 6 years if you underreported income by more than 25%, and indefinitely for fraudulent returns or if no return was filed. Keep all receipts, invoices, bank statements, and contracts for at least 7 years to be safe.

What happens if my books are wrong?

At minimum, your financial statements are inaccurate and you can't trust the numbers. At worst, you file incorrect tax returns, which can result in IRS or FTB assessments, penalties, and interest. Catching and correcting errors early is always cheaper than fixing them at year-end.