Small business bookkeeping basics: tasks, methods, tips

Published Friday 13 February 2026

Table of contents

• What is small business bookkeeping?
• Bookkeeping vs accounting
• Why bookkeeping matters for your business
• Basic bookkeeping tasks you need to know
• Bookkeeping methods explained
• Can you do your own bookkeeping?
• How to do bookkeeping for your small business
• Bookkeeping software for small businesses
• Common bookkeeping mistakes to avoid
• When to hire a bookkeeper
• How long should you keep bookkeeping records?
• Xero makes small business bookkeeping easy
• FAQs on small business bookkeeping

Key takeaways

• Set up a dedicated business bank account and connect it to accounting software to automatically import transactions, which saves time and reduces manual entry errors.
• Record and categorise all transactions as they happen using a clear chart of accounts, then reconcile your bank statements weekly or fortnightly to catch errors early.
• Choose the right accounting method for your business size and complexity—cash basis works well for simple operations under $25 million in annual receipts, while accrual basis provides a more accurate financial picture as you grow.
• Consider hiring professional help when you're spending more than a few hours weekly on bookkeeping or when your transaction volume exceeds 50-100 per month, so you can focus on running your business.

What is small business bookkeeping?

Small business bookkeeping is the process of recording, organising, and tracking your business's financial transactions. It covers everything from logging sales and expenses to reconciling bank accounts and preparing financial reports.

Good bookkeeping gives you a clear picture of your cash flow, helps you stay tax-ready, and supports smarter business decisions.

Bookkeeping vs accounting

Bookkeeping is the process of recording and organising financial transactions. Accounting uses that data to analyse performance, prepare tax returns, and guide business decisions.

Think of bookkeeping as the foundation. Accounting builds on that foundation to help you understand what the numbers mean and what to do next.

Many small business owners handle bookkeeping themselves and work with an accountant for tax time and strategic advice.

Why bookkeeping matters for your business

Accurate bookkeeping helps you run your business with confidence. When your records are up to date, you can make informed decisions and avoid costly surprises.

Here's what good bookkeeping helps you understand:

• profitability: whether your business is making or losing money
• cash flow: who owes you, what you owe, and when payments are due
• financial health: whether you can meet upcoming obligations
• business value: what your business is worth on paper

Your records also form the basis of your tax return. Errors can lead to penalties or problems if you're audited.

Basic bookkeeping tasks you need to know

Bookkeeping involves a set of recurring tasks that keep your financial records accurate and up to date. Understanding the scope helps you plan your time and decide what to handle yourself.

Core bookkeeping tasks include:

• recording transactions: logging income and expenses as they occur
• categorising entries: assigning each transaction to the right account
• reconciling bank accounts: matching your records to bank statements
• managing invoices: sending invoices and tracking payments
• tracking bills: recording what you owe and when it's due
• preparing reports: generating profit and loss, balance sheet, and cash flow statements
• storing records: keeping receipts, invoices, and supporting documents

Some businesses also handle payroll, inventory tracking, and tax preparation as part of bookkeeping. The more complex your operations, the more tasks you'll need to manage.

Bookkeeping methods explained

Bookkeeping methods determine how and when you record transactions. The two main decisions are: single-entry vs double-entry bookkeeping, and cash vs accrual accounting.

Single-entry vs double-entry bookkeeping

• Single-entry bookkeeping: Record each transaction once, similar to a chequebook register. Best for very small businesses with simple finances.
• Double-entry bookkeeping: Record each transaction twice (as a debit and a credit). This method catches errors more easily and gives a fuller picture of your finances. Most accounting software uses double-entry by default.

Cash basis vs accrual basis accounting

• Cash basis: Record income when you receive payment and expenses when you pay them. Simple to manage, but doesn't show money you're owed or bills you haven't paid yet.
• Accrual basis: Record income when you invoice and expenses when you're billed, regardless of when cash moves. It gives a more accurate picture of financial performance over time because the method complies with generally accepted accounting principles (GAAP), which are required for US publicly traded companies.

Most small businesses start with cash basis for simplicity, and for US federal income tax purposes, this method is generally allowed for businesses with average annual gross receipts of $25 million or less. As you grow, accrual accounting often makes more sense.

Can you do your own bookkeeping?

Yes, most small business owners can handle their own bookkeeping, especially in the early stages. Modern software makes the process straightforward, even without accounting experience.

DIY bookkeeping works well if:

• your transaction volume is low (under 50–100 per month)
• your business structure is simple (sole trader or small company)
• you have time to dedicate a few hours each week
• you're comfortable learning new software

As your business grows, you may want professional support. A bookkeeper can take over routine tasks, while an accountant helps with tax strategy and compliance.

Start with the basics, stay consistent, and get help when you need it.

How to do bookkeeping for your small business

Follow these steps to keep your books accurate and up to date. This process works whether you're using software or a simple spreadsheet.

1. Set up your bookkeeping system

Open a dedicated business bank account to keep personal and business expenses separate. This makes your bank statement a reliable record of business activity.

Connect your bank account to accounting software like Xero, and transactions flow through automatically. This saves time and reduces manual entry errors.

1. Capture your transactions

Once your system is set up, record transactions as they happen. This includes sales, expenses, and any money moving in or out of your business.

How you record transactions depends on your accounting method and the type of transaction.

Recording invoices and bills at time of issue

Record invoices at time of issue if you use accrual accounting. Log purchase invoices when they arrive and sales invoices when you send them.

These transactions won't appear in your bank account until paid. Use accounting software for invoicing and bill processing to capture amounts, dates, taxes, and contact details automatically.

Getting info from paper receipts

Photograph receipts for any cash or personal card purchases. You can enter the details manually later, or use an OCR app that scans the image and adds the transaction to your records automatically.

Pulling records from online shops or POS systems

You may be able to get detailed sales data from point-of-sale (POS) or ecommerce systems. For example, some software can help link transaction fees or courier costs to specific transactions, which is useful for working out the true cost of sales. You can connect software like that to an online accounting package to pull that information together.

Entering expenses from other bank accounts

If employees use a personal card for a business expense, you can reimburse them from your business account and capture the transaction that way. Don't forget to secure a copy of the receipt. If employees claim expenses a lot in your business, an expense app on their phone can simultaneously capture the receipt, send the reimbursement claim, and automate the accounting entry.

1. Categorise your transactions

A chart of accounts is your list of categories for sorting transactions. Each category classifies money as income, expenses, assets, or liabilities.

Common categories include:

• income: sales revenue, interest earned, other income
• expenses: cost of goods sold, utilities, advertising, consulting fees
• assets: equipment, inventory, accounts receivable
• liabilities: loans, accounts payable, credit card balances

Most accounting software includes a default chart of accounts you can customise. Consider involving an accountant when setting this up, as your choices affect how you analyse business performance.

1. Reconcile your accounts

Bank reconciliation means checking that your accounting records match your bank statement. Do this regularly to catch errors early.

Common reasons for discrepancies:

• cash transactions: payments made outside your bank account
• timing differences: invoices issued but not yet paid
• bank fees: charges you may have missed
• data entry errors: typos or duplicate entries

Accounting software simplifies reconciling accounts by importing bank data automatically and flagging transactions that need review.

1. Review your financial statements

Financial statements turn your bookkeeping data into insights you can act on. Accurate records let you generate:

• profit and loss statement: shows whether your business is making or losing money over a period
• balance sheet: shows what your business owns (assets) versus what it owes (liabilities)
• cash flow statement: shows how cash moved in and out of your business

Review these reports monthly or quarterly to spot trends and make informed decisions.

1. Handle complex transactions

Income and expenses that flow in and out of your bank account are generally straightforward. But recording capital assets, depreciation and loans is more complex.

Assets like vehicles, equipment, and commercial buildings are recorded as fixed assets. These assets are depreciated each year to reflect that they're losing value, and the depreciation can be claimed as a tax deduction. But there are detailed rules for how depreciation is calculated, so it's worth getting a professional to help keep you compliant.

Meanwhile, you need to split loan repayments into principal and interest portions, recording each to different accounts. You also need to properly document owner's contributions and withdrawals.

If you don't have one already, you can find accountants, bookkeepers and tax professionals to help in Xero's advisor directory.

Bookkeeping software for small businesses

Bookkeeping software automates routine tasks and reduces the risk of errors. It's faster and more reliable than spreadsheets or paper records, especially as your business grows.

Key benefits of using bookkeeping software:

• automatic bank feeds: transactions import directly from your bank account
• built-in reconciliation: software matches transactions and flags discrepancies
• real-time reporting: generate profit and loss, balance sheet, and cash flow reports instantly
• cloud access: view your books from anywhere, on any device
• collaborate: share access with your accountant or bookkeeper securely

Xero connects to your bank, automates data entry, and keeps your records organised in the cloud. You can also link apps for invoicing, expenses, payroll, and inventory.

Common bookkeeping mistakes to avoid

Even small errors can cause problems at tax time or when you need accurate financial data. Watch out for these common mistakes:

• mixing personal and business expenses: use a separate bank account and card for business transactions
• falling behind on data entry: reconcile weekly or fortnightly to catch issues early
• miscategorising transactions: review your chart of accounts and apply categories consistently
• losing receipts: photograph receipts immediately or use an expense capture app
• ignoring bank reconciliation: unreconciled accounts hide errors and make reports unreliable
• forgetting to back up data: use cloud software that stores records automatically

Catching mistakes early saves time and reduces stress when you need accurate numbers for tax returns, loan applications, or business planning.

When to hire a bookkeeper

Hiring a bookkeeper makes sense when your time is better spent running your business, or when your finances become too complex to manage alone.

Consider getting professional help if:

• you're spending more than a few hours a week on bookkeeping
• you're making frequent errors or struggling to reconcile accounts
• your business is growing and transactions are increasing
• you need help preparing taxes or staying compliant
• you want a second set of eyes to catch mistakes

A bookkeeper handles day-to-day record-keeping. An accountant provides higher-level advice on tax strategy, financial planning, and business decisions. Many small businesses use both.

Find a bookkeeper or accountant in the Xero advisor directory.

How long should you keep bookkeeping records?

Depending on your location and tax authority requirements, you should keep bookkeeping records for a set period; for example, the IRS advises that you should keep relevant records for three to seven years, but indefinitely if you fail to file a return. Retaining records protects you in case of an audit.

Documents to keep include:

• bank statements
• receipts and invoices
• payroll records
• tax returns and supporting documents
• contracts and agreements

Cloud accounting software stores records digitally, making it easier to store them long-term.

Xero makes small business bookkeeping easy

Bookkeeping doesn't have to be complicated. With the right tools, you can stay on top of your finances, make confident decisions, and spend less time on admin.

Xero automates bank feeds, simplifies reconciling accounts, and keeps your records organised in the cloud. Connect apps for invoicing, expenses, and payroll to manage everything in one place.

Ready to take control of your books? Get one month free and see how Xero works for your business.

FAQs on small business bookkeeping

Here are answers to common questions about bookkeeping for small businesses.

Can I do my own bookkeeping for my small business?

Yes, most small business owners can manage their own bookkeeping using software like Xero. As your business grows, you may want to hire a bookkeeper or accountant for support.

How long does bookkeeping take each week?

For a small business with low transaction volume, expect to spend one to three hours per week on bookkeeping tasks. Complexity and volume increase the time required.

What do bookkeepers charge per hour?

Bookkeeper rates vary by location and experience, typically ranging from $20 to $60 per hour. Some bookkeepers offer fixed monthly packages based on transaction volume.

Do I need bookkeeping software or can I use spreadsheets?

Spreadsheets work for very simple businesses, but software saves time, reduces errors, and scales as you grow. Most small businesses benefit from dedicated bookkeeping software.

What's the difference between a bookkeeper and an accountant?

A bookkeeper records and organises transactions. An accountant analyses financial data, prepares tax returns, and provides strategic advice. Many businesses use both.