What a bookkeeper actually does each month

“Bookkeeping” sounds like filing. In practice it is a short, repeating cycle, and knowing the steps makes it much easier to tell whether yours is being done properly.

Step one: every transaction gets recorded and categorised

Money moved in and out of the business last month. Each of those movements is recorded and given a category: materials, subcontractors, fuel, insurance, software, and so on.

Categories are not decoration. They decide which figure a cost lands in at tax time, and they are what makes a report readable. A business that files everything under “general expenses” has records, but it does not have information.

The IRS puts the same point in terms of what must be provable: your books have to show gross income, deductions and credits, and each entry needs a supporting document behind it, such as an invoice, a receipt, a bank statement or a cancelled cheque.

Step two: the accounts are reconciled

Reconciling means comparing what the books say against what the bank and the credit-card company say, line by line, until the two agree.

This is the step most often skipped, and it is the step that catches real problems:

• A payment that went out twice.
• A customer deposit that never arrived.
• A subscription that is still being charged for something the business stopped using.
• A transaction sitting in the wrong month, which quietly moves profit from one period to another.

Until the accounts are reconciled, every report built on top of them is a guess.

Step three: the unfinished business is sorted out

Most months leave loose ends. Invoices sent but not yet paid. Bills received but not yet paid. A payment that cannot be matched to anything.

A bookkeeper lists these rather than forcing them into a category, because a guess entered in September becomes a wrong number in April.

Step four: statements are produced

With the month closed, the business gets its statements. Usually:

• A profit and loss statement: what came in, what went out and what was left, over the period.
• A balance sheet: what the business owns and owes at a point in time.
• Often a cash-flow view, because a profitable month and a month with money in the bank are not the same month.

Step five: somebody actually reads them

A statement nobody reads is filing. The value is in the comparison: this month against last month, this year against last year. That is where you see materials creeping up, a customer paying slower than they used to, or one type of job quietly earning far more than another.

What good bookkeeping gets you

• A far shorter tax season. The work is already done and supported; the return is prepared from real figures rather than reconstructed from a shoebox in March.
• Decisions based on numbers instead of instinct. Pricing, hiring and borrowing all get easier when the figures are current.
• Fewer nasty surprises. Errors found in month two cost minutes. The same errors found fourteen months later cost days.
• Records you can stand behind. If a return is ever questioned, the supporting documents are already organised.

How to tell whether yours is being done properly

Four questions:

1. Are the bank and credit-card accounts reconciled every month?
2. Can you get a profit and loss statement for last month without waiting a week?
3. Is there a supporting document behind the entries, not just a category?
4. When something does not make sense, does somebody ask, or does it get filed as “general expenses”?

If the answer to any of those is no, the monthly cycle has a gap in it.