What is Bookkeeping? The Ultimate Guide

August 11, 2020
Business Basics

When I ran a small photography business, I often found that tracking how I was spending my income was the last thing that I was thinking about.

Of course, I knew that keeping track of my business' financial health was important, but it always felt like something that could be put off until later.

One day, I was chatting with another wedding photographer whose business was booming. They made a confession to me that, amidst the massive success of their business, they had lost $50,000 in a single month and had no idea why.

That conversation was a wake-up call. It dawned on me that, by not tracking the money coming in and out of my business, I was setting myself up for failure.

So, what is bookkeeping?

Noun • Book·keep·ing • /ˈbo͝okˌkēpiNG/

“The activity or occupation of keeping records of the financial affairs of a business.”

Put simply, bookkeeping is the process of tracking your business’ financial health by recording expenses (money you spend on your business) and income (money you earn from your business).

For freelancers and other creative small businesses, recording all the transactions that come in and out of a business provides a vibrant picture of the overall health of your operation!

Think about it - do you know exactly what your business made last year?

How much of that did your business spend on various expenses?

How much cash did you get to actually take home?

By tracking and recording every financial transaction that your creative small business makes, proper bookkeeping helps you answer all of these questions and more!

At tax time, it’s important to have your books in order (expenses and profits properly categorized) so that you can accurately report that information to the IRS. Properly categorizing your business expenses can also lead to tax write-offs and reductions in the amount that you owe — that means more money can be kept in your business (or in your pocket!).

For everyone, including freelancers like photographers and designers, there are two types of bookkeeping: Single-Entry and Double-Entry. Each of these bookkeeping systems have their benefits and drawbacks depending on the needs of your business.

What is Single-Entry Bookkeeping?

Single-Entry bookkeeping (sometimes referred to as single-entry accounting, or cash accounting) is the simplest of the two systems.

If your business is small and simple, or you’re just starting out, you’ll probably want to use Single-Entry bookkeeping!

When it comes to Single-Entry bookkeeping, only one transaction is recorded for every expense. Entries are recorded as either positive or negative and draw from your business’ cash balance.

For example, if you purchase a new camera or have to pay for a job-related expense, you’ll record that transaction by subtracting cash from your Cash balance. If you receive payment for a job, you’ll record that as a positive transaction in your Cash account.

Single-Entry bookkeeping is great for smaller businesses that don’t require inventory tracking, aren’t extending credit to their customers, or have less financially complex operations.

As transactions flow in and out of your business, Single-Entry can easily and accurately help you determine exactly how much money your business is making in terms of net income. 

Unfortunately, Single-Entry bookkeeping falls short in terms of reporting on the full financial picture of your business — there’s much more to keep track of than overall net income! 

As your freelancing business grows, it inevitably becomes more complex. Over time, it’s often best to move to a Double-Entry bookkeeping system.

What is Double-Entry Bookkeeping?

Double-Entry bookkeeping (also known as Double-Entry accounting or accrual accounting) is a two-column system that uses several types of accounts. 

With every transaction, two entries are recorded. One column is for “debits” and the other for “credits” — these terms describe if money is being transferred into (debit) or subtracted (credit) from an account. This creates a detailed, comprehensive view of your business’ financial health.

Bookkeepers record transactions via journal entries into several types of accounts within a Double-Entry system, often referred to as the Chart of Accounts. These accounts are split up into three categories - Assets, Liabilities, and Equity. These three categories are the foundations of bookkeeping and accounting!

In a Double-Entry system, these accounts must balance each other out in a simple equation:

Assets = Liabilities + Equity

For every dollar that comes in and out of your business, there is a corresponding journal entry in two accounts. Let’s look at an example of Double-Entry Bookkeeping.

Let’s say you purchase a brand new camera for $5,000 for your photography business. You spend $5,000 in cash (an asset) in exchange for another asset (the camera)!

In Double-Entry accounting, you’ll need to record a credit (a subtraction) journal entry to your cash balance. Since we’ve subtracted an amount from our cash balance, we’ll need to show an increase elsewhere in order to balance out our equation.

In this case, we’ll record a debit to the “Equipment” account to balance out our equation.

Remember, every debit in the Double-Entry system has to have a corresponding credit. Since this equation only affects our Asset account, our equation (Assets = Liabilities + Equity) remains balanced.

The Double-Entry bookkeeping system helps photographers, designers, and more to determine the exact amount of profit or loss that occurred during the year. Other helpful reports and information can be generated from a Double-Entry system!

What method is right for me?

If you work as a freelance designer from time to time, your bookkeeping needs will drastically differ from that of someone who’s been working as a photographer full-time for 10 years!

It can be difficult and confusing to know which bookkeeping and accounting system to use for many creative small businesses. Here’s a helpful guide to determining what’s right for you:

If you’re freelancing part-time…

Single-Entry (cash) bookkeeping may be best for you.

As a freelancer, you don’t have as many business expenses and the number of transactions that you do have each month are significantly fewer than other full-time creatives. This is a great position to be in, as you’ll simply need to keep track of what you spend and make each month!

If you’re creating full time…

Double-Entry (accrual) bookkeeping may be best for you.

Running a creative business full-time is no small task. You need to be able to identify exactly how much you’re bringing in every month and keep track of the liabilities that your business may have! For many full time creators (photographers, designers, and musicians), it’s best to use the Double-Entry system. You’ll be able to find a better financial picture of your business and make stronger decisions for the future!

Double-Entry bookkeeping helps to greatly reduce the number of accounting errors as well. When it comes to tax time, Double-Entry noticeably increases the transparency of your finances and allows you and your business to be taken seriously.

Not sure about going it alone? 

Tired of staring at Quickbooks all day and feeling confused by those numbers? 

There’s good news: we’re here to take care of your Double-Entry bookkeeping for you. We help photographers, designers, and musicians keep track of their financial health through Better Business Management.

Sign-up today and receive a free month of bookkeeping!

Unlock your financial story today.

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Jeremy Millar
Written by:
Jeremy Millar

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