Basic bookkeeping

After you open your business bank account, you can start planning a simple system for bookkeeping. Bookkeeping is important because it helps you understand where your money comes from as it enters your business (tracking income). It also shows where your money goes (watching expenses) and how much money you are making (managing cash flow). Profit is how much money is left after you pay all your bills.

Step 1 - Determine how you will account for funds coming in and going out: 

There are two main ways to do accounting. One is called the accrual method. It is more complex and focuses on when you take on an expense or earn money. For example, using the accrual method, the moment you receive your credit card bill, that amount would be subtracted from what you own, instead of when you actually pay the bill. If you use the cash method, the amount would be subtracted when you pay the bill. The cash method is easier because it is based on when you pay or receive money.

Now let us look at income. Imagine a child is in your care for a week, and you tell the parent they owe you $300. Using the accrual method, that $300 would be considered income at that time. With the cash method, it would not be considered income until the parent gives you the check and you deposit it. For most small child care businesses, the cash method is simpler and more helpful. It lets you know when money is coming into and going out of your account. This method feels more natural because it is similar to balancing your checkbook, but on a larger scale.

Step 2 – Determine how you will record your transactions: 

Now that you have decided how you will account for money, you need to decide how to record your transactions. Many small child care businesses can easily record transactions on paper or on a computer spreadsheet, such as Microsoft Excel or Google Sheets. You should start with some simple categories.

First, begin with your income. Decide what the main sources of money are for your business. These are the ways you primarily get your money. Parent fees will likely be one. Another might be a child care payment or money from a food program. You might also get extra money for students after school or grants. Each of these should be a separate income source to keep track of.

Next, list your expenses. These might include things like salaries, cleaning supplies, rent, repairs, other supplies, and other things specific to your business. The important thing is to not have too many categories. You do not need to list every possible category. Focus on the categories you have now. You can always add more categories later. If you have too many categories, it can be confusing and hard to keep track of spending or income because you will spend too much time deciding which category each item belongs in. You can use this list as an example for how to sort your income sources.

Revenue categories 

• Tuition
• Subsidy
• Fees
• Food program
• Grants
• Other 

You can use this example list to categorize your expenses: 

Expenses Categories 

• Personnel
• Taxes
• Rent
• Utilities
• Phone
• Food/snacks
• PPE
• Cleaning
• Loan payments
• Bank fees
• Other 

Step 3 – Set a schedule to record and review your transactions: 

You should plan a time to update your records at least once a month. You can update them more often if you want, but do it at least monthly. To update your records, start by looking at all your income sources. This includes cash, credit card and app payments like Venmo or Zelle, and checks that people wrote to you. Enter each of these into your income list on your spreadsheet. Next, you will record your expenses. You can look through your receipts, bank or credit card statements, and bills from people you paid. These records of payment will help you record the costs and make sure you record the correct amount for each one.

It might seem boring to record each transaction, but it is important for understanding your profit. It helps you track exactly where your money comes from and where it goes. After you record all your income and expenses for the month, add up each category. Then, subtract your expenses from your income. This will show you how much profit you made that month. You might want to take some of that profit out or leave it in the business in case you need it later, or to help pay upcoming bills.

You can use this helpful template to record and track your monthly revenue: 

What Revenue Did I Receive? 

You can use this helpful template to record and track your monthly expenses: 

What Did I Pay For? 

Bookkeeping pro-tip: 

When you sort and file your receipts, label them. This will help you remember which category they belong in.

Accounting tips:

After you start paying yourself, think about which business structure works best for you. Some business structures, like an LLC, separate your personal and business identities more for liability reasons. Becoming an employee of your own company can also have tax benefits. You should talk to a lawyer if you are interested in this type of business structure.

First, make a regular schedule! Be sure to update your records monthly, every other week, or weekly. This will save you time and trouble later. Letting all your expenses and income pile up will not help you. You will not know how your business is doing quickly. Also, you probably will not keep up with the system because it will become harder to record so many receipts and statements that have collected since you last updated it.

Second, think about using a computer system over time. Doing accounting by hand can be hard. You might want to create a simple spreadsheet or get an online system. When you look for online systems like QuickBooks, FreshBooks, or Xero, consider how easy they are to use, how much they cost, and how complex they are. The truth is, many of you with small child care businesses may not need QuickBooks or other complicated systems. You might want to choose a simpler system that is less expensive and easier to use. Even if you do, keep all your records. Take photos or scan each receipt and statement. Keep them electronically or even in a shoebox. Make sure you keep all the records of transactions you used for your bookkeeping system. This is important if the IRS audits you. It also allows you to check your information if you need to.

Disclaimer

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.