When you're just starting out, you don't need to outsource your bookkeeping.
You need to bootstrap and do it yourself!
But when it comes to figuring out how to DIY bookkeeping, the internet is pretty bare 😕
Which is why I've decided to step up and create the most epic guides for you to actually learn how to do your bookkeeping on your own...in an easy way!
Just so you know this guide is called EPIC for a reason!
It used to be a paid course that costed $97 and probably should have been $297!
So feel free to bookmark this page and come back as you complete the steps!
Module 1: Set Up Your Account
What is bookkeeping?
Bookkeeping doesn't have to be a scary undertaking, even though that's what you may be thinking right now!
NO MORE DODGING YOUR BOOKS!
You can do your own bookkeeping!
So what is bookkeeping, anyway?
Bookkeeping is simply a record of money going in and out of your business.
You're pulling all of your transactions (income and spending) from your bank statements into the software.
You can think of your books like a giant filing cabinet.
Each time you receive money or spend money, that transaction is kind of like a piece of paper to be filed.
The Chart of Accounts in your bookkeeping software is kind of like the folders.
Let's use your internet Payment as an example.
When you pay your internet bill, it shows up on your bank transactions.
The transaction (your paper to file) is then pulled into Wave and ready to be categorized.
You decide which account to categorize it to (your file folder).
And then at the end of the year you have your books full of categorized transactions (your complete filing cabinet) so you can easily pull reports for yourself and your accountant!
First thing's first, you've got to sign up for an account!
Luckily Wave is absolutely FREE, so hop on over to www.waveapps.com and sign up for your account.
I'll be here waiting ;)
No data entry is good data entry
Many years ago bookkeeping was kept in actual books. There was no way around it, data entry (by pen and paper) was a necessary part of the process.
Today, thankfully 🙌 we don't have to do the same level of data entry in our books because we technology on our side!
In the video I will show you how to add your bank feeds, but here quickly I want to explain why this is so important.
Without a bank feed, you would need to go line by line from a bank statement and type in each date, description, amount paid, to whom, and what for.
With bank feeds the description and amount paid are done for you. You are left to add who the money was paid to and put it in the proper accounts.
That cuts the time you spend on your bookkeeping by 50%!
Separate Bank Accounts
If you haven't already at this point, PLEASE get a separate business bank account!
If you put your personal bank account in Wave you will create 10x more work for yourself because you will have to wade through all of your personal expenses.
It saves time and creates a much cleaner set of financial statements when you have separate business and personal bank accounts.
OUR PICK for FREE online bank:
Capital One Spark Business: $0 to open, no minimum balance, no fees.
You may find a local bank with free business checking, just be sure to go through the bank search in the video to ensure your bank integrates with Wave.
Add your Bank Accounts, PayPal Accounts, & Credit Cards
What to do if your bank doesn't upload transactions as far back as you need or you can't connect your bank at all.
In this case we're going to have to manually download a record of your transactions from your bank. Every bank is different so you may have to look around, but you can usually find this feature where you can view all of your transactions.
There will be a download button somewhere. You will pick the dates you want to download and the file type can be any of the following:
- .OFX - Microsoft Money (rarely given option)
- .QBO - Quickbooks
- .QFX - Quicken
- .ASO - Simply Accounting (another rare option)
- .CSV - CSV (most popular)
In Wave you will click 'Accounting' on the left tab, and then 'Transactions' from the drop down on the left tab. Then, near the top of the screen to the right you will click the blue button that says 'Upload a bank statement'.
Find the file and choose which bank account it is from.
If you were unable to add your bank before, you will need to create the bank/credit card account now. Click the '+' button next to the 'Payment Account' box. You should give your accounts names that will help you know which bank account it is if you have multiple.
For a bank account: Asset - Bank - Bank & Cash - Checking or Savings Account
For a credit card account: Liability/Credit Card - Current Liability - Current Bank Debt - Credit Card
All set! When you click 'Dashboard' you should now see some information and graphs showing up. If so, good job! You're one step closer to having your books in order.
If not, something went wrong and you may need to troubleshoot why none of your transactions have been pulled into the software.
Starting out balanced
Once your bank feeds are in, you will want to ensure that you are starting out balanced.
So for instance if you are starting your books on January 1, but you already had money in your accounts or on your credit card before this date, your balances will be way off because the software is starting your accounts off from $0.
So we need to fix this with 'Starting Balances' that you will find on the left side under 'Accounting'.
You can put 'Starting balances'.
This is the date you will be starting your books. You will need to have no data entered before this date. Many people begin their books at January 1 so they have an entire years worth of data for taxes.
>> ACCOUNTS RECEIVABLE
If you know for a fact that you are using Accrual Basis for taxes, you can fill this in. Otherwise leave it blank.
If you had any open invoices on this date you can put that balance here on the LEFT side. Most people have no idea if they had any open invoices so they leave this blank.
>> BANK ACCOUNTS
You can look back at your January bank statements to see your opening balance. However, if your statements do not go perfectly by month (for instance if is runs 12/25 - 1/24), you will need to include or exclude the line items that will give you the exact balance as of your start date.
Put the balances on the LEFT side.
>> ACCOUNTS PAYABLE
Again, if you know you are Accrual Basis you can add this, otherwise leave it blank.
Any money owed as of this date on regular bills. Again, most people have no idea and leave this blank. If you do know though, this should be added as a POSITIVE number on the RIGHT side.
>> CREDIT CARD
You can look at your credit card statement like your bank statement. Be sure to put this a POSITIVE number on the RIGHT side.
Your loan balance should be added if it was acquired before the starting balance date. You will add this as a POSITIVE number on the RIGHT side.
>> REVENUE & EXPENSES
These should only be used if you are switching software mid-year and know the amount in each account you can read off from a year-to-date income statement.
Make it Balance
At this point you will scroll to the bottom and probably notice that the two side do not match. This is called being out of balance and in bookkeeping everything must ALWAYS balance.
Here's an example.
To make this match we need to add the amount they are off to the Owner Equity line of the side where the [#] appears.
So in this case, we put 3567.89 on the right side.
And now you can see it is balanced and we can save.
If you ever need to fix a number in your starting balance, you will do this in 'Journal Entry' under 'Accounting' and you should always come back to the bottom to make sure everything is balanced.
The easiest way to do this will be to delete the number in Owner Equity and Wave will automatically tell you how off the two sides are so you don't need to do the math.
Personalize Your Files
What in the world is a Chart of Accounts?
Remember how we talked about bookkeeping being like filing? You put each of your transactions into a different file...in bookkeeping these different files are called accounts. Your chart of accounts is just a list of your different types of accounts.
At this point it's important for you to know that there are 5 different types of accounts.
>> ASSETS - THINGS YOU OWN
These accounts include your bank accounts, any invoices owed to you since you've already done the work (called Accounts Receivable), and physical items you own like Office Equipment (which may include your computer or other office equipment that costed more than $2500) or business owned vehicles.
>> LIABILITIES - MONEY YOU OWE
This would include credit cards, any loans you may have, or bills that are outstanding.
>> EQUITY - YOUR HOLDING IN THE BUSINESS
The most common accounts here are Owner's Draw for money you pay yourself if you're a sole proprietor or LLC, Owner's Contribution for money you put into the business from your personal money, and Owner's Equity (or Retained Earnings which is really for corporations, but some softwares create this account automatically) which is a running total of how much you've made minus what you've paid yourself over the years.
Here we like to break out your Owner's Draw into multiple accounts. I'm assuming you are a sole proprietor or LLC, if you are an S Corp these taxes will be considered expense accounts instead.
Owner's Draw: for payments to yourself
Owner's Draw - Federal Taxes: for income taxes paid to the IRS
Owner's Draw - State Taxes: for income taxes paid to your state
Owner's Draw - City Taxes: only if you pay income taxes to a city
This would include your revenue streams. If you only make money from say coaching, you would just have one revenue account called 'Coaching Income'.
If you do coaching and sell a digital product you may have 'Coaching Income' and 'Digital Product Sales'. This will help you see exactly how much income came from each revenue stream.
This is the bulk of your accounts and the accounts you will be dealing with most often.
It's important here to note that you don't want everything to be too general having everything go into one or two accounts, but you also don't want to have an account for each expenses because that would be overwhelming on reports.
Module 2: Get Paid
How will you get paid?
In order to get paid by clients online you will need to have a payment processor set up and connected to your invoices.
Wave doesn't give you multiple option, so you are forced to use their payment processor if you want to receive payments online...which you absolutely should.
Luckily, their credit card processing fees are exactly the same as Stripe and most PayPal fees, 2.9% + $0.30 per transaction and you get paid in 2 days!
They've also recently added ACH payments which have lower fees at just 1%.
Using their payment processor also means that when a client pays your invoice it will automatically update your invoice as paid.
To set it up, click 'Sales' - 'Credit Card Payments' and then click the blue button that says 'Enable Credit Card Payments.'
You will be asked to give information about your business:
- Business' legal name
- Business type (sole proprietor, LLC, etc)
- Employer Identification Number (EIN - if you don't have one, you can sign up for one free in less than 5 minutes here)
- Info on the products and services you sell
When you save that information you will then be asked for personal information:
- Your name
- Home address
- Phone number
- Date of birth
- Social security number
Next, you will give your business name as you wish for it to appear on your customer's credit card statement.
You will then give the routing and account number for the bank you want client payments to be deposited into.
Finally you will verify your identity with a series of questions and then a piece of government-issued identification (driver's license, passport, etc) which you can either take a picture of or scan.
Keep in mind that your very first deposit from an invoice payment could take up to 7 days to receive. After that initial hoop, you should receive payments within 2 days.
Let's set some terms!
Ensure you get paid
When considering your invoice terms you always want to be fair, but make sure that you actually get paid for work you do.
The one sure way to ALWAYS get paid for work you do is to require payment upfront.
This idea is becoming a lot more popular so clients will be less likely to object to this term.
If clients are firmly against paying up front, you may consider taking 1/2 of the payment up front and the remaining 1/2 prior to turning over your work on completion.
Regardless of which direction you go, you should ALWAYS include these terms on your invoices. Everyone involved can clearly see what is expected so the client is less likely to say, "Oh, I didn't know that beforehand."
Payment Required Upfront
Thank you - we're really excited to get started working with you! Before we do, we ask that you please make your payment upfront and in full so we can jump in with your project.
1/2 Upfront - Project with a Deliverable
Thank you - we're so excited to get started working with you! Before we do, we ask that you please pay the first half of your invoice upfront. Upon completion of your project, the remaining half of your invoice will be paid prior to release of your X.
1/2 Upfront - No Deliverable (calls or something where the finished project is not leverage for payment)
Thank you - we're so excited to get started working with you! Before we do, we ask that you please pay the first half of your invoice upfront. Upon completion of our calls, we ask that you pay the remaining half of your invoice. There will be a 2% interest charge per month (or week) on late payments.
Ongoing 6-12 Month Engagement
Thank you - we're so excited to get started working with you! Your first payment is due today, before we begin working together. Each payment will be due on the 1st of the month. There will be a 2% interest charge per month (or week) on late invoices.
**Do not begin working on their project/calls/whatever until they've complied with your terms.**
SPECIAL NOTE: Paste terms into the FOOTER section rather than the memo section as this is currently experiencing a glitch.
Create Products & Services (optional)
On the left tab under 'Sales' - 'Products & Services' we can add our products and services that will go on our invoices. We can also add any products or services that we buy from others.
This step is totally optional...but can save you time later.
If for instance, we have a consulting package that we will be selling and invoicing for over and over, it makes sense to create a service here because it will cut out the need to type in the service, description, and price every single time we invoice - we can simply pull up the service we've already created and Wave will autofill the data into our invoice.
Sending your first invoice
Yay, it's time to send our first invoice!
Be sure you have your payment processor set up first before you send your invoice so your client can pay online.
This will mean you get paid faster and don't have to worry about taking payments to the bank since they will automatically be deposited for you.
Let's jump in :)
Remind people to pay you :)
It's important to remember that our clients are human and they do make mistakes.
Mistakes including forgetting to pay you.
When this happens it probably feels earth shattering to you, especially when your business is just getting off the ground and each client payment is literally what's keep you afloat.
But before you email them with your anger leading the way, it's important that you take a moment and remember how embarrassed you've felt in the past when you forgot to do something and important and someone reminded you.
It's also important to create a strategy to set your clients up for success in remembering to pay you.
We simply have to pick when we want clients to be reminded. But don't overdo it, you don't want to nag your clients.
Here's a preview of what your client will see when you send reminders:
Setting Reminders for One-Time Invoices
After you've saved an invoice, you will see this screen.
If you set the invoice due date out a few days, you will be able to set up email reminders before the due date or on the due date. Simply pick which reminders you want sent.
If you set the invoice due date to today, those options will be greyed out and you can only send reminders after the due date when payment hasn't been made.
You can also send a reminder from the unpaid invoices screen if you have a client that is still late past 14 days.
Setting Reminders for Recurring Invoices
You are more limited in your reminder emails on recurring invoices and they are set up directly in the recurring invoice edit screen.
You have the option to email the customer automatically like we discussed when we created your recurring invoice, which will send an email on the invoice date.
As for reminder emails, you can only set up reminders 3, 7, and 14 days after the due date. You can do just one or all three, but there is no option to send the invoices early.
Module 3: The day to day Bookkeeping
Introduction to transactions + Important notes
I advise reading through all of module 3 before beginning to implement
The topics work together, rather than sequentially.
Also, please note that Wave only allows accrual based accounting. If you wish to be considered cash basis at tax time (which most small online businesses are), you will need to tell your accountant who can quickly change your data to cash basis.
This is the part that most people think of when they think of bookkeeping.
This is categorizing your transactions.
Remember when I mentioned that bookkeeping is much like filing your transactions into folder (accounts)? Well that's what we're going to be doing in this lesson.
On the left side of your Wave account, click 'Accounting' and then 'Transactions'.
Here you will be able to filter through all of your transactions.
You are currently looking at unverified transactions which simply means that they have not been reviewed by you and verified by clicking the check mark to the right of the transaction.
You can change which transactions you see by manipulating the filters at the top of this screen so you can see:
- unverified or verified
- separate transactions by bank account or credit card
- only one type of transaction at once
- one expense or revenue account at once
Categorizing transactions - Revenue
We've already set up your different revenue accounts. Now we just need to put deposits in the right account.
Just so we're all on the same page, deposits are when money goes into your bank account, usually from either a client or you, the owner.
ONLY deposits from clients are considered revenue!
For invoices that were paid by your client through Wave, these payments will be automatically handled in Wave. They will be placed in the revenue account based on the products and services you added on the invoice. You will simply need to verify by clicking the checkmark to the right of the transaction.
In this video, you will learn how to categorize revenue.
Recording Payment Processing Fees
If an invoice was paid in Wave, you won't have this step. But if you are selling services or digital products on your website using a different payment processor like Stripe or PayPal, you will.
When taking a payment through a payment processor there will always be a fee. So for instance if your course costs $197, the breakdown will look like this:
$197 - fee = deposited amount
Most people skip this step altogether, but it's important for you to see exactly how muc you made from sales and how much you spent in fees.
CREATE PAYMENT PROCESSING FEES ACCOUNT
Go to Chart of Accounts and add an account. Wave considers these a Cost of Goods Sold account.
Expense > Cost of Goods > Cost of Goods > Merchant Account Fees - leave this name or change to Payment Processing Fees.
In this video you'll learn exactly how to do this for both a deposit that has an invoice and one which does not.
Categorizing Transactions: Expenses
Why should we even create bills?
Well because bills help us see exactly how much money we need to make to cover our bills coming due. Wave also makes it easy to see when we have bills that are overdue.
You can use this data to push you to increase revenue or know when it's time to cut expenses.
If you have big bills coming due, you can begin saving early so the money is ready to go and you aren't stressed when it's time to hand the money over.
And then of course, once you match the payment to the bill, you can verify the transaction by checking to the right.
Ultimately though, with your business still being small, bills are not required.
Once you upgrade to a software like Xero that will allow recurring bills, it may make more sense and be more time efficient.
Many transactions will be obvious...your phone bill obviously goes in the Telephone account. And Facebook ads obviously go in Advertising.
But there will be some expenses that could go in multiple accounts. In this case, it is best for you to just pick the best choice (like those tricky tests in school where more than one answer was correct, but there was a best option), and then stick with that account for that expense.
If you run into an expense that doesn't fit anywhere, you can simply create a new account.
It is important to remember that you do not need an account for each individual expense. This will clutter your Income Statement (which we'll learn about soon) and make it hard for you to understand the data.
Categorizing Transactions: Assets
It's very easy for bookkeeping regarding assets (things you own in your business) to get very confusing.
I'm going to explain this to you, but I HIGHLY recommend if you purchase an item worth more than $2500, to reach out to us at email@example.com so we can help you set up your assets and depreciation for a fee.
Small asset purchases under $2500
This is simple!
Just treat these purchases like an expense. You can create a new expense account such as:
- Office Equipment Under $2500
- Computer & Printer Under $2500
- or Cell Phone Under $2500
Any name to make it clear that the items in that account are assets, but under the $2500 rule.
You may want to stop here and move to the next lesson unless you have purchased an item over $2500 this year or plan to. Otherwise...it's probably going to unnecessarily overwhelm you 😝
Asset Purchases over $2500
CREATE ASSET ACCOUNT
Because these larger assets are not considered an expense until they are depreciated (which we will talk about in just a minute), we will need to create an asset account.
Go to the Chart of Accounts. You can handle this by either:
- Creating one account: Asset > Fixed Asset > Long-Term Assets > Machinery, Equipment, Furniture & Fixtures
- Creating an account for each item you purchase: Asset > Fixed Asset > Long-Term Assets > Other Long-Term Assets and then change the name to 'Asset: Item Name'. This way will make it easier than lumping everything together.
CATEGORIZING THE ITEM
When the purchase comes through your bank feed and into transactions, you should categorize the transaction to your new asset account.
Let's pretend we purchased an iMac from Apple for $2600.
ADD THE RECEIPT FOR THE PURCHASE
We will go into more detail about receipts in the receipt lesson.
Under 'Purchases' on the left side, click 'Receipts'. Then 'Upload a Receipt' or you can email your receipt to firstname.lastname@example.org from the email associated with your account.
Wave will process the receipt and pull any information it can from the image such as the vendor and total. Unfortunately, Wave will not allow you to put a receipt in an asset account. So you'll need to pick an expense account at random. You can then add additional information such as which bank account or credit card you purchased the item with and a description of what you purchased.
How do you like my fake receipt?
MERGE THE TRANSACTION & RECEIPT
For expense receipts, Wave should automatically merge your receipt and transaction, but because our receipt category is under an expense account and the transaction is under an expense category, it will not. So we will need to do it manually.
You can select the two transactions with a check mark to the left of each transaction and an option to merge the two will appear at the top of the screen.
Once you click there, the transaction and receipt will become one and the receipt will be attached to the transaction.
At this point it's important to make sure the transaction is still categorized correctly and the vendor is right.
Depreciation is where the bookkeeping for assets can get confusing.
The IRS will not allow all assets to be used as a deduction on your taxes the same year it is purchased. For larger assets over $2500, they require you to break down the cost over a certain amount of time depending on the item.
Because this is within the realm of taxes and there are many different ways to depreciate an item, you should ask your accountant how to depreciate your particular asset.
Once you have this answer, you can follow our steps below to plug in the numbers.
Before we get started with that though, I think it's important to understand what we are doing here.
We are expensing a portion of the total item price each month. So we will be putting that amount into an account that we will create called Depreciation Expense and the same amount as a negative in an asset account for Accumulated Depreciation. This will create a wash for the amount still in the item's asset account eventually.
CREATE ACCUMULATED DEPRECIATION ACCOUNT
Go to the Chart of Accounts and create the account: Asset > Fixed Asset > Long-Term Assets > Accumulated Amortization of Machinery, Equipment, Furniture & Fixtures and rename it to 'Accumulated Depreciation of [item name]'. Wave gets this wrong because amortization and depreciation are two different things.
CREATE JOURNAL ENTRY FOR DEPRECIATION
Journal entries are not to be played with. You can screw up your books so quickly with journal entries. So please follow the directions and images to a T.
We'll assume that our accountant told us that our computer would be depreciated evenly over a 5 year period. So we will take the cost of the computer $2600 and divide that by 5 years and then again by 12 months to get the amount we will depreciate each month, which in this case is $43.33.
So we will click on 'Accounting' on the left side and then 'Journal Transactions.' We will then click 'Add Transactions' and fill in the form exactly as I've shown you here, but changing to the date of purchase, your accumulated depreciation account, the description, and amount.
Be sure that the Depreciation Expense amount is under debit and Accumulated Depreciation is under credit; this is very important!
Unfortunately, Wave does not allow us to create recurring journal entries like some bookkeeping software. So we will need to create a new one for the 1st of each month.
I would suggest only doing one year at a time. If you sell the asset, you will not need to continue with these for that asset.
Categorizing Transactions: Liabilities
Credit cards + Payments
Liabilities are, like we've discussed, money you owe. So this of course includes your credit cards.
Because we added your credit card as a feed in the first module, these transactions will come through your feed.
Nearly all expenses will be categorized exactly as you would expenses in a regular account, with just a few exceptions.
With credit cards you will be charged interest fees on your outstanding balance. These will simply be categorized to Interest Expense.
Credit Card Fees
Credit Card fees are most usually late payment fees and annual card fees to use the card. Some people like to categorize these expenses to Bank Service Charges, but I think you will get more use out of your reports by breaking these out separately so you can see, together with your Interest Expense, how much your debt is costing you.
Create the account in your Chart of accounts: Expense > Expense > Fees, Charges & Subscriptions > Credit Card Discount Fees then delete 'Discount' from the name.
Rewards & Cash Back
Where to put this money is somewhat up for discussion:
- Some people like to create an Other Income account that will show up in a different spot on the Income Statement than their revenue (Income > Other Income). This is slightly wrong as this isn't technically income...it's a refund with a fun name.
- Others like to use these to lower an expense used by the credit card. For instance if they used the credit card for an airplane ticket (Travel) and received $4 back, they would categorize that as Travel Expense and it would offset the balance by $4. This could create confusion as cash back is usually for many different charges and would be time consuming to break out.
- A hybrid (my favorite) create a new expense account for Credit Card Rewards & Cash Back then dump all these deposits into this one account. It may be a bit funny to see an expense account with a positive balance, but ensures no one classifies it as income and you won't spend unnecessary time splitting transactions up a million times.
With your credit card in as a bank feed, when you make a payment from your bank account you will notice that there is a positive transaction and negative transaction side by side.
These are seen as a transfer between accounts. Some people think these payments are an expense, but remember, you have already expensed all of the credit card purchases. To expense this payment would be double expensing and I think the IRS would have a problem with that!
Wave does a very good job of automatically matching these transfers. Occasionally this feature may not work if for instance the dates on the two transactions are different.
You will select the two transactions and click Transfer at the top. Then verify the two transactions.
Loans + Payments
Loans are another form of liability. Because loans are typically paid off for several years, they are considered non-current which means long-term.
If you take out a loan, you will need to create an account for it. Liability/Credit Card > Non-Current Liability > Long-Term Debt > Loans and then rename the loan to a name that will help you identify it easily.
When the deposit of the loan amount comes through the bank feed, you will categorize it to your new loan liability account.
If you are starting your books at the beginning of the year, you will add your loan balance in the Starting Balances screen under Accounting. Be sure you put your balance on the Credit (right) side.
Payments for loans cannot simply be categorized to the loan account because if there is any interest on your loan, it is paid when you make your payment. For this reason, your payments on a loan will need to be split between principal (the portion going to pay down your loan) and interest.
In most cases you can ask for a loan schedule from the institution loaning you the money. Though this will quickly get mixed up if you make extra payments or fail to make payments. Sometimes they will break it out for you on your statements.
To split the transaction:
Break out the payment to principal and interest.
This is where Wave drastically differs from other softwares. You cannot create a payment to your loan account by choosing it as the category. Instead, you must create a transfer.
To do this, you will need to create a new transaction to match your principal payment to.
- Click the 'Add Income' button.
- Change the date to your payment date.
- Description: Principal payment
- Same amount as your principal payment
- Category can be left alone
- Account: your loan account
Then you will select both payments and create the transfer.
Now they show up as a transfer and you can verify the two lines.
This will lower the balance of your loan account by the principal payment.
If your services or digital products do not have to be taxed in your state you are free to skip this section! Otherwise, read on 😒
I HATE sales tax, but it's really not that big of a deal. Hahaha just a personal pet peeve I dislike dealing with.
But here goes, for those who need it....
As you receive sales tax, this money is not considered revenue. You are more like a holding account.
So the money is owed to you when you put it on an invoice. It goes into your [Tax Name] Receivable account.
When the client pays this invoice, it moves into [Tax Name] Payable account.
Then once you pay that money to the proper government agency, that outgoing money will be be categorized to the [Tax Name] Payable account to remove the balance from the liability account - showing you no longer owe this money.
+ Sales Tax Receivable (when you make an invoice with sales tax) ->
- Sales Tax Receivable & + Sales Tax Payable (when the invoice is paid) ->
- Sales Tax Payable (when the sales tax is paid to the government)
Categorizing Transactions: Equity
I'm assuming in this lesson that you are a sole proprietor or LLC.
Sometimes equity is hard to explain...hell sometimes I even get confused by what is and isn't considered equity.
But the most basic explanation I can give is that it is your stake in your business.
If you take out more than you make and put into the business, you will have negative equity in the business, which isn't the best position to be in.
So we want to be sure that our equity is positive!
Owner Contribution, or Owner Investments as Wave calls it, is the money that you, as the owner, put into the business.
This account is used if for instance your business bank balance gets low and you transfer money into the business to cover expenses. Obviously this isn't income so we don't want to have it taxed! Putting these deposits in Owner Contribution makes sure that doesn't happen.
Note: In Wave they combine Owner Investments/Drawings.
When you pay for a business expense with your personal account
PLEASE PLEASE PLEASE PLEASE PLEASE PLEASE
STOP mixing your business and personal expenses in your business and personal accounts.
- Because it's a pain in the ass to deal with for starters!
- It takes way more time to do your bookkeeping.
- You will probably miss some deductions you deserve if you forget you purchased them.
- You will keep your mindset firmly planted in freelancer territory rather than viewing your biz as a legit business
If you have put business expenses on personal accounts in the past though, this is how you include those purchases in your books so you actually get to deduct those expenses.
Many people think they should just add their personal account to the books, but no! Don't do that or you will have all kinds of confusion and millions of transactions to work through.
Now Wave does have a "simple" way to do this. And though I am going to tell you about it...please don't lean on this and just keep up with this mixing expense junk.
I'm watching you!
If you have many business expenses on your personal account
You can add your personal account into the personal bookkeeping section.
In the top left of your Wave account you will see your business name with a small carrot next to it.
Business Name >
When you click the little carrot, another list will open, showing you your business account and an account labeled Personal.
You can set up your personal bank feeds in that account just as you did your business account.
Then you will go back through those transactions and find your business expenses. You will click the drop down for that transaction and ask the software to move it to your business account.
,This will automatically move the transaction to your business account as owner contribution, where you can then categorize the expense.
If you have just a few to add Wave makes this pretty simple.
You will simply add a spend money transaction in the Transaction screen. Add the purchase details (don't forget the vendor!), choose the category, and then - THIS IS IMPORTANT - change the account to Owner Investments/Drawing.
Owner Draw, or Owner Drawings as Wave calls it, is money that you take from the business or as we'll discuss in a moment anytime you use business funds for something personal.
Owner draws are usually when you pay yourself. As a sole proprietor or LLC, you can pay yourself by simply transferring funds to your personal account.
When this comes through your bank feed you will CATEGORIZE this to Owner Investment/Drawings, but leave the ACCOUNT as the bank account the money came out of.
When you pay for a personal expense with your business account
Let's imagine for a second you were out and about and then you see the most beautiful shoes. You MUST have them.
But all you have is your business card! So you charge them anyway!
BTW I am in NO WAY condoning this. Don't do this!
Just like when you pay yourself, if you use business money for something personal, you can't consider this an expense. So you will CATEGORIZE it to Owner Investment/Drawings and leave the ACCOUNT as the bank account the money came out of.
Owner Investment/Drawings as One Account or Two?
Wave automatically puts these two accounts together. But if you'd prefer to see exactly how much you put into the business and took out separately (which I do with my business and those of our clients), you can rename the original account to one or the other and create a new account for the other.
Emptying these accounts at the beginning of the year
Your equity accounts will continue to accumulate over time. So for instance if you have two years worth of data, when you pull the Balance Sheet you will see two years worth of pay and contributions.
Obviously, this isn't optimal.
So what is the fix?
Well you need to close out these accounts at the beginning of each new year so you can start at $0.
Unfortunately it would take too many templates for me to show you how to do this because it can differ based on which accounts have balances and if those balances are positive or negative.
So my suggestion is each year you hire a bookkeeper to quickly go in and make these adjustments for you so you can start fresh each year.
We offer this service - if you are interested, you can let us know by emailing us at email@example.com.
Receipts - Yes, you need to keep all of them!
The first discovery call I ever did in my business ended with a coach who was so infuriated that no one had ever told her she needed to keep receipts. I didn't handle the situation very well...but there were also tons of nerves involved so whatevs.
The main thing I learned that day is that SO MANY entrepreneurs have no idea they're supposed to be keeping their business receipts OR they know, but just simply aren't doing it.
Well gone are the days of shoving them all in a shoebox. That age has passed and thank goodness the age of technology is here to save the day!
You can choose to simply dump photos of your receipts into a folder in the cloud for each month, use any number of softwares of available, or use Wave's built in receipt feature. So long as your receipts are stored somewhere and you can actually tell what the purchase was for you're good.
Speaking of making sure you can tell what the purchase was
If it isn't readily available knowledge, feel free to write directly on the receipt before snapping your picture. If you go to dinner with a potential client write 'Potential client - Name'. Or if you flew across the country, make a note what the conference or event was.
The IRS will require you to know this info and I'm willing to bet 5 years down the road your mind might not be as clear about that receipt for $29.99 where the name of the store is cut off.
Wave Receipt App
Not only is there a feature on the online Wave dashboard (which I'll show you how to use shortly), you can also download their free app. This is great if you frequently have physical receipts. You can take a quick snapshot and the app will link the receipt to your account.
Connecting receipts to transactions
Before I explain how to do this, you might be wondering why you would want to do this in the first place.
For some people, extra organization and peace of mind just isn't that important. But for others, they just can't let it be until they KNOW without a shadow of a doubt that they will be able to find a receipt if they are ever audited.
If this is you, this will ease your fears and give you that added organization that you're craving!
You can find the 'Receipts' section under 'Purchases' on the left navigation.
First you will add the image of the receipt, then wait for the software to extract any info it can from the image like vendor and total.
Next click the drop down next to the receipt line and choose 'View/Edit Details.'
Another fake receipt where I've obviously been drinking, but I really was at Dave & Busters. Moving on!
I will then verify the receipt and this receipt will now show up on the 'Transactions' screen.
At this point we will need to match the receipt to it's counterpart that was created from the bank feed and merge the two.
And as you can see, the two transaction lines have now become one and the receipt is attached in the details section.
REconciling -AKA- checking your work
Awesome, now you know how to do the day to day books!
Gosh, you're a beast!
But hold up...were you the type to turn in tests without double checking your answers?
I was; I just couldn't be bothered 😒
But in bookkeeping you MUST be bothered with double checking your work!
Luckily it doesn't mean going back through each line to make sure you categorized it right.
Nope, we just need to make sure the ending balance on your bank statement matches the balance in Wave for that date.
So we will go into the 'Transactions' Screen. Sort by the bank account we are looking at and the dates of the statement.
You will now see three boxes.
In the first box, when you click on N/A it will become a textbox where you can add the ending balance on your bank account. Hopefully it matches the 'Verified Balance.'
Obviously I'm rooting for you to get this right on your first try, but sometimes it just doesn't work out that way. Which is why it's so important not to skip this step.
So if you run into a discrepancy what do you do?
Well it depends by how much your balances are off. If for instance they are off by $6.01, you may remember that is the payment processing fee from one $197 course sale. So maybe you missed putting in the fee on one sale during the month. You'll need to go find where you left it off and add it in.
Usually though it isn't so simple. WOMP WOMP 😭
You will need to go line by line and make sure every line from your statement is in Wave and that there are no duplicates. Also remember that revenue will show up different in Wave than on your statement since Wave will have the full amount and the payment processor and your statement will only have the deposit amount. Same goes for loan payments.
Occasionally a date of a transaction will get pushed into another month. Some people choose to change the date to match the statement, but since Wave is on accrual basis this isn't the proper way to do it. You will simply need to mark it on your statement and move on. Finding these outlying transactions may mean that you need to change the dates you're looking at on the Transaction screen.
Once every line is accounted for, there are no duplicates, and all transactions (even those in another month) add up to your ending balance, you can assume your books are correct.
Module 4: Understanding your numbers
Income Statement :: What you made!
Before we learn how to create an Income Statement, let's talk for a minute about what it actually is.
I remember being so confused by this in the beginning unnecessarily.
An Income Statement is just that...a report showing you how much income you made. It also shows you how much you spent. And the difference between the two so you can see what's left over.
With that in mind, obviously we always want to see that difference (which is called Net Income) as a POSITIVE number. And hopefully more than just a few dollars! We want this number to be as high as it can be, within reason.
High net income means...you have yourself a cash cow
Pulling your income statement
People make out like creating reports is hard...but it can be done in approximately 10 seconds.
Click 'Reports' in the left nav.
Under 'Financial Statements', select 'Income Statement'.
Put in the dates for the month, quarter, or year you want to see and then click Update.
Balance Sheet :: Money in the bank!
The Balance Sheet is a lot like a snapshot. It shows you the balances in your asset, liability, and equity accounts. It's important to notice here that Income and Expenses are NOT on the Balance Sheet - remember those were on the Income Statement.
So when you pull this report you are doing it based off one date, which is usually the last day of the month.
Why is this report important?
Well, you probably already know how much money you have in the bank. But it can be helpful to have past reports to see next to your current reports.
For instance, you can look at the same month last year and see if you have more in the bank now. This can help you gauge whether your business is growing, or shrinking.
Any other assets will likely stay the same, but any accumulated depreciation will be growing each month. Honestly, you'll probably never look at this.
You will be able to see your Accounts Receivable, or invoices that are still not paid. This can be really helpful so you can see how much should be coming in over the next few weeks. Of course you will also be able to monitor this to make sure it doesn't go too high. If that happens you'll know it's time to hunt down payments!
Again, you're probably aware how much you have on your credit card, but you might be less aware of the current balance on a loan. So having this monthly snapshot can motivate you to keep paying it down as you see the balance go down.
You will also be able to see your Accounts Payable to know exactly how much you still have in outstanding bills.
How to pull your Balance Sheet
On the left navigation click 'Reports'.
Under Financial Statements, click 'Balance Sheet'.
Pick the date you want to see, usually the last day of the previous month, and click 'Update'.
Easy peasy lemon squeezy!
Bigger Picture Thinking
So what's the big deal with knowing your numbers?
I see you so many entrepreneurs who couldn't give a flying flip what their numbers have to say.
But do you know what else I see?
A bunch of entrepreneurs struggling to thrive. They can make money, but once it's in their hands they are completely clueless about how to manage it!
Bookkeeping won't make you an awesome money manager
I hate to squash your dreams there, but bookkeeping alone won't really make you a brilliant money manager.
What it will do though, is help you understand where your money is going.
It's up to you to use your numbers to create profit in your business!
Using Your Numbers to Create Profit
So let's imagine you are bringing in $4k consistently each month.
Your software and website costs $250 each month.
You have a VA who costs $600 each month.
And you have a business coach that is $1200 each month.
You pay yourself the $1950 that's left over. You're not saving for taxes and there's never money left in your account.
Your numbers are telling you that you're spending 51% of your revenue on expenses. Now don't get me wrong that's not terrible...but it could be better.
So at this point you can decide to drop the coach and lower your expenses to just 21% ($850), leaving you free to start paying yourself a $2k paycheck, saving 24% for taxes ($960), and setting 5% aside for profit ($190)!
In 6 months you'll have over $1100 in profits and you'll have already paid your quarterly estimated income tax so the tax men aren't after you 😅