In the busy world of childcare, where you are managing everything from children’s daily learning activities to family communication, it can be hard to find the time to maintain your business’s financial records. Yet, bookkeeping stands as a cornerstone for the success and growth of any childcare business. Whether you're a small home-based program or an established childcare center, understanding the significance of proper bookkeeping is crucial. It not only ensures financial stability but also helps in making informed decisions, complying with legal requirements, and ultimately fostering the growth and sustainability of your childcare enterprise.

In this article, we’ll explore the vital role that bookkeeping plays in running a successful childcare business. We’ll cover the basics of daycare bookkeeping, from tracking income and expenses to managing payroll and tax obligations, and best practices you can adopt for your childcare business.

What is basic bookkeeping?

Bookkeeping is the process of tracking and recording a business’s financial transactions. Generally, this includes the money coming in and being spent. Since bookkeeping is a practice dating back to the 15th century, until recent years bookkeepers have used physical books to keep track of financial transactions. Now, much of bookkeeping is made easier with digital software that helps perform tasks like invoicing, paying bills, and preparing tax returns. 

The duties of basic bookkeeping for your daycare business might look like this:

• Recording transactions
• Creating invoices and tracking childcare payments from families
• Collecting and organizing financial records
• Tracking debit and credit payments 
• Processing payroll
• Providing tax documents
• Reviewing and reconciling financial reports

There are several types of bookkeeping, but the two main types are single-entry bookkeeping and double-entry bookkeeping. Single-entry bookkeeping records reflect only money going out in the transaction. For example, if you spend $250 in the current month on classroom supplies, an increase in your expense account, by this amount, is recorded. With a double-entry system, both a decrease of $250 in your cash account and an increase of $250 in your expense account are recorded. Instead of reflecting only one side of a transaction, double-entry bookkeeping records both—the money coming in and going out. 

Bookkeepers use single-entry systems to keep track of cash, taxable income, and tax-deductible expenses while a double-entry system works well for liabilities, assets, expenses, and revenue. Single-entry bookkeeping may be simpler, but its double-entry alternative is more thorough and accurate.

If you’re new to bookkeeping, there’s a learning curve to the terminology and processes that you’ll need to master. You can use the following list as an introduction to some of the concepts involved in the process:

• Assets: Things your daycare business has bought and owns, including inventory and money owed to your business
• Balance sheet: A list of what your daycare owns (and the value) as well as the amounts of what your business owes
• Expenses: The money you spend to keep your daycare operating
• Financial statements: Reports showing financial performance and activities 
• Ledger: The record of your business’s financial transactions
• Liabilities: The amount your business owes (unpaid bills, taxes, wages, or loans)
• Revenue: Money coming into your daycare

It’s impossible to run a successful daycare business without managing your finances. While some incorrectly consider bookkeeping and accounting to be the same, it’s necessary to differentiate between the two as you plan to incorporate bookkeeping into your operations.

What is the difference between bookkeeping and accounting?

Bookkeeping and accounting have similarities, but they’re not the same. Both deal with recording financial transactions, but their functions are different. Bookkeeping is more administrative, where you record your day-to-day finances. Accounting is more analytical. You analyze your finances with the information gathered from bookkeeping, using it to make reports and financial statements.

Accounting can include bookkeeping, but a bookkeeper can’t be an accountant without the proper education and certification. Although bookkeepers may perform some basic accounting tasks, the role and responsibilities of accountants expands well beyond those basic tasks. Accounting tasks typically include:

• Analyzing operation costs
• Advising on financial decisions
• Reviewing and analyzing financial statements
• Performing audits
• Assessing the financial health of the business
• Making financial forecasts
• Filing tax returns

Accounting is a high-level process that can help you make business decisions. Alternatively, bookkeeping is a day-to-day process that gives you a more targeted look into your finances and ultimately affects how your daycare can manage its accounting.

Importance of bookkeeping

Bookkeeping can feel like an overwhelming task, especially once you consider how many transactions your daycare business makes. Regardless, your childcare program can’t reach the peak of its success without it.

The process helps you keep a record of all your financial transactions and blends into other areas of your business. Keeping track of this information helps you evaluate your finances much easier and helps you catch mistakes. For example, imagine your daycare lost money last month. Bookkeeping can help you identify where the loss came from. For example, maybe you made duplicate payroll payments or a few families missed a payment. Bookkeeping helps you spend less time fixing these discrepancies.

Bookkeeping also helps you get prepared for tax season. The rush to compile all the appropriate paperwork can be stressful. Fortunately, most of the documentation you need to give the government—financial transactions, statements, and cash flow reports—is easily accessible when you stay up to date with your bookkeeping.

Daycare bookkeeping 101

Bookkeeping can be challenging if you’re new to the process. Consider the following best practices for your daycare bookkeeping.

Create a separate financial account for your daycare business

When you have your own daycare business, the lines can blur between your personal and business finances, especially when you start as a small business. It’s best to separate them as soon as possible. You can start by using a business credit card for all business expenses, creating separate checking accounts, and separating and organizing your personal and business receipts.

Separating your finances will create a clear picture of your business finances and also lessen your chances of triggering an IRS audit. If you run your business as a sole proprietorship—meaning you own the business and are responsible for its assets and liabilities—you’re not legally required to have a separate business account, but it’s still a good idea. Limited liability companies (LLCs), partnerships, and corporations, however, are legally required to have a separate business account.

Ultimately, creating a separate financial account will lessen your chances of accidentally keeping or reporting wrong business records.

Track your expenses

As consumers, we sometimes don’t track all our personal expenses; however, tracking your business expenses is crucial to keeping your daycare thriving. It helps you understand your cash flow so your expenses don’t outweigh your income. Tracking your expenses also helps you stay within your budget and figure out where you can save money. For example, some common tax deductions your daycare can receive are for employee wages, bank fees, advertising charges, supply charges, furniture and equipment costs, and meal expenses. You can claim these on your taxes only if you track them. When in doubt, track everything.  

Transition to a digital software

How are you managing your bookkeeping? In the past, you might have been using an outdated system of paper, pen, and a filing cabinet. A more up-to-date approach might look like managing your finances with a spreadsheet. Now, many daycare owners are turning to digital software to record their balances, deposits, revenue, and more. A tool like brightwheel’s billing and payments feature makes it convenient to manage payments, deposit funds, and centralize record keeping.

Be sure to take your time as you move your financial information to any bookkeeping platform. It can become overwhelming doing it all at once, so a gradual approach is best as you get familiar with the software.

Check your transactions

You don’t want to wait until the end of the year to find out that there are errors in your transactions. At the end of each month, compare your transactions, both revenue and expenses, with your accounting information or software. This will help you identify any clerical errors that might’ve been made during bookkeeping. When checking your transactions, check your monthly account balance, calculate your revenue and expenses, and look for mistakes between your receipts and bank statements.

Pay estimated quarterly taxes

If you’re transitioning from being an employee to someone who owns their business, it can be difficult to remember (or wrap your head around) quarterly estimated taxes. While most of us pay attention to the April 15 tax deadline, you’ll also need to be aware of additional important dates as a business owner. 

It’s recommended that business owners pay estimated quarterly taxes throughout the year. This helps you avoid fees during tax season and can lessen the financial burden of paying your taxes all at once. With your bookkeeping records in order, you can figure out your profits and use that to estimate your taxes.

Stay on track

An organized bookkeeping system is the only way to keep track of your daycare business transactions. By recording your expenses and revenue, you can stay within your budget, find discrepancies, and save on tax deductions. Bookkeeping can be a tedious process, especially if you’re manually managing your finances. Transitioning to digital software will help you reap the greatest benefits of bookkeeping—having clear insight into your finances and using that information to make sound financial decisions for your childcare program.

Brightwheel is the complete solution for early education providers, enabling you to streamline your center’s operations and build a stand-out reputation. Brightwheel connects the most critical aspects of running your center—including sign in and out, parent communications, tuition billing, and licensing and compliance—in one easy-to-use tool, along with providing best-in-class customer support and coaching. Brightwheel is trusted by thousands of early education centers and millions of parents. Learn more at mybrightwheel.com.