Many small businesses think proper accounting needs software, an accountant on call and a steep monthly bill. It does not. A well-organised set of Excel sheets can do the job for a small shop, workshop or service business, and it produces the same reports a bank, an investor or KRA will ask for. The trick is to keep the system simple enough that you actually use it every week.

Step 1: Start with a cashbook

Every system begins with the cashbook, a record of every shilling that comes in and goes out. Use one line per transaction: the date, what it was, who it was with, the amount in or out, and the running balance. Keep cash and M-Pesa in the same book if you use both, with a column showing which one was used. The simple cashbook has the layout ready, and keeping records with M-Pesa Business shows how to match mobile money statements to your entries.

Update it at least once a week. A cashbook written up from memory at the end of the month is where mistakes and missing receipts start.

Step 2: Add categories

A list of transactions tells you little. Add a category to each line, such as sales, stock purchases, rent, wages, transport, airtime and tax. These categories are what let you see where the money goes. They also make it easy to separate business spending that you can deduct from personal spending that you cannot. See expenses small businesses can deduct for the list, and separating business and personal money for how to keep the two apart.

Step 3: Use a journal for the entries that are not cash

Not everything that affects your business is a payment. Goods sold on credit, bills you have received but not yet paid, and the wear on equipment all matter. A journal records these. Each entry has two sides, a debit and a credit, of equal value, and the journal entry book shows how to write them. If you sell on credit, the aged receivables tracker keeps track of who owes you money and for how long.

Step 4: Post to a ledger and check with a trial balance

Once a month, take your cashbook and journal entries and post them to a ledger, which is a page for each account such as sales, rent or bank. The chart of accounts and general ledger gives you the accounts to start with. Then prepare a trial balance, a list of every account balance. The total of the debits must equal the total of the credits. If they do not, there is a mistake to find before you go any further, and the trial balance template does the adding for you.

From the trial balance to reports

When the trial balance agrees, the reports follow almost automatically:

These two reports tell you whether the business is making money and whether it can pay its bills. A bank will ask for them if you apply for a loan.

Tie it to your tax

Good books make tax simple. Your sales total feeds your VAT or turnover tax return, and your expenses support your annual return. If you are not sure which regime applies, our turnover tax calculator and VAT return calculator show what you would pay, and the sole trader or limited company calculator helps with the bigger question of structure. KRA expects you to keep records for several years, so read how to keep business records for KRA.

Keep the habit simple

Back up your files, name them by year, and protect them with a password if they hold customer details. Reconcile your bank and M-Pesa balances at the end of each month; our guide to bank reconciliation, step by step walks through it. A basic system you use every week beats a perfect one you abandon in March.

Common mistakes to avoid

Three mistakes cause most of the trouble. The first is mixing personal and business money, which makes every report unreliable. The second is leaving receipts in a drawer instead of recording them the same week. The third is changing the layout of your sheets halfway through the year, so the months cannot be compared. Decide the structure once, copy the file for each new year and keep the old one untouched. If the business grows, an accountant can pick up a clean set of Excel books and move them into software without starting again.