Catching Up on Bookkeeping for Your Handmade Business — A Step-by-Step Reset
Fallen behind on your handmade business bookkeeping? Here's exactly how to catch up, including the inventory step most guides forget to mention.
Somewhere between filling orders, sourcing materials, and actually making things, the bookkeeping slipped. It happens to almost every maker. And if you’re reading this, you’re probably staring at months of unrecorded transactions wondering where to even start.
First: you’re not alone. This comes up constantly among makers. And the good news is that catching up on bookkeeping is entirely doable, even if you’re a year behind, as long as you work through it in the right order.
There’s just one thing most bookkeeping catch-up guides miss. They’re written for service businesses or generic small business owners. For product-based businesses (makers who sell things they physically make) there’s an extra layer: inventory. Skip it, and your books will look complete but won’t actually be.
More on that shortly. First, let’s get the basics sorted.
Why Makers Fall Behind on Bookkeeping (And Why That’s Okay)
Nobody sits down and decides to ignore their books. It creeps up. You get a rush of orders. You spend a weekend making instead of recording. Then two weeks pass, then six, and suddenly it’s been four months and the idea of opening your spreadsheet feels genuinely overwhelming.
The business education that comes with selling on Etsy or Shopify doesn’t include an accounting module. You’re expected to figure it out, which is a bit unfair, honestly. So if you’re behind, that’s not a character flaw. It’s what happens when creative people are also trying to run businesses without a bookkeeper.
Catching up now, even months late, is far better than waiting until tax time forces your hand.
What You’ll Need Before You Start
Gather these before you sit down to work. Having everything in one place saves the painful stop-start cycle of hunting for records mid-session.
- Bank statements: every month you need to cover, from your business account
- Credit card statements: any card used for business purchases
- Payment processor records: Etsy Payments, Shopify Payments, PayPal, Square, or wherever sales land
- Receipts: digital or physical, for any purchases you haven’t recorded yet
- Sales channel data: order history exports from Etsy, Shopify, or wherever you sell
- Any invoices: if you sell wholesale or take custom orders by invoice
You don’t need everything perfect before you start. Begin with bank statements. Everything else fills in around them.
The Bookkeeping Catch-Up Process for Makers
Work through these steps in order. Each one builds on the last.
Step 1: Reconcile Your Bank Statements
Your bank statement is the source of truth. Start with the earliest month you’re missing and work forward.
For each statement, categorise every transaction: sales revenue, material purchases, packaging, shipping supplies, marketplace fees, subscriptions, and so on. Most accounting tools (QuickBooks, Wave, Xero) let you import bank statements directly and suggest categories.
Don’t obsess over getting every category perfect on the first pass. You can adjust later. The goal right now is getting transactions into the system, not having them perfectly organised.
Step 2: Record Sales by Channel
Payment processor imports give you revenue figures, but they don’t always break down cleanly by product or channel. Go into each sales platform and pull your order history for the period you’re catching up.
You want to know:
- Total revenue by channel (Etsy, Shopify, markets, wholesale)
- Returns and refunds
- Fees charged by each platform
If you sell on multiple channels, this is also where you’ll notice any discrepancies between what you received in your bank account and what the platforms show you earned. Marketplace fees and processing fees are usually the gap.
Step 3: Categorise Your Expenses
This is where most people spend the most time. Go line by line through your bank and card statements and put each business expense in the right bucket:
- Cost of goods sold (COGS): materials and supplies that went directly into products you made and sold
- Packaging and shipping: boxes, tape, mailers, postage
- Platform fees: Etsy listing fees, Shopify subscription, marketplace commissions
- Marketing and advertising: paid ads, promoted listings
- Tools and equipment: any equipment purchases (check whether these are expenses or depreciable assets — worth asking your accountant)
- Home office or studio: if you work from home, a portion of rent and utilities may be deductible
For COGS specifically: what counts is the cost of materials that went into products you actually sold, not everything you bought. This is where the inventory step becomes critical.
Step 4: The Step Most Guides Skip — Reconcile Your Inventory
Here’s where bookkeeping catch-up for makers diverges from generic small business advice.
If you make physical products, your COGS isn’t just “what I spent on supplies.” It’s specifically the cost of the materials that went into the products you sold. To get that number right, you need to know:
- What materials you had at the start of the period
- What you purchased during the period
- What you used to make products
- What finished products you sold
- What materials and finished goods are still on hand
This is inventory accounting. Most bookkeeping guides skip it entirely or treat it as a footnote, because they’re written for service businesses or retailers buying finished goods rather than making them.
For a handmade business, this step is not optional. The IRS asks about it directly on Schedule C (Part III, Cost of Goods Sold), and it requires you to report beginning inventory, purchases, and ending inventory to calculate your COGS accurately. Skip it and you’re filing incomplete numbers.
If you’ve been tracking this in a spreadsheet, pull those numbers now. If you haven’t, you’ll need to either reconstruct it from your materials purchase records and production notes, or do a physical count of what you currently have on hand and work backwards from there.
This is also the part where software like Craftybase makes a significant difference. Rather than manually tracking which materials went into which products, it does that automatically based on your recipes and manufacturing records. Your COGS is calculated in the background, not reconstructed at catch-up time.
Learn more about how COGS works for handmade sellers and what goes on Schedule C for product-based businesses.
Step 5: Calculate Your COGS for the Period
Once you have your inventory figures, the formula is straightforward:
COGS = Beginning Inventory + Purchases − Ending Inventory
Where:
- Beginning inventory = the value of materials and finished goods you had at the start of the period
- Purchases = all materials, supplies, and components you bought during the period
- Ending inventory = the value of what you still have on hand
The result is what it actually cost you to make and sell the products that generated your revenue. That number goes into your books as cost of goods sold, and it’s what flows through to your tax return.
If your COGS calculation reveals your margins are tighter than you thought, that’s important information, even if it’s uncomfortable. Better to know now than to discover it after another year of selling at the same prices.
Step 6: Pull It Together and Review
With income categorised, expenses sorted, and COGS calculated, you can now produce a simple profit and loss view for the period:
Revenue − COGS − Operating expenses = Net profit (or loss)
Review it by month where you can. Look for patterns: months with high material spend but low sales (you may have been building stock), or months where margins compressed unexpectedly (material costs went up, or a product mix shift happened).
This isn’t just for tax purposes. It tells you how your business actually performed, and that’s information worth having.
Setting Up So You Don’t Fall Behind Again
The goal after a catch-up isn’t just to get current. It’s to build habits that keep you current.
Do a quick reconciliation monthly. Set aside 30-60 minutes at the end of each month. Import bank transactions, check that expenses are categorised, and verify your sales numbers match what arrived in your account. Monthly catch-ups take a fraction of the time of quarterly or annual ones.
Track inventory as you go, not at the end. If you’re manually tracking materials, log purchases when you make them and record what you used when you manufacture. Waiting to reconstruct this at the end of a quarter is where the pain comes from.
Separate your business and personal finances. A dedicated business bank account and card make bookkeeping dramatically simpler. Every transaction is business-related by default. If you haven’t done this yet, it’s worth doing before anything else. A dedicated business bank account removes most of the sorting-personal-from-business friction that slows down catch-up.
Consider software that handles inventory alongside bookkeeping. Most bookkeeping tools track money. Craftybase tracks money and materials, so your COGS is calculated automatically as you manufacture rather than reconstructed from scratch every quarter. If you’re finding the inventory catch-up step the hardest part, that’s a signal that tracking it manually isn’t sustainable at your current volume.
Frequently Asked Questions
How far back do I need to go when catching up on bookkeeping?
For tax purposes, you generally need records going back three years in case of an audit, and seven years for anything related to property or assets. For a practical catch-up, start with the current tax year, get that complete first, then work on prior years if needed. If you're only behind by a few months within the current year, you can almost certainly get current in one or two focused sessions.
What if I can't find all my receipts?
Your bank and credit card statements are usually sufficient documentation for most expenses. If you paid for something business-related and it shows on your statement, you can generally claim it even without the original receipt. For large purchases, it's worth trying to get a duplicate receipt from the vendor. But don't let missing receipts stop you from completing the catch-up. Document what you can and move forward.
Do I need to track inventory separately from my bookkeeping?
Yes, inventory tracking is technically separate from bookkeeping, but the two are deeply connected. Your bookkeeping records transactions (money in, money out). Inventory tracking records what materials you have, what you used, and what finished goods are on hand. You need the inventory data to calculate an accurate COGS, which flows into your bookkeeping. Most general bookkeeping tools don't handle this well for product-based businesses, which is why many makers use dedicated inventory software alongside their accounting tool — or use Craftybase, which handles both.
Can I catch up on bookkeeping myself, or do I need an accountant?
Most makers can handle their own catch-up, especially with accounting software to guide categorisation. Where an accountant adds value is in reviewing your COGS calculations, advising on what's deductible, and preparing your actual tax return. If your books are more than a year behind or you have complex situations (multiple income streams, home office deductions, equipment purchases), getting a bookkeeper for the initial catch-up session is often worth the cost. They can also set you up with a system so it doesn't happen again.
How do I catch up on COGS if I didn't track my materials purchases?
Start with your bank and credit card statements. Any purchases from craft suppliers, wholesalers, or raw material vendors are your materials costs. Pull order history from suppliers if available. For the ending inventory value, do a physical count of what you have on hand now and estimate the cost of those materials based on what you paid. It won't be perfectly precise, but a well-researched estimate supported by documentation is better than leaving COGS blank. Going forward, Craftybase tracks material costs against each production run so you never have to reconstruct this again.
Getting caught up feels overwhelming until you start. And once you start, you usually find it’s more manageable than the dread suggested.
The key for makers is to not skip the inventory step. Recording your sales and expenses is half the picture. Knowing what materials went into those sales is the other half, and it’s the piece that determines whether your pricing is actually working.
If you want to make sure the inventory tracking doesn’t slip behind again, Craftybase tracks your materials, recipes, and COGS automatically as you manufacture. It handles the maker-specific bookkeeping layer so your numbers stay current without a quarterly reconstruction session.
