Bookkeeping refers to the process of making and maintaining financial records. In a basic sense, bookkeeping involves documentation of an individual’s or company’s credits and debits, that is, what the entity owns and owes. This simple fact can have very complex ramifications, however. These complexities have led to the developing of professional standards subject to governmental regulation. At the company level, Bookkeeping is usually performed by professional accountants like those here at NumberSquad.
What is bookkeeping? The Basics of bookkeeping
In simple terms, bookkeeping involves keeping track of all the money coming into your business and going out of it. This includes monitoring sales, expenses, and any other financial activities. Bookkeeping is essential for managing cash flow, making informed decisions, and meeting legal and tax obligations. At its core, bookkeeping involves maintaining a general ledger, which is a record of all financial transactions organized into accounts. Some fundamental bookkeeping tasks include recording sales and expenses, balancing bank statements, and preparing financial reports. By staying on top of bookkeeping basics, business owners can ensure their company runs smoothly, identify potential issues early, and make better financial decisions for future growth.
What are the Main Elements of Bookkeeping?
It is important for the bookkeeper to know which form of accounting to use. There are two primary approaches to use in bookkeeping, these include:
The cash basis method is used to track financial transactions through money exchanges that appear in the books. It ignores outstanding expenses and owed income.
The accrual basis is a method that is a more realistic approach to bookkeeping. In the accrual method, bookkeepers record the financial transactions immediately. Entries are made as soon as income or sales amount becomes due.
10 Most Important Terms of Bookkeeping
Here are some common terms used in bookkeeping that you should be familiar with.
Resources owned by a business with economic value, such as cash, inventory, buildings, equipment, and accounts receivable.
Obligations or debts a business owes to other parties, such as loans, accounts payable, and mortgages.
The residual interest in a business after liabilities have been deducted from assets, representing the owner’s stake in the company.
Income generated by a business through sales, services, or other activities.
Costs incurred by a business during its operations, such as rent, salaries, utilities, and marketing.
A comprehensive record of all financial transactions organized by account, serving as a business’s central source of financial information.
Chart of accounts:
A structured list of accounts used to categorize and organize financial transactions in the general ledger.
Debits and credits:
A double-entry bookkeeping system’s two primary components represent accounts’ increases and decreases, respectively.
A record of a financial transaction in the general ledger, typically including the date, accounts affected, and amounts of debits and credits.
A financial report that lists all general ledger accounts and their balances, used to verify that the total debits equal the total credits.
History of Bookkeeping?
Some of the earliest written records consist of financial records used to keep track of transactions and debts, pointing to the possibility that bookkeeping was intimately involved in the development of writing. In earlier periods, literary and religious texts were commonly preserved through oral transmission. Double-entry bookkeeping appeared in the late-Medieval period in Florence, in what is now Italy, due to trading contacts with merchants using similar systems in the Mediterranean and Asia. Merchants and theorists from other cities of the Italian peninsula contributed to its cultivation and description over the next few centuries.
More recently, in the 19th century, governments formally regulated bookkeeping standards, with each official accounting body promulgating and enforcing its particular standards. The digital transformation of the past few decades has produced further changes, allowing for streamlining bookkeeping tasks and applying sophisticated information analysis techniques to accounting data.
What is the Importance of Bookkeeping?
Bookkeeping helps you keep track of your company’s expenditures. Bookkeeping is important in several respects. First, there’s the benefit that bookkeeping provides in terms of your ability to judge your company’s health and plan for its future. Second, good bookkeeping allows people outside the company to evaluate your company quickly. This facilitates the process of applying for financing, for example. Another important aspect of bookkeeping has to do with your company’s legal responsibilities. Transparent and orderly bookkeeping can help you to make your legal case if your company comes to be involved in litigation.
Who is in Charge of Bookkeeping?
Bookkeepers are in charge of keeping the books for a business. Bookkeepers are responsible for recording the income and the outflow of money, property, and other financial assets. The most important bookkeeper’s job is to record and review all financial data accurately. The information bookkeeper’s record is kept in a ledger or is logged into computer software created to track and record the company’s financial activities. Bookkeepers are also responsible for keeping track of the bank account or accounts and relating the incomings and outgoings of those accounts.
How Do You Do Bookkeeping?
How to do Bookkeeping? It’s one question that many small business owners may be asking themselves when they start up their businesses. Bookkeeping requires collecting records of expenses and revenues and then posting those transactions in a ledger.
Below are the steps that will allow you to learn how to do bookkeeping.
- Establish a System. It is essential to be consistent in bookkeeping. Consistency is important so that you keep receipts and remember to record transactions or record the same transaction twice.
- Use accounting software. Accounting software makes it simple to ensure that transactions are recorded reliably. Some programs such as QuickBooks, FreshBooks, or Expensify help to take the guesswork out of recording different types of transactions.
- Use a spreadsheet. Using a manual system, a spreadsheet will help you record transactions.
- Be consistent. It’s important to stay consistent when doing bookkeeping. You must be sure you enter the transaction data regularly and enter it the same way each time.
- Record transactions in journals. Transactions should be entered into daily or weekly journals, depending on your volume. These entries will include information on the transaction, such as buyer and seller information, amount, date, and type of transaction.
- Separate transactions into accounts. You should separate the transactions into different accounts within the ledger. Starting with set accounts will give you a clearer picture of where money is coming in and going.
- Post transactions regularly. You can post transactions daily, weekly, or even monthly. This should be done consistently.
- Analyze your ledger accounts. Ledger accounts can show the financial health of a business. Ledger accounts can be used to create simple comparisons or reports.
What are the Different Types of Bookkeeping?
There are different methods and types of bookkeeping that have different objectives. First, one objective of bookkeeping is the complete recording of transactions and is concerned with a complete and permanent record of all transactions systematically and logically. The second objective is to determine the financial effect on the business. This concerns the combined effect of all the transactions during a certain accounting period on the business. It’s important to understand these objectives of bookkeeping to understand the different ways that bookkeeping is done.
There are two types of bookkeeping systems that businesses commonly use, single-entry and double-entry. Each system has advantages and disadvantages depending on how they are used. A business must choose the system that better suits its needs to get the most out of the system. The double-entry system in bookkeeping requires a double entry in the ledger for each financial transaction. A single-entry Bookkeeping system requires recording one entry for each financial activity or transaction. The double-entry system provides checks and balances by recording a corresponding credit entry for each debit entry. The single-entry system is a basic system that a company uses to record the daily receipts or to generate a daily or weekly report of cash flow.
What are the Benefits of Bookkeeping?
Bookkeeping is an essential and required part of managing the finances of a business. Bookkeepers compile all the financial data of a business and then turn them into accessible reports that can be used for future analysis. Good bookkeeping has multiple benefits for a business. It can help a business stay organized and save money.
Access to detailed transaction records
It’s essential to maintain detailed transaction records when running a business.
Bookkeeping provides a thorough and detailed way to maintain that transaction records are kept up to date. It also allows you to have assistance once it becomes time to prepare financial statements or if your business is audited. The records from bookkeeping allow easier access to a business’s transaction history. Access to detailed transaction records is especially important in case your business is audited.
Having a detailed record gives you a better overview of the company’s accounts and makes it much easier to make decisions about the business’s financial future. When your financial data provides you with the confidence you need, you can start solving issues quickly and potentially take advantage of any opportunities.
Improved Tax Preparation
When filing taxes, it is essential to have up-to-date financial records detailing your company’s income and expenses. Maintaining accurate and up-to-date records will make it easier to have your receipts and invoices together come tax season. Bookkeeping can help make it easier during tax season, as your records will be ready and accessible for tax preparation.
Is Bookkeeping Required even for a Small Business?
Yes, it is important for small businesses to maintain accurate financial records. Knowing how to do bookkeeping is a good practice and is something that is required by law. It is important to know how to do it because accurate bookkeeping will help you budget your small business’s finances, and prepare the company’s financial records for tax season. It also helps a company stay better organized and can provide a good source of data for business analysis. Once an analysis is done on a business’s finances, management can make better decisions regarding the finances of a company.
Bookkeeping can also help provide better financial statements for investors and produces financial statements such as the balance sheet, the income statement, and the cash flow statement which all present the value of a company. This allows potential investors to have up-to-date information about the company. Investors can make better and well-informed decisions from good bookkeeping practices. This allows small business owners to have a better chance of finding potential investors for their business.
What is the Difference Between Bookkeeping and Accounting?
Bookkeeping vs. accounting, what are the differences between the two? The differences between the two are very important and are subtle but essential to the nature of the two. Where bookkeeping records the day-to-day financial transactions of a business, accounting focuses more on the big financial picture of a company. Bookkeeping deals with identifying and recording financial transactions only, whereas accounting refers to the process of summarizing, interpreting, and communicating the financial data of a company. Most of the information that is used in bookkeeping is not enough to make decisions, but management can make decisions based on the information obtained from accounting.
Small Business Bookkeeping Services
Small business bookkeeping services typically provide support with managing financial transactions and record keeping for small businesses. These services often include:
- Recording financial transactions such as sales, purchases, and payments in a software or manual ledgers
- Reconciling bank and credit card statements
- Generating financial reports such as balance sheets, income statements, and cash flow statements
- Tracking and paying bills
- Creating and sending invoices to customers
- Generating and filing tax documents
- Assisting with budgeting and forecasting
Small business bookkeeping services can be provided by professional bookkeepers, accounting firms, or specialized bookkeeping service providers. They can offer these services on-site, remotely or a combination of both. Some small business bookkeeping services may also offer software and tools to automate some of the tasks. The cost of bookkeeping services can vary depending on the provider and the level of service required.