Bookkeeping is one of the most crucial aspects of running a successful business and managing your finances. It will help you budget accurately, prepare for taxes, comply with government regulations, and much more.
Simply put, bookkeeping is the daily recording of all financial transactions and information related to your business—amounts, dates, revenue sources, expenses, gains, and losses. It ensures that all financial transaction records are accurate, current, and complete. It’s an essential part of your company’s accounting process.
The accuracy of your financial records will help you in answering critical questions about your business, such as:
- Is my business profitable?
- Is it on solid financial footing?
- Are there any anomalies in my cash flow?
In this post, we’ll go over what bookkeeping is, how it varies from accounting, why it’s vital, and the procedures involved.
Bookkeeping vs. Accounting
Before we get into the specifics, you should know the distinction between accounting and bookkeeping.
Bookkeeping is a transactional and administrative role that records your company’s financial transactions. Things like purchases, receipts, sales, and payments.
Accounting, on the other hand, provides financial insights based on data from your bookkeeping.
In other words, bookkeepers and accountants collaborate (rather than compete) to manage your company’s accounts.
Types of Bookkeeping
Before you begin your bookkeeping process, it’s best to choose between the two main types.
The most crucial factor to consider is the size of your company. Your daily transaction volume and income earned will give you a good estimate. For instance, if you own a small company, you may not need a system developed for large corporations.
With that out of the way, here are the two main bookkeeping types, so you can decide on the right one for your business:
Single-entry bookkeeping is a simple method in which you make one entry in your records for each transaction. These transactions are frequently recorded in a cash book to track revenue and expenses. Because of its simplicity, there’s no need for any formal training to get started. The single-entry method is appropriate for small companies and sole traders with a small inventory, no credit, or few tangible assets.
Double-entry bookkeeping is a more robust method than single-entry. Every transaction affects at least two accounts and is recorded as a debit or a credit. The total credits must always equal the total debits in this system. When this is done correctly, your books are said to be “balanced.”
If your company is large, public, or buys and sells on credit, the double-entry bookkeeping method is recommended. One reason for this is that this system has a lower margin of error. You can detect any discrepancies because the transactions are offsetting one another.
What Are The Methods of Bookkeeping?
Businesses often use one of two methods. Manual or computerised.
Manual bookkeeping is the paper-based and traditional method that business owners have used for thousands of years. Transactions are manually recorded in a ledger or a paper book, and it is primarily used by small businesses with simple transactions. Manual bookkeeping is less expensive and simpler to complete than computerized bookkeeping, but it can be time-consuming, tedious, and prone to errors.
Technology-based bookkeeping is a relatively new and innovative method of recording business transactions through the use of accounting software. This method is simpler, faster, and more convenient. The computerised method provides reliable and accurate financial reporting with very few drawbacks.
Why Bookkeeping is Important for Your Business
The importance of recording your day-to-day business transactions cannot be overstated. Failure to analyze your company’s expenses and revenues can prevent it from reaching its full potential. If that isn’t enough, the following points will further demonstrate its significance.
Improve Your Business Budgeting
Bookkeeping allows you to easily examine your expenses and make adjustments to your budget as needed.
Examining financial statements allows you to determine which products, services, or industries bring in the most money for you. That enables you to refocus your business to increase profits.
It can also help you in identifying expenses that are no longer required. For example, some advertising mediums, such as newspapers and television, were once effective ways to draw attention to your brand, but they are no longer as effective today. That way, you can reduce that slice of your marketing budget and redirect it someplace else.
For business owners, tax preparation can be extremely stressful. Bookkeeping will be your best friend in avoiding the hassle.
Instead of having endless stacks of documents to analyze and sort through, bookkeeping will help you find all of this information in one place, neatly arranged and ready to file.
Not only will you save time and reduce stress, but you will also have all of your invoices ready and will be able to detect any potential tax write-offs.
Helps You Comply With Government Regulations
Businesses must abide by the legal rules and financial systems that govern them. Financial transactions, financial statements, tax compliance, and cash flow reports are some of the typical documents you must present to the government as a business owner.
Well-maintained and accurate books will provide you with a solid foundation for compliance.
The bookkeeping process can be simplified by following these steps:
1 – Prepare All Transaction Documents
Every business transaction, operation, or other events should be documented. This is the starting point for your bookkeeping process.
Documents to keep track of include:
- Purchase invoices from suppliers when buying goods or services
- A copy of the banknote payable if borrowing money from a bank
- Transaction slips when customers pay with credit cards for your products
- Salary rosters and time cards for payroll
These documents serve as information sources for your bookkeeping system, which the bookkeeper uses to record all of your business’s transactions.
2 – Record Transactions in Your Original Books of Entry
Record all transactions from the source documents in a preliminary directory called “Book of Original Entry.” It is a journal in which invoices, cash transactions, and other transactions are recorded before they are transferred to ledger accounts. The book of original entry is updated daily and contains all transaction-related information.
3 – Move The Entries To Your Ledger
Transfer the details written to the ledger after analyzing your records in the books of original entry. The ledger is the main accounting book that records all debits and credits in business operations to balance the books.
4 – Prepare a Trial Balance
A trial balance will help you in detecting any errors that have occurred if you are using a double-entry accounting system. A trial balance should be prepared by compiling all the ledger account balances for a given period, usually at the end of each reporting period. The trial balance is considered balanced if the total debits equal the total credits.
5 – Close The Books At The End of The Financial Year
At the end of each financial year, use your ledger to prepare the final set of your company’s accounts. These final accounts include a profit and loss statement, a balance sheet, and a trading account. These records are required for taxation and other purposes.
Keep Up With Your finances
The success of your business is dependent on keeping accurate financial records. It is essential for developing effective business strategies to ensure your success. However, using the incorrect system for your organization can cause more difficulties than it solves. And, while you can absolutely do it yourself, manual bookkeeping can consume a significant amount of your time, time that could be spent on other aspects of your business. Accountsdept is here to help if you want to outsource accounting tasks to the experts.
At Accountsdept, we offer a complete suite of accounting services, provided by a dedicated team for any business size.