- Bookkeeping involves verifying receipts, depositing payments into a bank account, and keeping clear records so that all financial information is easily accessible when needed.
- Bookkeeping is important because accurate accounting records are essential to a company's sustainability. Accurate bookkeeping helps a business manage its cash flow, meet its financial obligations and plan its investments.
- To get started with bookkeeping, you need to become familiar with and set up a chart of accounts, record all financial transactions, reconcile bank accounts, and run monthly financial statements.
- This article is for business owners who want to improve their knowledge of bookkeeping and follow best practices in setting up a system to record the financial activities of their company.
Whether you are an independent contractor or a multinational corporation, bookkeeping is important to you. It will help you establish a budget. With a budget, you are better equipped to plan for future expenses. It will also aid in tax preparation. These bookkeeping tips and best practices will help your business improve its financial recordkeeping.
What is bookkeeping?
Bookkeeping consists of creating and maintaining an organization's financial records. It involves consistently recording a company's financial transactions, as well as the archiving and secure storage of financial documentation. When bookkeeping is handled properly, the information is accurate, well organized and helpful so that business owners or shareholders can make key financial decisions involving the company.
Editor's note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
Why is bookkeeping important for businesses?
Proper bookkeeping helps you maintain accurate financial records, which businesses are required by law to do for taxation purposes. Besides the legal requirement, good bookkeeping offers practical business benefits. Some of the reasons why good bookkeeping is essential to a successful business are:
- Budgeting: When income and expenses are recorded, it is easier to review your financial resources and estimate cash flow.
- Organization: Bookkeeping is an important tool for others – the IRS, investors, accountants and lenders – who have an interest in your financial records. When your records are well organized, it is easier to locate and provide information when needed, it can be easier to file your taxes, and it can improve your chances of securing funding.
- Analysis: Bookkeeping helps your company generate financial statements. These statements can be used as a tool to track cash flow and assist you in analyzing your company's strengths and weaknesses.
- Planning: Financial statements can also indicate initiatives that have or haven't worked, which can help business owners and shareholders plan for the future.
[Related Article: How and Why to Audit Your Company Bookkeeper]
Bookkeeping vs. accounting
A bookkeeper ensures that all financial transactions are recorded and organized for financial reporting. Depending on the size of the company, quarterly reporting may be required. In some cases, this information is needed only at the end of the year for tax preparation.
An accountant takes a bookkeeper's work, analyzes the data and prepares financial statements for the company.
Single vs. double-entry bookkeeping
Single-entry bookkeeping is a good choice if your business is small and has a low volume of activity. It is similar to keeping a checkbook. You record one entry per transaction. You keep a two-column ledger: one for revenue and one for expenses.
A double-entry bookkeeping system has two columns, and each transaction is located in two accounts. You enter a debit in one account and a credit in another for each transaction. For example, if your company wants to pay off a creditor, the "cash" account is reduced by the amount you owe to the creditor. That is called a debit. The "creditor" account is then increased by the same amount. That is called a credit. This method is the best way to keep track of asset and liability accounts. The advantage of a double-entry accounting system is that it assures accuracy. For every debit, there is a corresponding and equal credit.
How to get started with bookkeeping
To get started with bookkeeping, the first step is to familiarize yourself with bookkeeping terms and phrases. (You can find a glossary of bookkeeping terms below.) In addition to reading this article (and others on Business News Daily), you can find resources online, including helpful blogs, webinars, and tutorials. There are also workshops you can attend.
The next step is to choose which accounting method (single entry or double entry) you want to use. Once you know that, then decide how you want to maintain your records. The following are the three most popular options:
- Spreadsheets: This is a good option when your business is in the early stages. You can use programs like Excel or Google Sheets.
- Accounting book: You can purchase hardbound accounting journals or ledger sheets, which provide an efficient way of tracking simple accounting records.
- Bookkeeping software: You can use a cloud-hosted bookkeeping app or desktop software to help you record your company's transactions.
Bookkeeping best practices
Keep these best practices in mind when implementing a bookkeeping system in your company:
- Maintain accurate records. Good recordkeeping will aid in tax preparation and financial decision-making.
- Use accounting software to track expenses. Using accounting software can help you save valuable time. Many applications connect with your business's checking account so you don't have to manually record entries.
- Monitor everything. Keeping a close watch on your cash flow can help you avoid running out of funds and incurring expensive bank fees. Keep a record of all receipts – this is your proof of how you've spent funds throughout the year and can be invaluable if you're audited.
Who should manage bookkeeping services?
There are several options to explore when deciding who should manage your bookkeeping.
DIY
When your small business is just starting out, you might do your own bookkeeping. This option is a good choice if you are on a tight budget. You can find good resources online that can help you get started and provide tips to ensure you are doing it correctly. However, bookkeeping can be time-consuming, which is something to consider.
Third-party service
As your business grows, it may be time to hire a service to manage your books. Although this is an expense, your time is valuable, too. If you're considering this route, check with other business owners for recommendations on the services they use.
Accounting software
Accounting software assists you with basic billing, invoicing and tax preparation. It can help manage your clients, reconcile your bank accounts and generate essential financial reports that can help your business grow.
Glossary of bookkeeping terms
Some common terms used in bookkeeping to be aware of include:
- Account: A place where financial entries are recorded. You enter business credits and debits pertaining to the operation of your business.
- Accounting: The process of organizing and entering financial data into a bookkeeping system for your business.
- Accounts payable (A/P): These are funds owed by your business to other businesses or authorities. Money that you owe is also known as a liability.
- Accounts receivable (A/R): This is money owed to your business by your customers or other entities. Money owed to you can also be called an asset.
- Assets: This is any item of value owned by your business. It includes cash and accounts receivables, as well as any equipment or vehicles owned by your company.
- Budget: A financial plan that estimates what you will earn during the year and what your earnings will be spent on. Once this plan is in place, you can then compare the actual figures to what was estimated.
- Capital: This refers to cash or other assets a business owner has to start and run a business.
- Credit: A credit is a bookkeeping entry that decreases assets and expenses and increases income and liability.
- A creditor is a person or business to whom your company owes money.
- Data is financial information entered in your bookkeeping system.
- Debit: A debit is an entry in your bookkeeping system that increases assets and expenses and decreases income and liability.
- A debtor is a person or company that owes your business money.
- Deductible expense: A purchase that reduces the amount of income tax you owe the government because it reduces your profit.
- Depreciation refers to a decrease in value of the assets owned by your business over time due to wear and tear or the natural obsolescence of a physical asset. This can be claimed as a business expense and can reduce your income tax.
- Double entry: A system of bookkeeping in which financial information is entered twice: once as a debit and once as a credit.
- Equity: The net assets of your business minus your liabilities.
- Expenses refer to purchases made by the business or costs the business incurs. This can reduce the amount of tax owed to the government.
- Fiscal year: A financial year comprising 12 months. Your company's fiscal year can follow the calendar year, or it can begin with any month. Income taxes are calculated at the end of those twelve months.
- General ledger accounts: All financial transactions (debits and credits) are displayed in the ledger or main accounting record a company uses.
- Gross profit: The business's income minus the cost of sales is gross profit. If the costs of sales exceeds the income, this is known as gross loss.
- Liability: Any debt owed by the company to other businesses or authorities. Liabilities can include loans or credit card balances.
- Net profit: The amount of money a company has after expenses are subtracted from gross profit.
- Opening balance: This is the amount of money a company carries forward on the first day of the month. This amount should match the ending balance of the previous month.
- Payable is any bill that is due from your company. This is part of your accounts payable.
- Petty cash: A small amount of cash that is kept on hand for small purchases, such as stamps, pens, etc. These purchases are typically not recorded the general ledger.
- Profit refers to the difference between a company's earnings and what it pays in expenses.
- Receivable: These are funds that businesses owe you and should be included in your accounts receivable report.
- Reconcile: A process in which you review your records against the bank statement to ensure they match. It is also a way to ensure all invoices owed to you have been paid.
- Recurring: A transaction for a preset amount that occurs at a set time, i.e., weekly or monthly.
- Remittance refers to payments that a company makes in relation to an invoice or bill.
- Statement: A summary of financial information. Examples of common statements can be a profit and loss report or a bank statement, which lists all of the transactions that take place in a bank account for a set period of time.