Bookkeeping is all about recording and keeping track of financial transactions. These are then recorded under different categories with supporting documents to verify the transactions.
The process involves tracking and monitoring all the accounts using accounting software. Moreover, bookkeeping helps you know details about where your money is going, how it is spent, and where your revenue comes from tax deductions.
A beginner needs to know about the basics of bookkeeping which include:
- Charts of accounts set up
- Records of financial transactions
- Bank account reconciliation
- Financial statements at the month’s closing
Bookkeeper and Accountant
If you are confused between the term accountant and a bookkeeper, then let me clarify. These only look similar apparently because a bookkeeper is someone that makes a recording of all the financial transactions. Whereas, an accountant is responsible for analyzing and interpreting the data that has been recorded by the bookkeeper.
If you want to know the basics of bookkeeping, you will find plenty of information from scratch.
There are certain accounts used during the bookkeeping process that you should know.
This is the value your business holds. It includes the cash balance in your bank account, inventory, office equipment, furniture, balance/money owed by customers to you, and accounts receivable balance.
This is debt that your business owes to vendors. These are your accounts payable balance or any kind of loans that your business owes.
These are any kind of income/money earned by your business during many operations like the selling of products or services. Whether that income comes from products sold or services rendered, it will be recorded in this account.
Your expenses like electricity bills, salaries of employees, and your working lunch with clients are all included in the expense account.
Then comes your equity account of business. You get equity after deducting business liabilities from business assets. This stands for your financial interest in the business.
Steps to handle your Bookkeeping for Small Business
Let’s go into more detail to know who bookkeeping actually works for small business setup. In this article, we have outlined different steps to make bookkeeping easy for you to understand.
Set up Chart of Accounts
Charts of accounts are actually the backbone of your business that help you record transactions properly. It is a list present in the General Ledger of the company which includes assets, liabilities, equity, expenses, and revenue. You can create or buy a ledger, but with accounting software, setting up a chart of accounts is easier.
Start Recording Financial Transactions
Whatever transaction incurred at your end of the business is either recorded in the ledger account or in the accounting software. This is about preparing an invoice for the customers in a similar manner to paying electricity bills. Moreover, a great thing about the accounting software is that the debits and credits for creating invoices are handled behind the scenes.
Let’s understand this from the example;
Journal entry for posting and preparing invoice amount to John Green is $150 for consulting.
After payment is made by John Green or he pays the invoice, the posted entry in the accounts will now be reversed.
Reconciliation of Bank Accounts
This is another important bookkeeping account that provides an accurate cash balance for small businesses with limited cash flows. Usually, you have to wait to receive a monthly bank statement or a reconciliation statement. These monthly reconciliations provide a transparent view of any outstanding checks, bank transactions, or additional charges/ account fees.
With the use of accounting software, the bank reconciliation process gets easier. This can be possible by connecting your bank account with the software. This helps you in daily and weekly reconciliation to make the month-end process simple. Without software, you will have to reconcile the accounts yourself manually.
Closing Month and Run Financial Statements
After your business bank reconciliation and other adjustments are achieved, you will have to close the month and prepare financial statements. With a manual ledger, you will have to close separate accounts for each transaction and combine them into proper accounts. However, this process is quite time-consuming and you can make things smooth with accounting software for the automatic procedure.
Usually, the month-end closing process leads you to the preparation of a financial statement. In the case of new products, you will choose any cut-off date for transactions and get an accurate balance for the month after the preparation of financial statements.
With three basic financial statements, you can get a closer view of the financial health of your business. These financial statements are then shared with your accountants or CPA to gain a birds-eye view of your financial reporting and business performance.
It provides an overview of your business assets, liabilities, and equity on a particular date.
For small businesses, the income statement is useful as it depicts the net income over a specific period of time.
Cash Flow Statement
During a specific period of time, the inflow and outflow of cash in any business are listed down in the cash-flow statement.
Types of Bookkeeping
There are two types of bookkeeping;
Big and small businesses use these two types of bookkeeping to keep track of transactions and profit or loss.
This is an easy and straightforward method that records your revenue and expenses in two different columns. Most small businesses opt for the single-entry system, as it has fewer transactions for keeping records.
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The double-entry system is more complicated in comparison to the single-entry system. This method records transactions of a single entry on both sides. If you purchase laptops for your office use, you have to add them to the debit side of your account.
In the same manner, this amount will be credited to accounts payable from the credit side. It means that data is entered twice and is called double-entry bookkeeping.
Significance of Bookkeeping
Bookkeeping is important as it assists in budget preparation along with organizing revenue and expenses. You find it easy to review the finances of your business, assess financial health, and produce an ideal financial road map.
There are many reasons which make bookkeeping important for your business:
- Bookkeeping makes it easier for you to understand the tax amount you need to pay
- It updates your books and you do not miss out on taxes to pay in time
- You can easily evaluate the money your business has to give salaries to employees and to deal with other financial matters.
With bookkeeping, there are fewer chances that you make mistakes while updating books.