The Basics of Bookkeeping

Bookkeeping is one of the most important aspects of running a business. Without proper bookkeeping, a business can quickly go bankrupt. But what is bookkeeping? Is bookkeeping the same as accounting and how does it all work?

Bookkeeping: What Is It?

What is bookkeeping, exactly? Bookkeeping is simply the recording and maintenance of a business’s financial transactions. This accounting process is crucial because it helps:

·       Business owners make informed decisions about operations, investments and other financial decisions.

·       Banks, investors and the government understand the financial health of the business.

Bookkeepers use one of two accounting methods when recording transactions:

·       Cash: Records income when the money is received.

·       Accrual: Records income when a transaction occurs, even if the business doesn’t have the cash in hand yet.

While their job may seem similar to an accountant, bookkeepers are more limited in what they can do for a business.

What Distinctions Exist Between Accounting and Bookkeeping?

Accounting and bookkeeping are similar in nature, but there are some distinct differences.

·       Bookkeeping is simply the recording and maintaining of financial transactions for a business.

·       Accounting also encompasses bookkeeping, but it adds the interpretation and analysis of data bookkeeping data.

Accounting is more subjective because it looks beyond just the financial numbers. For example, an accountant may suggest options for optimizing a business’s tax returns and help owners see the “big picture” of their business finances.

Accounting also includes conducting audits and forecasting cash flow and future needs. For example, accounting software may estimate how much taxes a business will need to pay this year or software like Cash Flow Frog can use a business’s accounting data to forecast and manage cash flow.

Bookkeeping, on the other hand, is purely the recording of financial transactions.

What Are the Requirements for Setting Up Bookkeeping in Your Business?

Setting up bookkeeping in your business is a relatively straightforward process, and it’s one that should begin before you even open your business.

While you can buy a ledger and keep a physical, written record of your transactions, it’s typically easier to use accounting software.

Step 1: Choose an Accounting Method

Before you start recording transactions, you need to choose an accounting method. Choose from either cash or accrual accounting methods.

Step 2: Start Recording Transactions

Next, you can start recording transactions based on the accounting method you’ve chosen. Every transaction must be recorded in either your ledger book or your accounting software.

If you’re using accounting software, this process will be handled automatically whenever you create and send an invoice.

Step 3: Reconcile Accounts

Monthly reconciliation helps you understand which checks are still outstanding and allows you to add additional charges and post bank transactions.

Reconciliation is an important process because it provides you with a more accurate cash balance.

If you’re using accounting software, reconciliation will be performed automatically if you’ve linked your bank account to your software application.

Step 4: Close

Once reconciliation is complete and adjustments have been made, you can close out the month and start printing financial statements.

Accounting software will also take care of the closing process and create statements for you.

Acquiring Knowledge of Assets, Liabilities, And Equity for Bookkeeping

Bookkeeping is more complex than it seems at the surface level. If you’re going to do your own bookkeeping, it’s important to understand these three accounts:

·       Assets: Anything that is of value in your business. Assets can include accounts receivable (A/R), cash in your bank account, inventory, equipment, furniture, etc.

·       Liabilities: Any debts your business owes, such as accounts payable (A/P) and loans.

·       Equity: The balance after subtracting your business liabilities from your business assets.

In addition to understanding these accounts, you need to understand credits and debits. Any transaction you record will be either a credit or debit.

Best Practices for Bookkeeping

Bookkeeping plays an important role in the financial health and management of a business, so it’s important to follow the best practices for this process.

These best practices include:

·       Choose your accounting method wisely and stick with it. Of course, you'll need the IRS’s permission if you want to change your accounting method, so keep this in mind.

·       Keep your personal and bank accounts separate. Comingling personal and business finances will make your bookkeeping and accounting more complex.

·       Optimize and update your chart of accounts regularly.

·       Set guidelines for processing accounts receivable and accounts payable to avoid confusion.

·       Plan for taxes ahead of time.

·       Use accounting software to track expenses and streamline bookkeeping processes.

·       Ask vendors for electronic documents so that they can be easily integrated into your accounting software.

·       Consider using bookkeeping services if you don’t have enough time to do your bookkeeping properly.

Final Conclusion

Bookkeeping is essential for every business. It’s important to follow the best practices listed above and to understand how the process works. Messy or inconsistent bookkeeping will make it difficult to manage your business’s finances.