Bookkeeping is the practice that records all transactions conducted by businesses. Bookkeepers are accountable for recording, classifying, and organizing all financial transactions that occur in the process of business operations. Bookkeeping is different from accounting. Accounting processes use the books maintained by the bookkeepers to create the annual accounting statements at the end of the year and accounts.
Smaller companies may opt for an easy bookkeeping system that tracks each financial transaction the same way as an account book. Firms that are more involved with financial transactions generally make use of the double-entry accounting process.
What is Bookkeeping?
Bookkeeping is the practice to keep track of each financial transaction performed by a business company beginning with the time of opening until the closure of the business. It is contingent on the accounting system employed by the company, each transaction in the financial system is recorded on documents supporting the transaction. This could be an invoice, a receipt or purchase order, or any other similar financial record that proves the transaction was made.
The bookkeeping transaction can be recorded manually in a notebook or spreadsheet software like Microsoft Excel. The majority of businesses use computer programs for bookkeeping to keep records of financial transactions. Bookkeepers may use double-entry or single-entry bookkeeping to keep track of financial transactions. Bookkeepers must be aware of the company’s diagram of accounts and how to utilize credit and debits to make sure that the books are balanced. 1
How Does Bookkeeping Differ From Accounting?
Bookkeeping for a business is vital, though essential, but not a real accounting process. Bookkeepers collect the paperwork for every financial transaction, then record all transactions within the journal of accounting and categorize each transaction in terms of one or two debits or one or more credits, and arrange the transactions in accordance with the firm’s chart of accounts.
All financial transactions are recorded, however, they need to be summarized at the close of certain time periods. Some firms require quarterly reports. Some smaller companies might require annual reports at the close of the year, to prepare for tax filing.
After the time frame the accountant is appointed and analyses, reviews and interprets financial data for the company. Accounting professionals also create the year-end financial statements as well as the appropriate accounting for the company. The year-end financial reports produced by the accountant must be in line with the standards set by the Financial Accounting Standards Board (FASB). These standards are referred to as Generally Accepted Accounting Principles (GAAP).
What Do You Need to Set Up Bookkeeping for Your Business?
One of the initial decisions you need to make when making the decision to set up your bookkeeping program is whether or not you want to utilize the accrual or cash software for accounting. If you run an unassuming, small-sized business working from home, or perhaps a bigger consulting business from a single office, you may want to go with cash-based accounts. 2
If you are using Cash accounting, it is important to document your transactions when cash is transferred. Utilizing accrual accounting, you can record transactions immediately, even if cash isn’t transferred until a later date. Some businesses begin their business using cash accounting but then shift to accrual accounting when they expand.
If you intend to give your customers credit or solicit credit from your suppliers then you must use the accrual system of accounting.
You must also decide when you are a brand new business owner if intend to utilize books that are double-entry or one-entry. Single-entry bookkeeping resembles keeping your checkbook. You keep track of transactions as you pay bills and also make deposits to your company account. It is only effective in the case of a company that is small and has a small number of transactions.
If your business is larger as well as more intricate, it is necessary to establish a double-entry bookkeeping system. At least two entries two, are recorded for every transaction. A minimum of the debit goes to a single account and then at the very least one credit is given to a different account. This is the basis of accounting with double entry.
Businesses also need to establish computers for accounting as they establish bookkeeping for their companies. The majority of companies utilize computers to track their accounting journals and entry into their bookkeeping. Smaller companies may utilize basic spreadsheets, such as Microsoft Excel. Larger corporations use more sophisticated software to track accounting journals.
Finally, the company must create a chart of accounts. Chart of Accounts can be altered in time as the company grows and alters.
Understanding Assets, Liabilities, and Equity When Balancing the Books
Effective bookkeeping requires a thorough understanding of the basic accounts. These accounts, along with their sub-accounts form the company’s account chart. The assets, liabilities, as well as equity, are the three accounts of the company’s statement of balance.
Assets are the assets that the business has including its inventory as well as accounts receivable. Also, assets include fixed assets that are typically the equipment, plant, and even land. If you take to examine the layout of the statement of balance you will find the accounts for assets are listed in order of their liquidity. Asset accounts begin at the cash accounts as cash is extremely liquid. After the cash account, you will find the receivables, inventory, and fixed assets account. These are tangible assets. You can even touch them. Companies also have intangible assets, such as the goodwill of customers, which can be included in the balance sheet.
The liabilities are the amount that the business has to pay similar to the amount they owe their suppliers, banks, mortgage loans, business loans as well as any other debt that is recorded. The accounts for liability on a balance sheet comprise the current and long-term liabilities. These are typically accruals and accounts payable. These are typically what the business owes its suppliers, credit card companies as well as bank loans. Accruals include taxes due such as sales tax due as well as social security and Medicare taxes on employees, which are usually paid every quarter. Long-term obligations have a term that is longer than one year. They include things like mortgage loans.
Equity is the capital investment that the business owner, and any other investors, make in the company. The equity accounts contain all the rights owner has against the business. The business owner is an investment and it could be the sole investor in the company. If the company has acquired other investors, it will be evident in this.
In bookkeeping, you need to make sure that your books are balanced at the close of the year. The bookkeeper should be aware of the items in question and ensure that all transactions involving assets as well as liabilities and equity are correctly recorded and at the correct spot. There is a crucial formula you can employ to ensure that your books are always balanced. The formula is called”the Accounting Equation:
Assets = Liabilities + Equity
The accounting equation explains that the entirety of the assets the company owns (assets) is weighed against liabilities against the business (liabilities as well as equity). Liabilities are the claims that arise from the amount you owe to vendors and lenders. Business owners have rights against the remaining funds (equity).
Income Statement and Bookkeeping: Revenue, Expenses, and Costs
It is the Income statement created by making use of revenue from sales as well as other sources, expenditures, and expenses. In bookkeeping, you need to document every financial transaction in your journal for accounting that falls within the three categories listed above.
Revenue is the sum of the earnings that a company earns from selling its goods or services. 4 Costs also referred to as cost for selling goods is the sum of money that a company spends to purchase or make the products or services it offers to its clients. The Account for Purchases on this chart records the items purchased.
It is all the money that is used to operate the business that isn’t directly related to the product or service offered. 5 An example of an expense account would be the account for Salaries and Wages and administrative expenses.
Bookkeepers are responsible for identifying the accounts on which transactions must be recorded. For instance, if your business sells cash to a client and the business is using double-entry bookkeeping, then you should keep the cash in the account for assets called Cash, while the sale will be reported within the Revenue account known as Sales.