To understand how your business is doing financially, you need accurate bookkeeping.
- Verifying receipts, making bank deposits, and maintaining organized records are all part of bookkeeping, which ensures that all financial data is available when required.
- Because precise financial records are necessary for a firm to be sustainable, bookkeeping is critical. A company may better manage its cash flow, fulfill its financial commitments, and organize its investments with the aid of accurate bookkeeping.
- You must familiarise yourself with a chart of accounts, build one up, record all financial transactions, reconcile bank accounts, & run monthly financial statements before you can begin bookkeeping.
- The goal of this article is to help business owners who wish to learn more about bookkeeping and how to build up a system to track their company’s financial activity.
Bookkeeping is vital to you whether you are an international organization or an individual freelancer. It will assist you in creating a budget. You can better prepare for future costs if you have a budget. It will also be helpful when filing taxes. These best practices and bookkeeping advice can aid your business’s performance recordkeeping.
The act of keeping financial records for an organization is known as bookkeeping. It entails accurately documenting a business’ financial activities as well as keeping financial records archived and safely stored. When accounting is done correctly, the data is precise, well-organized, and useful so that shareholders or business owners may make important financial choices affecting the organization.
Why is bookkeeping important for businesses?
Maintaining correct financial records, which is something that businesses are obligated to do by law for taxes reasons, is made easier with proper accounting. In addition to being a legal duty, accurate accounting has useful commercial advantages. A successful firm needs effective accounting for several reasons, including:
- Budgeting: Reviewing your financial resources and calculating cash flow are both made simpler when income and spending are documented.
- Organization: For those with an interest in your financial records, such as the IRS, investors, accountants, and lenders, bookkeeping is a crucial tool. When your documents are structured, it will be simpler to find the information you need when you need it, to deliver it when requested, to pay your taxes, and it may increase your chances of getting financing.
- Analysis: Your business may produce financial statements with the help of bookkeeping. These statements may be used to monitor cash flow and help you identify the strengths and weaknesses of your business.
- Planning: Financial statements may also show if certain projects have been successful or unsuccessful, which can aid shareholders and business owners in making plans.
Accounting vs bookkeeping
All financial transactions are tracked and arranged by a bookkeeper in preparation for financial reporting. Depending on the business’s size, quarterly reporting can be necessary. In certain instances, this data is only required for tax preparation at the end of the year.
A bookkeeper’s job is taken over by an accountant, who then analyses the data and creates financial statements for the business.
Double-entry vs single-entry bookkeeping
If your business is tiny and has little activity, single-entry bookkeeping is an excellent option. It is comparable to maintaining a chequebook. Per transaction, one entry is made. You maintain a ledger with two columns: one for income and one for costs.
Every transaction is recorded in two accounts, and there are two columns in a double-entry bookkeeping system. For each transaction, you record a debit in one account and a credit in another. For instance, if your business wishes to pay off a creditor, the amount you pay to the creditor is deducted from the “cash” account. It is referred to as a debit. Then the identical amount is added to the “creditor” account. It is referred to as credit. The most effective approach to monitoring assets and liabilities accounts is using this technique. A double-entry accounting system has the benefit of ensuring correctness. There is a matching and equal credit for each debit.
How to begin bookkeeping
Learning the words and phrases of bookkeeping is the first step in getting started with it. (A dictionary of bookkeeping words is provided below.) In addition to reading this and other articles on Business News Daily, you can access online tools like tutorials, webinars, and useful blogs. You may attend seminars as well.
The next step is to decide whether you wish to employ the single entry or double entry accounting system. Once you are aware of it, you may choose how to keep your records. The three most common choices are as follows:
- Spreadsheets: This is a wise decision if your company is just starting. You may make use of applications like Google Sheets or Excel.
- Accounting book: You may keep basic accounting data organized by purchasing hardbound ledger sheets or accounting journals.
- Bookkeeping software: To assist you to keep track of your company’s transactions, you may utilize desktop software or a bookkeeping tool located in the cloud.
Bookkeeping best practices
When putting in place a bookkeeping system in your business, bear the following recommended practices in mind:
- Maintain accurate records. Maintaining accurate records can help with tax planning and money management.
- To keep track of spending, use accounting software. You may make use of accounting software to save time. You may avoid manually recording entries by using one of the many programs that link to your business’s checking account.
- Study everything. You may prevent running out of money and paying hefty bank fees by closely monitoring your financial flow. Keep a copy of every receipt you get; this will serve as evidence of your spending patterns for the whole year and come in handy in the event of an audit.
Who should oversee services for bookkeeping?
When determining who should handle your bookkeeping, you have a variety of alternatives to consider.
When your small company is just starting, you might handle the bookkeeping. This is a sensible option to take into account if money is tight. Online, you could come across useful resources that can help you get started and guide you to ensure you are doing it correctly. It should be remembered, nevertheless, that bookkeeping may take some time.
It may be time to engage a firm to handle your books as your business expands. Your time is precious even if this is an expenditure. Ask other company owners for ideas on the services they use if you are thinking about taking this path.
You can prepare taxes and do basic billing and invoicing with the aid of accounting software. It may support customer management, bank account reconciliation, and the creation of crucial financial reports for the growth of your business.
A glossary of bookkeeping terms
Among the terms you should be aware of in bookkeeping are:
Account: A location where financial transactions are documented. To operate your business, you input business credits and debits.
Accounting: Collecting and inputting financial information into your business’s bookkeeping system.
Accounts payable (A/P): These are money that your business paid other companies or authorities. You may also refer to debt as a responsibility.
Accounts receivable (A/R): This is money that clients or other organizations owe your company. You may also refer to money due to you as an asset.
Assets: This includes everything of worth that your business owns. In addition to any equipment or cars held by your business, it also contains cash and accounts receivable.
Budget: A budget that projects your year’s income and expenditures. Once this strategy is in place, you may contrast the actual results with the predictions.
Capital: To establish and maintain a firm, a business owner needs capital or other resources.
Credit: A credit is a bookkeeping item that raises revenue and reduces liabilities while increasing assets and costs.
A creditor is someone or something that your firm owes money.
Financial data put into your bookkeeping system is referred to as data.
Debit: A debit is input in your bookkeeping system that raises assets and costs while lowering income and liabilities.
A debtor is a person or business that owes money to your firm.
Deductible expense: A purchase that lowers your profit, so lowering the amount of income tax you owe the government.
Depreciation is the term used to describe a drop in the value of the assets that your business manages over time as a result of normal wear and tear or a physical asset’s innate obsolescence. This may be written off as a business cost, which can lower your taxable income.
Double entry: A method of bookkeeping that involves entering financial data twice: once as a debit and once as a credit.
Equity: the difference between your company’s net assets and liabilities.
Costs incurred by the firm or purchases it makes are referred to as expenses. The amount of taxes payable to the government may decrease as a result.
Fiscal year: An economic year made up of 12 months. The fiscal year of your business might start in any month or on the first of the year. After those twelve months, income taxes are determined.
General ledger accounts: The ledger, or primary accounting record, a corporation utilizes displays all financial transactions (debits and credits).
Gross profit: Gross profit is the business’s revenue less its cost of sales. Gross loss is what happens when the expenses of sales outweigh the revenue.
Liability: any amount owed by the firm to people, organizations, or governments. Loans and credit card debt are examples of liabilities.
Net profit: the amount of money a business has left after deducting expenditures from gross profit.
Opening balance: The amount a business carries forward on the first of the month is this. This sum must correspond to the prior month’s final balance.
Any bill that is due from your business is payable. This is a component of your payables.
Petty cash: a little sum of money kept on hand for little expenses like stamps, pencils, etc. Usually, these purchases are not shown in the general ledger.
The difference between a company’s profits and its outlays is referred to as profit.
Receivable: Your accounts receivable report has to reflect the money that companies owe you.
Reconcile: a procedure where you compare your records to the bank statement to make sure they line up. It is also a technique to confirm that you have received payment for any outstanding bills.
Recurring: a transaction with a fixed price that happens regularly, such as once a week or once a month.
Payments that a business sends in response to an invoice or bill are referred to as remittances.
Statement: a breakdown of the financial data. A profit and loss statement or a bank statement, which details all transactions made in a bank account during a certain time, are examples of frequent statements.