Bookkeeping is a process through which a company or an organization keeps a record of a company’s financial transactions by entering the details into a physical book or accounting software. Bookkeepers assist a company with the documentation of the financial operations resulting from any sort of business activity.
Bookkeeping is used for adding details of where a business spends its money, where its revenue comes from, and what tax deductions can be applied. In simple words, the bookkeeping process helps a business record all monetary transactions. It ensures the owner by providing the actual record of all company’s economic activities to avoid further conflicts.
What is Bookkeeping?
Definition: Bookkeeping is defined as an accounting process used to record transactions, business expenses, tax returns, and associated financial results of a business or organization. Different business transactions include purchases, sales, receipts, bank statements, and payments by an individual or organization/corporation.
The six basic accounts of a business involve assets, equity, liabilities, expenses, revenue, and costs that are managed by bookkeeping. It is a regularly recorded financial operation that is practiced by a new, big or small business owner. Proper bookkeeping involves documenting economic activities, investments, sales, purchases, or any monetary decision.
A bookkeeper is responsible for managing financial choices so that the owner of the company can be aware of the financial position of the company and its related transactions.
Moreover, the accuracy in bookkeeping helps external individuals such as investors, government, or financial organizations make the perfect decisions about investing in the company by analyzing the information of the Book.
Both internal and external users get benefited from the bookkeeping process before offering financial decisions. It also provides a reliable measurement of any organization’s performance.
Features of Bookkeeping Services
Bookkeeping is meant to maintain the records of all the financial transactions taking place in a firm. The record is maintained right from the beginning to the closing of the firm. Each financial record is maintained based on supporting documentation. Financial records are maintained depending on the type of accounting system.
The documentation might be a receipt, a purchase order, an invoice. It can be any other financial record similar to it that confirms that the transaction took place. Bookkeeping transactions can be recorded manually in a journal or by using a spreadsheet program like MS Excel.
The key features of bookkeeping are as follows:
- Bookkeeping is the documentation of every financial transaction of a company from its incorporating day to its closing day
- Several accounting professionals analyze, review, report, and predict the financial whereabouts and draft a year-end document about the organizations’ financial statements and valid accounts
- Cash accounting offers the record of the transaction during the hand-to-hand transfer of the cash. It ensures the implementation of accrual accounting in which the professionals can record the transaction of any purchases or sales instantly
- Effective bookkeeping of a company requires an overview of the entire accounting details of the company, including the basic accounts. As a result, it becomes easier to chart accounts with these accounts and their sub-accounts of the company.
- The six basic business accounts include Assets, Equity, Liabilities, Revenue, Expenses, and Costs
Importance of Bookkeeping
A company always gets involved in many financial performances, and keeping them recorded is crucial to avoid further confusion for both the owner and the financial employees. Bookkeeping confirms the financial functioning of a company to its external and internal users.
1. An idea on taxes
Having an exact figure on the net income of a company is very important to determine the taxes. The net income and the company’s expenses provide the accounting department to figure out the tax amount. Bookkeeping always assists in keeping all the records of financial transactions.
2. Complete details on the monetary activities
The financial statements are essential to secure the financial health of small and large businesses. The number of sales, shipping costs, the extra money for covering up the payrolls, and the activities of cash flows and check if it’s increasing or decreasing are included in the Book. The financial statements of the organizations provide complete details on the monetary activities.
3. Overviews of the tax deduction
The tax deduction of any company can be evaluated by keeping the records of the books by the Bookkeeping process. The detailed information of the financial statements decreases the tax during the tax period. So, Bookkeeping is a legitimate way to stay stress-free in terms of the company’s taxes.
4. Lending and borrowing money
The operations of lending and borrowing money on behalf of any organization require proper documentation of those transactions. The Bookkeeping process includes the financial statements anyone can appeal for a business loan, bank-issued line of credit, or seed investments, based on the set of Books of the companies.
5. Minimizing the errors
The monetary documentation during the year-end can enhance the possibilities of errors by the bank or the professionals during the tax time. It can affect the company’s financial status and create problems during cash flow and dealing with investors. So, keeping up to date with the Books is essential for ensuring flawless operation throughout the year.
Easy Steps of Bookkeeping
Bookkeeping is not an easy process and demands to be error-free and regularly. A journey towards Bookkeeping through straightforward steps is enlightened to make your company’s financial machine eligible for smooth running.
1. Separate your personal and professional expenses
The first and foremost step for starting your journey towards Bookkeeping is separating the personal and professional expenses from each other.
After creating a business bank account, the most critical criteria of Bookkeeping is building a wall between personal and professional transactions to avoid conflicts and confusion.
Liability often enhances the chances of disputes, and you can be liable personally for any debts that occurred in the professional place.
So, assimilating personal and professional expenses is a bad idea and creates a stressful life for all businessmen.
2. Choose in between Single-entry & Double-entry Bookkeeping System
There are two Bookkeeping methods are available in the business industry, and they’re single-entry and double-entry Bookkeeping.
For single-entry, each transaction is recorded once as either income or expense and allows the assets and liabilities to be recorded distinctly.
On the contrary, double-entry accounting tasks demand recording of all the transactions in the accounting journal, and each transaction is registered twice in the form of both a debit and a credit.
Single-entry Bookkeeping is suggested for small businesses as people do out of hobbies. But, when actual business occurs, the accountants or bookkeepers mainly offer a double-entry Bookkeeping process for the companies.
3. Determine the accounting method – Cash & Accrual
Another critical decision to create Bookkeeping is to choose between cash accounting and accrual accounting.
Cash accounting is a hand-in-hand transaction where the ledger is not involved until the cash is submitted into bank accounts.
And, accrual accounting offers the accountants to record the bill instantly according to the income.
On that note, accrual accounting is highly efficient for bigger businesses.
4. Application of right tools
Categorizing the transactions under the books requires many processes, and the subcategories of accounts such as liabilities, revenue, assets, and expenses need to be organized smartly.
So, to reduce the mismatching of each entity, there are few tools or software available, including cloud accounting solutions, income spreadsheet templates, etc.
You can also hire bookkeepers to record all your transactions and run a smooth Bookkeeping process for your company.
5. Organize way to store documents
The record of all the expenses and incomes is vital during the tax deduction.
So, keeping the backups of all documents is the basic necessity for a company as an accident might happen, and that causes loss of the recorded data.
You can use applications such as Google Drive, Dropbox, or other backup facilities to decrease the probability of losing the recorded documents.
6. Manage transactions
The next thing you should do is to manage your day-to-day transactions to ensure all financial transactions are imported accurately.
You should also categorize your transactions into assets, equity, liabilities, expenses, income, sorts of categories.
Finally, you should make sure that your bookkeeping does reconcile these transactions to ensure their recording as per the chosen accounting method and entry system.
7. Handle accounts receivable and payable
While doing bookkeeping for small businesses, you should also channelize all the tasks associated with accounts receivable and accounts payable.
In accounts receivable, basic bookkeeping is involved in estimating the value of a finished project, handling invoices, and sending statements in a way that a business is paid for its products or services.
In addition, it is also important here to make sure you pay all your dues on time. Hence, bookkeeping also covers details to make timely payments.
8. Set up payroll
Different businesses have different kinds of payroll setup and the process.
You should also set up your payroll system and coordinate the whole process with the balance of your bookkeeping tasks.
9. Coordinate with your tax specialist
Bookkeeping incorporates some tax-related processes, as it is essential for businesses to find out potential deductions for the business. You might work in collaboration with a tax specialist for making your tax procedures hassle-free.
Two of the prevalent ways to do this is-
1. The DIY approach
In case you run a small business and you have a limited budget then you can do it yourself via the DIY route. You may consult with a CPA or bookkeeper while doing it the first time to ensure that everything is going in the right direction.
Once you have basic level expertise in the process, you can do it via a simple spreadsheet or by using any accounting or bookkeeping software solutions.
2. Outsourcing to a professional
At the time when your business is growing rapidly, and you are not being able to manage time to do bookkeeping every month then it would be good for you to hire a professional or outsource an agency to help you by doing it for you.
This will help in channelizing the whole process online or the way you would like to process it by using simple software for producing financial statements and managing your daily expenses.
10. Manage financial statements and documents
Finally, the most crucial thing you should always pay heed to is managing important accounting documents to maintain the details related to transactions, income, assets, expenses, etc.
Your bookkeeping is further used to prepare different financial statements such as balance sheet, income statement, etc. It is also important to ensure here that all your documents are stored and well organized as well as easily accessible for all the team members or consultants who are supposed to use them.
All in all, the whole process of bookkeeping is required for making sure that your finances are managed and channelized smoothly and accurately.
Bookkeeping Vs. Accounting Process
Bookkeeping in the business is a necessary process, and it’s very much related to the term accounting and is the final result of the entire Bookkeeping process.
Bookkeeping is involved in recording and organizing financial data while accounting is related to the interpretation and presentation of those recorded and organized data to the investors or business owners.
Bookkeeping is the record of all financial transactions that occur in a company, and the record should be maintained regularly.
A bookkeeper’s responsibility in Bookkeeping involves the collection of all the documents of monetary exchanges, the inclusion of each transaction history in the accounting journal, identification of each transaction as single or multiple debits or credits, and finally, accumulation of all transactions as per the desired chart of accounting of the company.
The entire summary of the regular transaction records at the end of the year is known as accounting. The accountants review, analyze, interpret, and report all the financial operations to the owner. The accountants also create a perfect account and its financial statements for the company.
|They generally have on-the-job training experience. Some of them opt for certification via bookkeeping training programs.||They generally have an accounting degree. Some of them are certified public accountants or CPAs.|
|Bookkeepers are involved with different business software solutions that let them make recommendations on technology that bookkeepers, clients, and employees can use.||Accountants use accounting solutions for the purpose of tax planning and other financial insights. Clients generally do not work within these programs.|
|They do not perform independent audits or attestations.||CPAs and certified auditors are capable of performing audits and attestations for producing certified financial statements.|
|They know the day-to-day details of a client’s business.||They generally have a higher-level view of a client’s business for extracting crucial financial insights.|
|They are only aware of a client’s business finances.||They have insight into personal finances as well as the business finances of a client.|
|They do not file tax returns other than those for payroll and sales taxes.||They generally file business and personal income tax returns.|
Bookkeeping is an important entity for both small and large businesses to secure any flaws in transactions.
In business, keeping the records of financial operations is a remarkable act to dodge all sorts of monetary complexities. It also helps to keep a smooth relationship with the company and its shareholders and investors.
On the concluding note, we hope you would have understood bookkeeping is the process of keeping the track of all of your financial transactions and business finances. Effective bookkeeping is associated with the understanding of all the basic accounts of a firm.
How important do you consider bookkeeping for managing business transactions and financial information to get useful financial insights?