Bookkeeping is the act that records income and expenses in your company. It helps you understand what you’re doing in cash flow and how your company performs. Maintaining a good track of your bookkeeping needs so that you don’t face sudden realizations regarding balances on your accounts and other expenses. This guide has been put together to help you independently comprehend the fundamentals of conducting books.
Why Bookkeeping Is Important for Small Businesses
Bookkeeping is a crucial task you’ll have to take on as an owner of a business. It’s vital due to:
- It helps organize information like financial information and contains it to make it easier for analysis and understanding.
- The IRS demands that you keep track of certain data. If you are doing your taxes, you’ll require precise information on your gross earnings, expenses, and receipts, such as assets, entertainment, travel expenses, and taxes on employment.
- It aids in planning your budget: Knowing the cash flow helps you assign resources for new projects and launches that can help your company expand.
- It helps you make better decisions: If the books are in order, you will have the most accurate picture of the business’s performance. This allows you to make better choices about the growth and operations of your business.
- It assists in tracking profit. You would like your business to be as profitable as you can be. Bookkeeping allows you to keep track of your progress and earnings.
Bookkeeping vs. Accounting
Although they are often misunderstood for one and the other, there are some key distinctions between accounting and bookkeeping. In essence, bookkeeping is the process of keeping track of financial data, whereas accounting is the process of interpreting financial data. Accounting cannot be achieved without bookkeeping. Without proper bookkeeping, there’d not be any data to analyze.
Generally speaking, bookkeepers aid in organizing and collecting information and could have specific certificates to accomplish this for your company. However, accountants typically have an accounting degree and can be certified state-wide CPAs. Most bookkeepers will be expected to manage the general ledger and account, while the accountant will be there to prepare and analyze more detailed financial statements.
Key Components of Bookkeeping
Certain components are essential to maintaining your books if you manage the bookkeeping yourself or engage a professional to manage it. Certain of these are completed more frequently than others to ensure the books are up-to-date. Other components are completed during specific times as needed to finish a task in business.
Bookkeepers make journal entries to track credit and debits. Each financial transaction must have access to the general ledger, which keeps track of everything in one location. The public ledger should record the account number that the credit or debit is made. The most efficient accounting software automates many of the journal steps for daily credits and debits to reduce the possibility of mistakes in data entry.
If this is not done before the transaction, the bookkeeper will prepare invoices to pay for funds that have to be collected by the business. The bookkeeper inputs the relevant data like date, price, number, and taxes on sales (if appropriate). After this is completed in an accounting program, an invoice is created then a journal entry is completed, which debits the accounts receivable or cash account while crediting the report for sales.
Preparing Basic Financial Statements
Because the data gathered in bookkeeping is utilized by business owners, accountants, and business owners, it forms the foundation of the generated financial statements. Many accounting software programs allow users to automatically run the most common financial information, such as income and expense statements, a balance sheet, and statements of cash flows. Accountants or business owners can use these financial statements to understand the business’s financial health better.
After each pay period, the bookkeeper collects employee details regarding payroll, including the hours, worked as well as rates. The total pay is calculated using the tax withholdings and taxes applicable. Paychecks are issued and completed. Accounting software, the main journal entry for the entire payroll, is an entry in the compensation account and is credited to cash.
There are two accounting techniques to pick from cash and accrual. Choosing the method that will help you manage your company’s finances is important.
The most common way to record accounting data is through the cash-based method. This method records financial transactions that occur when cash is exchanged. This means you don’t keep track of an invoice until the invoice is paid. Also, you don’t note the outstanding balance until you pay them. This process provides a clear overview of your assets and the amount of debt at any time.
Another accounting method is the accrual-based method of accounting. It records bills and invoices even though they’re not yet paid. It is a highly suggested method since it provides the financial state of your company by analyzing the money coming in and going out. Because the funds are counted in the bookkeeping system, you can utilize the information to calculate the growth.
For more details, please read our article on the difference between cash and accrual accounting.
Bookkeeping Tools and Software
It’s a good thing for business owners looking to streamline their accounting. Businesses who don’t wish to burden themselves with the task of data entry can use an online service for bookkeeping. They are an affordable way to handle the daily bookkeeping tasks to allow business owners to concentrate on the things they excel at managing their business. If you are a business owner and do not mind data entry, accounting software can help simplify the process. There is no need to fret about entering double-entry information in two accounts. The software will do the work for you.
How To Manage Bookkeeping in 4 Steps
If you’re doing bookkeeping typically, you’ll follow the steps below to ensure that your books are current and correct. Be aware that every transaction is allocated to a particular account credited in the overall ledger. Posting debits and credits into the proper accounts will make reports more accurate. Review the steps listed below to help you manage your bookkeeping.
Assign Transactions to Specific Accounts
Please look at the item in the query and figure out which account it is in. For instance, if the money is generated from an item sold, it will be transferred to the fund for sales revenue. Making sure that transactions are correctly assigned to accounts will give you the complete picture of your company and also helps you get the most useful data from your bookkeeping software.
Perform Journal Entries to Debit and Credit Accounts
If you manually manage the bookkeeping, the debits are recorded in the lower left corner of the ledger, and credits are on the right. Credits and debits should always be equal to each other to ensure that the books are in equilibrium.
Post Entries to Ledger Account
After the entries have been assigned to the right accounts, you can add them to the general ledger to have a close-up view of the current state of your cash. Most accounting software will do this for you, so you don’t have to fret about an additional step.
Adjust Entries at the End of Each Accounting Period
After an accounting cycle, you should take some time for changes to your entry. The adjustments will make your book more precise. For instance, you might have estimated some invoices later confirmed by a valid number. Adjust the entries to show accurate information.
Aren’t you sure you’re up to the task? You might consider employing one of the top bookkeeping services to make managing your books easy.
As an owner of a business as a business owner, it’s important to know the financial health of your business. It all begins with keeping accurate and up-to-date books. Bookkeeping records all the information to gather the information required to make informed decisions regarding hiring, growth, marketing, and hiring.