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Running a business

What is bookkeeping, and why is it important?

Bookkeeping is so much more than numbers and spreadsheets. It’s the meticulous art of recording all financial transactions a business makes. It gives you an in-depth look at your expenses and revenue, and it gets you on the path to transforming your business into a money-maker.

But what is bookkeeping? And why is it so important? We’ll walk you through what you need to know about bookkeeping basics.

What is bookkeeping?

Bookkeeping is the process of tracking all documentation of any financial transactions that a business entity makes from launch to closure. Business owners or bookkeepers record business activities based on supporting documentation, depending on the accounting principles the company implements. Documents can be bills, receipts, invoices , purchase orders or other financial reports that indicate a transaction.

You can record transactions by hand in a journal or a Microsoft Excel spreadsheet, but many companies opt to use bookkeeping software to organise their financial histories.

Bookkeepers can log a company’s financial transactions using single-entry or double-entry bookkeeping. In single-entry bookkeeping, you report profits and expenses for all expenditures in a cash register. The double-entry method begins with a journal, followed by a ledger, a trial balance and financial statements.

In short, bookkeeping is just one facet of doing business and keeping good financial records. With well-managed bookkeeping, your business can closely monitor its financial capabilities and journey toward heightened profits, breakthrough growth and deserved success.

What is the purpose of bookkeeping?

One of the most frequently asked questions about bookkeeping basics is, “What is the purpose of bookkeeping?” If you’re new to business, you may already have a million other things to worry about. Brushing up on your bookkeeping skills may seem like a task for another day. However, there are innumerable benefits to keeping accurate documentation and monitoring your spending and income.

Bookkeeping has two primary objectives:

  1. To accurately document all financial transactions that result from business activities using best practices.
  2. To determine and analyse the financial outcomes of business activities.

To adequately log all business-related financial transactions, bookkeepers typically require a robust catalogue of all transactions and associated costs. They may group transactions into categories like goods or services, wages, taxes or another general business operation.

When it’s finally time to audit all reported financial transactions, bookkeepers produce reports that give an accurate look into how the company delegated its capital. The two key reports that bookkeepers provide are the balance sheet and the income statement. Both reports should be easy to comprehend so that all readers can grasp how well the business is doing.

Why is bookkeeping important?

Whether you’re just getting started or you’re a small business owner with a brilliant vision, you’ll need to implement some basic bookkeeping techniques. How you organise and document your finances is up to you. You can outsource the work to a professional bookkeeper , or you can do it alone. However you decide, note that you must keep adequate records of business transactions.

It’s essential for businesses to devote time and money to keeping accurate financial reports. Ultimately, when you have a balanced bookkeeping system, you can rest assured that you also have an accurate indicator of measurable success. In doing so, businesses of all sizes and ages can make strategic plans and develop realistic objectives.

Additionally, businesses must comply with the legal tax regulations and systems that govern their finances. Some of the most common documentation businesses must provide to the federal government include:

  • Financial transactions
  • Financial statements
  • Tax compliance
  • Cash flow reports

Accurate and well-maintained bookkeeping creates a strong basis for all levels of compliance.

What’s the difference between bookkeeping and accounting?

Without a firm grasp on bookkeeping basics, it can be easy to confuse terms or use them interchangeably. Bookkeeping and accounting are a perfect example.

Accounting is the umbrella term for all associated processes tied to recording a company’s financial transactions. The goal of accounting is to interpret, categorise, analyse, report and summarise all financial information accurately. Bookkeeping, on the other hand, is an integral part of the accounting process. It zeroes in on the administrative side of a company’s financial history and present.

What are the types of bookkeeping?

There are two main types of bookkeeping: single-entry bookkeeping and double-entry bookkeeping.

The single-entry method is the preferred method for sole traders, small startups and companies with unfussy or minimal transaction activity. The single-entry system tracks cash sales and expenditures over a period of time. With this bookkeeping process, you must maintain three pieces of documentation.

  • Cash sales journal: this is where the business records all revenue.
  • Cash disbursements journal: this is where the business records all expenses.
  • Bank statements: all journal entries should align with the company’s bank statements.

The double-entry framework is more complicated. It’s ideal for enterprises with accrued expenses, or expenditures entered into the bookkeeping system on the purchase date rather than payment date.

Double-entry bookkeeping is common in accounting software programs like QuickBooks Online. With this type of bookkeeping, bookkeepers record transactions under expenses or income. They then create a second entry to classify the transaction on the appropriate account. The following documents comprise double-entry bookkeeping:

You can manage your bookkeeping manually with pen and paper or digitally with online bookkeeping software. Whether you’re a small business or a large corporation, choose a method that will lead to the most accurate and organised data.

What are good bookkeeping practices?

Now that you’ve got a firm grasp on the basics of bookkeeping, let’s take a deeper dive into how to practice good bookkeeping. There’s no one-size-fits-all answer to efficient bookkeeping, but there are universal standards. The following three bookkeeping practices can help you stay on top of your business finances.

1. Consider a phased approach

Trying to juggle too many things at once only works to put your organisation in danger. If you’re looking to convert from manual bookkeeping to digital, consider a staggered approach. Overhauling all at once can be overwhelming and discouraging, so it’s best to take it slow and make meaningful and intentional shifts.

Those baby steps can help you manage your organisation on a new and improved system. Small steps also give everyone time to familiarise themselves with the new bookkeeping software. Consider using the help of a professional bookkeeper to assist with implementing this transition.

2. Keep your general ledger current

A general ledger is a collection of accounts that classify and store all records associated with a company’s financial transactions. The general ledger includes balance sheet accounts ( liabilities, equity, assets ) and income statement accounts (revenue, expenditure, gains, losses).

Under the double-entry accounting structure, every business transaction will affect two or more general ledger accounts. General ledger accounts include:

  • Asset accounts, such as cash, accounts receivable, investments, land, equipment and inventory.
  • Liability accounts, such as accounts payable, accrued expenses payable, customer deposits and notes payable.
  • Shareholders’ equity accounts such as ordinary shares, treasury shares and retained earnings.

Your general ledger should be up to date, so your bookkeeping software must provide functionality that you can navigate easily. QuickBooks Online is an excellent option for novice and experienced digital bookkeepers.

3. Plan for taxes throughout the year

Whether it’s updating your books or keeping in contact with your tax advisor, maintain your company’s financial records and expenses. When it’s time to file taxes with the tax office, you will be well prepared. Without any hiccups or last-minute scrambles, you’ll be able to enter tax time confidently.

Should I do my own bookkeeping?

It can be difficult to figure out whether or not you should do your own bookkeeping. Ultimately, your decision will come down to two key factors: expertise and time.

Do you have the expertise?

How does your accounting and bookkeeping experience size up? You may be hoping for the best and have a few college courses in your back pocket, or maybe you’re relying on your knowledge of bookkeeping basics. Even with these tools, you may not have the expertise you need.

If you’re unfamiliar with GST and tax rules, doing your own bookkeeping may prove challenging. Outsourcing the work to a professional bookkeeper can ensure accuracy and compliance, leaving you to focus on your business.

Do you have the time?

Bookkeeping can be time-consuming and tedious. If you’re a new business owner, you’re likely already spread thin. You might be trying to determine which bank account is best for your business and the difference between debits and credits, in addition to the many record-keeping habits you need to manage. Adding bookkeeping to the mix may overwhelm you.

But if you have the time to dedicate to updating your books regularly, doing your own bookkeeping may be feasible.

If you’re like most modern business owners, the odds are that you didn’t become one so that you could practice professional-grade bookkeeping. Outsourcing the work to a professional bookkeeper can allow you to focus on your business plan and growth.

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