Accurate bookkeeping builds the foundation for good accounting practices in your small business. It helps you track your finances, including cash inflows and outflows, and maintain proper records. Proper bookkeeping involves recording and tracing all financial records of your company. If you’re a small business owner or you run a startup, you need to know why solid bookkeeping serves as a step on the path to business success. Additionally, you should be aware of the different types of bookkeeping and what you can do to ensure proper bookkeeping practices.
What Is Bookkeeping?
Bookkeeping is a vital sector of the accounting process, but what does it actually entail? Bookkeeping involves noting, organizing, and tracking your company’s financial records. Succinctly put, bookkeeping is the part of accounting that involves keeping and maintaining financial books, which are crucial for the growth of your business. Well-maintained records are essential when completing your tax returns, applying for business loans, or evaluating the financial state of your company.
Cash books, inventory books, payroll records, assets records, and bank transactions are some of the books and records you should keep. Others include cash payment vouchers, credit and debit books, sales invoices, assets records, and profit and loss accounts.
The Importance of Bookkeeping for a Small Business
One of the main reasons you’re running a business is to make profits. Tracking your company’s profitability lets you follow your earnings over time and plan for ways to improve it in the future. Profitability measures let you easily and quickly track transactions and determine how much your business earns on inventory. Some helpful profitability ratios that let you gauge your company’s efficiency include:
- Gross margin ratio
- Profit margin
- Return on assets ratio
- Return on equity
- Return on capital employed
Maintaining Cash Flow and Improved Financial Management
As a responsible small business owner or bookkeeper, you should be aware of your company’s revenue streams and outgoings. With accurate bookkeeping, you can tell how much your business is making in terms of income and track your spending and ensure that you have enough cash on hand to cover your business expenses. Proper financial records make it easier for you to analyze the financial state of your firm and determine areas that need improvement.
Bookkeeping Helps You Prepare for Taxation
If you run a startup or SME, you can save time during filing by recording all transactions as you go. This saves you from the last-minute scrambles and time spent tracking important financial information when the end of the financial period rolls around. You need to be aware of the taxes you owe the government and when they’re due. With proper bookkeeping, you can determine the types of taxes and calculate the amount payable in advance.
As a business owner, you’re responsible for reporting crucial financial data about your firm to potential investors and other stakeholders. Bookkeeping programs that incorporate graphs, charts, and other visual aids make it easier to increase data precision and improve communication when you’re wooing investors.
You’re also responsible for communicating with your employees and allowing them to know the financial state of your firm. They need to know if the company is making some progress and how they contribute to its growth. Bookkeeping accounting ensures that you have the right information to talk to your team and make them feel like they’re part of the company.
Proper Bookkeeping Allows You to Evaluate Performance and Plan for the Future
Accurate bookkeeping helps you trace your firm’s financial records and evaluate its performance levels. You can look back, see patterns, and even draw comparisons with previous business years. Bookkeeping allows you to have a greater understanding of the areas within your business where you can trim costs. You may need to re-strategise and make adjustments to ensure you stay on top of your business.
Proper bookkeeping also allows you to determine the areas within your company that could benefit from improvements. If you’re a small business owner, it’s necessary to set projections and forecast the future of your business. Bookkeeping accounting lets you know if your small business needs extra employees or requires operational changes.
Single-Entry Versus Double-Entry Bookkeeping
One of the most crucial financial decisions when starting a small business is deciding whether to use single- or double-entry methods to record and keep your books. The size of your company and complexity of your accounting procedures determine the type of bookkeeping you should adopt. If you’re a small business owner, you need to undergo training in bookkeeping to know the types of bookkeeping and learn how to organize your books and ensure they’re up to date.
What Is Single-entry Bookkeeping?
With single-entry bookkeeping, each financial transaction is recorded only once, either as an asset or liability. This bookkeeping system is ideal for small businesses with a low volume of activity or uncomplicated transactions. The single-entry system is also beneficial if you use an accrual reporting system to record and keep your financial transactions. You may find that this simple bookkeeping approach is similar to keeping your personal check register.
With the single-entry bookkeeping process, you only need to use one column and record the entries as positive or negative amounts. Alternatively, you can use two columns to record and keep your books. One column indicates the revenue your company makes, while the other columns records your expenses. Regardless of the number of columns you adopt, you can only use one line for each successful financial transaction. In essence, you use this system of bookkeeping when recording and checking transactions in your bank statements, cash disbursement journals, and cash sales journals.
One of the main reasons you should use a single-entry method in bookkeeping is because it’s an economical process that saves you the costs associated with hiring highly skilled accounting professionals. Also, it’s easy to understand, implement, and maintain the process while tracking transactions when you use this method of bookkeeping.
Double-Entry Bookkeeping Explained
When using double-entry bookkeeping, you record every financial transaction twice. This process requires that you offset two entries in two different accounts within your accounting system. The double-entry system has the major benefit of being far more accurate than single-entry bookkeeping, especially if your company is growing quickly.
You should use the double-entry bookkeeping method if you operate a company with complex financial transactions or if you receive inventory and merchandise on credit. Also, this method of bookkeeping better suits your company if you routinely collect income through accounts receivable. With this system, you post each transaction as either income or an expense. Then, you make a second entry to trace and confirm the transaction in a corresponding account.
For example, imagine you receive income from your client. You post the revenue as income in one transaction and repeat a similar transaction in the customer’s account. In the event that you need to audit your transactions or trail how your company generates incomes and pays for expenses, you only need to trail either of the accounts to find the information you need. Also, in the case where information from one account is missing, you have a corresponding account to trail the transaction.
Succinctly put, when using a double-entry system, you’re simply making debits and credits, which involves making increases and decreases to affected accounts. You may find that this method has advantages over the single-entry system because it allows you to calculate income and losses accurately and prepare financial statements, such as the balance sheet, directly from the accounting books, and it’s easy to detect fraud and errors. Unlike the single-entry method, you can use the double-entry bookkeeping system to trace asset and liability accounts.
How to Learn More About Proper Bookkeeping Practices
If you’re hoping to improve your bookkeeping skills, you can sign up for free or reasonably priced bookkeeping training courses. For instance, you may register with QuickBooks ProAdvisor Program, which offers a myriad of online accounting courses and training. You may also choose to attend in-person seminars, take classes at community colleges, or enroll for a bookkeeping course the Canadian Institute of Bookkeeping or the Institute of Professional Bookkeepers of Canada. You can watch free online videos and explore a range of other bookkeeping training options. When keeping the books for your business, it helps to arm yourself with the right information about basic accounting and bookkeeping methods. In addition to covering general accounting or bookkeeping principles, most of the online training courses show you how to use bookkeeping accounting software so you can organize your records electronically.
The Bottom Line
The survival of your company largely depends on your ability to establish good bookkeeping practices. Given that there are two primary methods of bookkeeping, namely single-entry and double-entry bookkeeping methods, you need to determine which method is most appropriate for your company. If finance isn’t your thing, you’re likely looking forward to using single-entry booking keeping, which is simple and suitable for very small businesses. As a professional bookkeeper or business owner of a company with complex transactions, you’re more likely to use the double-entry method, which is accurate and makes it easy to trail financial information. Keep your books accurate and up to date automatically. Change the way you manage your finances now.