Bookkeeping is so much more than numbers and spreadsheets. It’s the meticulous art of recording financial transactions that 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 how do we define bookkeeping, and why is bookkeeping important? We’ll walk you through what you need to know about bookkeeping basics.
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. This convenience is a large part of the importance of bookkeeping and why recording transactions manually is almost always unnecessary.
Bookkeepers can log a business’s financial transactions using single-entry or double-entry bookkeeping. In single-entry bookkeeping, you report profits and business 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 its journey toward greater profits, breakthrough growth, and the success it deserves.
One of the most frequently asked questions about bookkeeping basics is, “What is the purpose of bookkeeping?” If you’re new to the world of business, you probably 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 countless benefits that come with keeping accurate documentation and monitoring your spending and income.
Bookkeeping has two primary objectives:
In order 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 provide 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 understand so that all readers can grasp how well the business is doing.
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 financial resources, though, is up to you. You can outsource the work to a professional bookkeeper, or you can do it alone. Whatever you decide, remember that you need to maintain 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 their country’s legal regulations and systems that govern their finances. Some of the most common documentation businesses must provide to the federal government include:
Accurate and well-maintained bookkeeping sets a strong basis for all levels of compliance.
Without a firm grasp of bookkeeping basics, it can be easy to confuse the terms bookkeeping and accounting and use them interchangeably.
Accounting is the umbrella term for all associated processes tied to recording financial transactions. Although there are different types of accounting, the goal of accounting is to ultimately 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 business’s financial history and present.
There are two main types of bookkeeping: single-entry bookkeeping and double-entry bookkeeping.
The single-entry method is the preferred method for sole proprietors, small startups, and companies with unfussy or minimal transaction activity. The single-entry bookkeeping system tracks cash sales and expenditures over a period of time. With this bookkeeping process, you must maintain three pieces of documentation.
The double-entry framework is more complicated. It’s ideal for enterprises with accrued business expenses—or expenditures entered into the bookkeeping system on the purchase date rather than the payment date.
Double-entry bookkeeping is common in accounting software programs like QuickBooks. With this type of bookkeeping, bookkeepers record transactions under expense or income. Then they create a second entry to classify the transaction associated with the appropriate account. The following documents comprise double-entry bookkeeping:
You can manage your bookkeeping manually with pen and paper, or you can do it digitally with online bookkeeping software. Whether you’re a small business or a large corporation, you should choose a method that will lead to the most accurate and organised data.
Now that you’ve got a firm grasp on the basics of bookkeeping, let’s take a deeper dive into practicing 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's financial resources.
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 bookkeeping system. Small steps also give everyone time to familiarise themselves with the new bookkeeping software.
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:
Your general ledger should be up to date, so your bookkeeping software should provide functionality that you can navigate easily. QuickBooks is an excellent option for novice and seasoned 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 business’s financial records and business expenses. When it’s time to file taxes with the IRS, you can be well prepared. Without any hiccups or last-minute scrambles, you’ll be able to enter tax season confidently.
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 still, you may not have the expertise you need to handle bookkeeping on your own.
If you’re unfamiliar with tax codes, doing your own bookkeeping may be challenging. If you have in-depth tax and finance knowledge beyond the bookkeeping basics, you may be able to get the job done.
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 while juggling 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 it on your own may be feasible.
If you’re like most modern business owners, odds are you didn’t become one just so you could practice professional-grade bookkeeping. Outsourcing the work to a seasoned bookkeeper can allow you to focus on your business plan and growth.
Take routine bookkeeping off your never-ending to-do list with the help of a QuickBooks-certified professional. QuickBooks Online can help ensure that your business’s books close every month and that you’re primed for tax season. Our experts—CPAs and QuickBooks ProAdvisors—have an average of 15 years’ worth of experience working with small businesses across industries.
Whether you’re trying to determine the best accounting system for your business, learning how to read a cash flow statement, or creating a chart of accounts, QuickBooks can put you on the right path.
