One does need to specialize in accounting to know about business bookkeeping. Knowledge about bookkeeping basics is a must for any business owner, big or small. This article will talk about everything that a businessman needs to know about bookkeeping.
Bookkeeping Definition
The process of maintaining the financial transactions of one’s firm into organized accounts on a day-to-day basis is known as bookkeeping. It depends on business to business when it comes to choosing the technique for bookkeeping. There is much importance of bookkeeping and one of them is that it allows creating financial reports that further helps to check how the person’s business is performing. It becomes easier to audit for tax if the books are maintained properly.
Who is a Bookkeeper?
People generally get confused between an accountant and a bookkeeper. But a bookkeeper is a professional who is responsible for maintaining and recording the financial transactions of a firm like payments, invoices, sales revenue, expense, and purchases. Below is a list of tasks performed by a bookkeeper.
- Recording financial transactions
- Bank feed management
- Bank account reconciliation
- Account receivables handling
- Account payables handling
- Helps with tax compliance
- Formulates the financial statements
- Some Human resources and payroll functions are taken by them
- Make recommendations for process streamlining and technology
What are the Different Bookkeeping Methods and Types?
A business person needs to decide the bookkeeping type they want to follow. The revenue of the business and the day-to-day transaction are to be considered while deciding the bookkeeping method and types. At times, the size of a business is also the factor of the method used to maintain the books. Single Entry and Double-entry are the two bookkeeping types.
Bookkeeping can be made either manually or digitally.
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Manual Bookkeeping
It is a traditional and paper-based bookkeeping method. The record of all the transactions is made manually using ledger books, journal registers, etc. It is used when the business transactions are not very complex and the firm size is small. This task is easier and cheaper but at the same time can be very tedious and required a lot of patience and skills.
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Computerized Bookkeeping
The digital or computerized way of bookkeeping and maintaining and recording transaction is comparatively new and innovative. The bookkeeper or usually an in-house person uses bookkeeping or accounting software. This method of recording transactions for a business is convenient, faster, and easier. It is most preferred by the business of the new generation as the tedious work is eliminated which is not the case with manual bookkeeping. In this method, the financial reports generated are accurate and reliable. Apart from Tally.ERP 9, the other software that businesses can use includes:
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Intuit QuickBooks Online
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- Easy to use and set up
- The starting price per month is USD 7
- Integrated with various applications
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FreshBooks Accounting Software
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- Professional and quick invoicing
- The starting price per month is USD 15
- The invoice is automated
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Oracle NetSuite
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- The ERP features are robust
- The pricing can be customized
- A system is available for payment management
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Zoho Books
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- The accounting tasks involves automation
- The starting price per month is USD 9
- Portal for client
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ZarMoney
- The pricing is transparent
- The starting price per month is USD 15
- More than 9600 banks are integrated with it
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How to do Bookkeeping?
Small businesses should have bookkeeping in place. Here is a guide for small business accounting:
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Establish A System
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- The system type that one wants to use should be decided consistency is very important when doing bookkeeping. The financial health of a firm can be affected if the receipts are lost, transactions recording is missed, or a transaction is been recorded multiple times. So being consistent with transaction recording in journal and ledger entry, is the way to avoid mistakes.
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- Accounting software is a must While there are businesses that still use the old way for bookkeeping, i.e doing it manually. It is suggested that businesses use accounting software as the financial statement is more reliable, accurate and the entire process is very fast.
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- Using a spreadsheet should be a go-to if deciding to do bookkeeping manually.
Using a spreadsheet to record the transaction, when going the traditional way is the best go-to. Amount paid/owed, date of invoice creation/ received revenue/expenses type, account number, and buyers/supplier name.
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Record Transactions Properly
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- The accounting method used should be the same for all entries Accrual and cash are the two methods for bookkeeping and accounting. So before starting the entire process, the accounting method should be decided based on the firm’s objectives and goals. Also, it should be decided if single or double bookkeeping should be used.
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Transactions Should Be Posted In A Ledger
- There should be a separate ledger for every account recorded, i.e for retained earnings, owners equity, payroll expenses, sale costs, inventory, sales, accounts payable or receivable, cash, etc. The transactions should be posted regularly and the ledger accounts should be analyzed.
Bookkeeping basic Terms that Small Businesses Should know
Before opting for bookkeeping, the small and the large businesses should know these basic terms.
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Account Receivables
The track of the amount that any third party owes to you is known as account receivables.
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Account Payable
The track of the amount that a firm owes to the government, banks, supplier companies, other third parties, or from any borrower is an account payable.
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Balance Sheet
The breakdown of a firm’s financial position through a detailed report into a liability, asset, business capital, etc is known as a balance sheet.
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Asset
The things a firm or its owner owns that further assist in running the business is known as an asset. For example, cash in hand, cash in the bank, furniture, buildings, machinery, land, vehicles, tools, etc
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Capital
Capital is the money or any other asset that the business owner owns and is not a part of the profit earned from the business operations.
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Bookkeeping
As already discussed above, bookkeeping is the financial;l statement of a business day to day transactions.
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Cost of Good Sold
Also known as COGS, it is the amount of money spent on services or goods that a business owner plans to sell to its customers.
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Equity
The accumulated profits and the capital of the firm owner together make a firm’s equity. The equity for small business owners is shown in the capital account.
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Depreciation
Every asset or product’s value is reduced over time due to wear and tear, and this reduction in the value is known as depreciation.
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Income Statement
The financial activities summary or the summary of the financial statements over a certain period of time is known as the income statement. The revenue earned, expenses, COGS, net loss, and profit are shown in this statement.
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General Ledger
A general ledger is the account or records one uses to summarize, sort, and store the transactions. It is also featured in the income statement and the balance sheet.
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Liabilities
The debts a firm owes to any third party be it a bank, clients, etc are known as liability. It can be loans, unpaid bills, etc.
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Journal
The bookkeepers store and record their everyday transactions in a journal. There is a separate journal for each active account be it account payable, account receivables, or cash.
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Revenue
The money collected in the process of selling services and goods is the revenue of a firm. A business can make revenue by selling assets that are no longer in use.
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Payroll
Payroll is something that that small businesses pay to their employees. Payroll is the bookkeeping part, that is very big, and even involves aspects are reports have to be sent to the government.
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Trial Balance
Before closing the books for the year, and making a final financial statement, it is necessary to check that books are balanced. The process of testing the same is known as trial balance.
Difference Between Accounting And Bookkeeping
Business owners get confused between the two terms, i.e bookkeeping and accounting.
