What is Bookkeeping: Understanding the Basics for Business Success

What is Bookkeeping? The process of tracking and recording a company’s financial transactions is known as bookkeeping. These business actions are recorded using the accounting rules and accompanying documentation of the company.

Examples of these documents include:

• Bills
• Receipts
• Invoices
• Purchase orders

Business transactions might be manually recorded in a journal or on an Excel spreadsheet. Many businesses utilize bookkeeping software to keep track of their financial history to make things easier.

Bookkeeping is only one aspect of running a business and maintaining correct financial records. Your company can closely monitor its financial capacities and progress toward increased profitability, breakthrough growth, and merited success with well-managed bookkeeping.

What is Bookkeeping? What’s the difference between Accounting and Bookkeeping?

At first look, bookkeeping and accounting may appear to be synonymous. While they are often confused, they are not the same thing. Accounting refers to all activities linked to recording a company’s financial transactions, whereas bookkeeping is an essential aspect of the accounting process.

Common examples of bookkeeping include:

• Recording financial transactions
• Posting debits and credits to a journal
• Preparing financial statements
• Processing payroll

Bookkeeping, as opposed to accounting, focuses on the administrative side of a company’s financial past and present. Accounting, on the other hand, is far more subjective and relies on data from bookkeepers.

Common examples of accounting include:

• Reviewing and analyzing financial statements
• Preparing to adjust entries
• Performing audits
• Filing relevant tax returns

Without bookkeeping, accountants would be unable to provide business owners with the information they require to make sound financial decisions.

Read more: What Is The Difference Between Bookkeeping And Accounting?

3 key benefits of bookkeeping

If you’re new to the business, you might be wondering why bookkeeping is so important. You’ll be able to reap a range of benefits whether you outsource the work to a professional bookkeeper or handle it yourself.

1. Access to detailed records of all transactions

You will have simple access to any financial information you require if you log and track all financial transactions. To make things even easier, bookkeepers frequently categorize transactions.

Common transaction categories include:

• Operating Expenses (Supplies & Materials,…)
• Facilities Expenses
• Salaries & Wages Expenses
• Administrative Expenses (Office supplies,…)

When the time comes to audit all of your transactions, bookkeepers can provide reliable reports that provide an inside look at how your company allocated its capital. The balance sheet and income statement are the two most important reports that bookkeepers provide. The purpose of both reports is to be simple enough for all readers to understand how well the business is performing.

2. Ability to make informed decisions

You will have access to information that provides reliable indicators of measured performance because bookkeeping entails the compilation of financial reports. Businesses of all sizes and ages can build strategic plans and set realistic goals with access to this data.

Examples of financial statements that can help with decision-making include:

• Balance sheets
• Income statements
• Cash flow statements

This can help you not only create goals but also uncover difficulties in your firm. You can simply identify any differences between financial accounts and what’s been reported if you keep a precise record of all transactions. This will allow you to detect any mistakes that may arise in the future rapidly.

3. Better tax preparation

When it’s time to file your taxes, you’ll need to comply with the Internal Revenue Service’s (IRS) legal 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

By remaining on top of your bookkeeping throughout the year, you can help ease some of the stress associated with tax season. Read more at Recordkeeping.

2 types of bookkeeping for small businesses

There are two forms of bookkeeping: single-entry bookkeeping and double-entry bookkeeping. Continue reading to learn more about which strategy may be ideal for you and your company.

1. Single-entry bookkeeping

Single-entry bookkeeping is frequently used for sole proprietors, small startups, and businesses with simple or low transaction activity. The single-entry system records cash sales and expenditures over 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 business’s bank statements.

Transactions are documented as a single entry rather than two separate entries in these papers.

2. Double-entry bookkeeping

The technique of recording transactions in at least two accounts, as a debit or credit, is known as double-entry bookkeeping. The amount of debits recorded must match the amount of credits recorded when using this technique of bookkeeping. This more complicated method is excellent for businesses that have accumulated expenses.

The following documents are required for double-entry bookkeeping:

• Journal entries
• General ledgers
• Inventory
• Cashbooks
• Accounts payable
• Accounts receivable
• Loans
• Payroll

Accounting software applications such as QuickBooks use a double-entry bookkeeping approach. Bookkeepers use this strategy to report transactions as expense or income. The transaction is then classified on the appropriate account using a second entry.

Read more: Dive into our expertly crafted e-book on bookkeeping and discover the golden keys to financial mastery. Packed with invaluable insights and easy-to-implement strategies, this guide is your first step towards financial empowerment. Say goodbye to financial confusion and hello to clarity and growth.

Bookkeeping best practices

Now that you’ve mastered the fundamentals of bookkeeping, let’s delve deeper into how to practice proper bookkeeping. There is no one-size-fits-all solution to effective bookkeeping, but there are some general guidelines. The four bookkeeping methods listed below might assist you in staying on top of your company’s finances.

1. Consider a phased approach

Trying to handle too many things at once only serves to endanger your organization. Consider a staggered approach to converting from manual to digital bookkeeping. Overhauling everything at once can be stressful and disheartening, so go slowly and make meaningful and thoughtful changes.

Those small measures will assist you in managing your organization on a new and enhanced method. Small steps also allow everyone time to become acquainted with the new bookkeeping software.

2. Keep your general ledger current

A general ledger is a set of accounts that categorizes and stores all records related to a company’s financial activities. The general ledger contains balance sheet accounts (liabilities, equity, and assets) as well as income statement accounts (revenue, expenses, gains, and losses).

Every business transaction affects two or more general ledger accounts under the double-entry accounting framework. Accounts in the general ledger include:

• Asset accounts such as Cash, Inventory, Accounts Receivable, Fixed assets (Building, Land, Equipments), Investments
• Liability accounts such as accounts payable, accrued expenses payable, customer deposits, and notes payable
• Stockholders’ equity accounts such as common stock, treasury stock, and retained earnings

Your general ledger should be up to date so that your bookkeeping software can give functionality that is simple to use. QuickBooks is a wonderful choice for both new and experienced digital bookkeepers.

3. Keep your personal and business finances separate

As you progress through the bookkeeping process, it may be easy to conflate your personal and corporate accounts, but this is not a good idea. By avoiding this, you will lessen the likelihood of an IRS audit and provide an accurate picture of your company’s finances.

Some common ways to help keep your personal and business finances separate include:

• Utilizing a business credit card for all business expenses
• Setting up separate checking accounts
• Keeping all personal and business receipts organized and separate

Following these steps and working tirelessly to keep your personal and business funds separate, you’ll receive a comprehensive picture of your business’s performance while limiting the chance of mistakenly misrepresenting your business’s finances.

4. Plan for taxes throughout the year

Maintain your company’s financial records and spending throughout the year, whether it’s updating your books or communicating with your tax expert. That way, you’ll be ready when it comes time to submit your taxes to the IRS. You’ll be able to start tax season with confidence, as there will be no hiccups or last-minute scrambles.

Should I do my own bookkeeping? 2 questions to ask yourself first

Now that you have a better grasp of bookkeeping, you may be thinking if you should do it yourself or hire a professional. There are two factors to consider before making this selection.

1. Do I have the expertise?

How would you rate your accounting and bookkeeping experience? You might be hoping for the best and have a few college courses on hand. Even with these tools, you may lack the competence required to execute the duties of a bookkeeper.

Doing your own bookkeeping may be difficult if you are inexperienced with local and federal tax rules. On the other hand, if you have extensive tax and finance expertise beyond the basics of bookkeeping, you might be able to get the task done.

2. Do I have the time?

Bookkeeping can be time-consuming and labor-intensive. If you’re a new business owner, you’re probably already overburdened. Adding bookkeeping to the mix may be too much for you. However, if you have the time to update your accounts on a regular basis, conducting your own bookkeeping may be viable.

If you’re like most modern business owners, you probably didn’t start out wanting to do professional-level bookkeeping. Outsourcing the task to an experienced bookkeeper allows you to concentrate on your business plan and growth.

Ready to get started?

With the assistance of a licensed professional, you may cross routine bookkeeping off your never-ending to-do list. A XOATAX Live bookkeeper may help ensure that your company’s books close on time each month and that you’re ready for tax season. Our CPAs and Tax Experts have an average of 15 years of experience working with small businesses in a variety of industries.

Whether you’re looking for the best accounting system for your company, learning how to interpret a cash flow statement, or creating a chart of accounts, XOATAX can help.

>>People also read:

• Pro Tips for Effective Restaurant Bookkeeping
• Signals That Tell You Need A Bookkeeping Service
• Interim Management: Short-Term, Big Impact
• Form 2555: Reporting Foreign Earned Income