Bookkeeping Systems To Use For Small Business
Learning the types of bookkeeping systems is essential in identifying which one to adopt and use in keeping the records of business transactions. By studying the different types of bookkeeping systems, you will be able to determine the most appropriate to the business or client that you serve.
Millions of small business owners and startup entrepreneurs are masters at creating great products and services, building effective teams and winning over customers. Many of them, however, would probably flunk basic bookkeeping.
As the business owner, if you don’t understand the different types of “accounts” your bookkeeper uses to organize your finances, measuring the success (or failure) of your efforts will be futile.
Being adept at digital marketing, for example, isn’t enough if you don’t have a clear financial picture of your business and run headlong into cash flow problems.
You wouldn’t go to the doctor and ask only to have your legs checked. You want a comprehensive exam! It’s the same with the financial aspects of your business. You need to know everything about your business’s finances, not just your bank account balance. As small- business writer Joshua Adamson-Pickett explains, it not only helps you make solid decisions now and plans for your company down the road, and an efficient bookkeeping system saves time. Notably, it prepares you for government audits and helps prevent fraud.
Traditional bookkeeping was performed using one of two systems. Accountants and bookkeepers used the systems to manually calculate company books and present financial statements in accordance with federal regulations. The two main systems still exist in today’s digital era, but it’s much easier to perform bookkeeping tasks for your company on the computer than by hand. Many business owners opt to do their own bookkeeping or outsource the duty to off-site accounting professionals.
Accountants and bookkeepers rely on set systems to efficiently and adequately accomplish daily tasks. With a steady bookkeeping system in place, they’re able to automatically or manually calculate company books and meet federal regulations. Automation, bookkeeping software, and other technology used in accounting also rely on one of many systems for tracking accounting-related files and expenses.
Choosing the right bookkeeping system for your business is a matter of understanding how these systems work and whether they fit in with your current style of business.
If you want to use these systems to calculate your finances manually or you want to choose an electronic software to do your books, it’s important to know all you can about your options.
What Is Bookkeeping?
Bookkeeping involves the recording, on a daily basis, of a company’s financial transactions. With proper bookkeeping, companies are able to track all information on its books to make key operating, investing, and financing decisions.
Bookkeepers are individuals who manage all financial data for companies. Without bookkeepers, companies would not be aware of their current financial position, as well as the transactions that occur within the company.
Accurate bookkeeping is also crucial to external users, which includes investors, financial institutions, or the government – people or organizations that need access to reliable information to make better investments or lending decisions. Simply put, the entire economy relies on accurate and reliable bookkeeping for both internal and external users.
Bookkeeping is a task concerned with the recording of financial data relating to business operations in a significant and orderly manner. It envelopes all the procedural aspects of accounting work and embraces record-keeping function. There are different types and methods of bookkeeping which are practiced in managing books of accounts.
Importance of Bookkeeping
Proper bookkeeping gives companies a reliable measure of their performance. It also provides information on general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.
Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.
The single-entry bookkeeping system is used for businesses that have minimal or uncomplicated transactions. This system records cash sales and business expenses that are paid when incurred. This system is not traditionally used for businesses that have accounts receivable, accounts payable or many capital transactions. Bookkeeping entries under this system don’t match transactions to corresponding accounts, which can make tracing revenues and expenses more difficult. In essence, the single-entry system consists of a cash sales journal, a cash disbursements journal and your bank statements. An entry is made to the sales journal when revenue is received, and an entry is made to the disbursement journal when an expense is paid. Your journal entries should reconcile with your bank account transactions.
Single-entry Bookkeeping System is commonly used for small businesses with very little or minimal transactions. It is often referred to them the as simple, practical and informal way of recording. Usually, it only maintains a record of cash disbursement, cash receipts, sales and purchases. All the rest of the accounting records, such as inventory, equipment, capital, etc., are only recorded in the form of memorandum or notes.
The books or records maintained in a single-entry bookkeeping system are the daily summary of cash receipts, as well as a monthly summary of cash receipts and disbursements, which represents the revenue and expense, respectively.
Unlike the double-entry bookkeeping system wherein one transaction affects two accounts, in the single-entry bookkeeping system, a transaction only affects one account. Example, a cash sale is recorded only as an increase in cash receipts or deposits with no corresponding sales account.
However, the simplicity of single-entry bookkeeping system is prone to error and incompleteness because it lacks a detailed recording system compared to the double-entry bookkeeping system. Although for tax purposes, it is an acceptable method of record-keeping for small and simple businesses, however, it may not provide a fair valuation of the relevant financial information of a business.
The single-entry system is often the system of choice for small business owners. It’s certainly less complex than other systems, but it’s also difficult to keep track of huge volumes of data.
It’s called a single-entry data system because each item gets its own entry in the accounting records. It primarily focuses on cash sales and business expenses. It can’t keep track of more complicated expenditures, so large businesses probably shouldn’t use it.
Single-entry systems work only if the items are entered when they are incurred. It uses cash disbursements journals, cash sales journals, and recorded bank statements to monitor transactions. As soon as a transaction recurs, it’s recorded in one of these journals. At the end of a certain period, such as a week or month, the recordings will be compared and reconciled with the bank account.
It’s an excellent way for small businesses and startups to keep track of their accounts on a budget. It’s easy to maintain, and business owners typically don’t need to hire outside help. It can be done with an Excel spreadsheet or by hand. It’s also easier to calculate loss and profit for a certain period since there’s minimal data.
Businesses with more complex expenses shouldn’t use this system. It’s best for companies lacking accounts payable, accounts receivable, and frequent capital transactions because these transactions become too complex for the simplicity of this structure. It also can’t track assets and liabilities, so small businesses with high risk or expensive assets may want to consider another option.
Businesses using a single-entry system will also struggle to make predictions for the future. There’s not enough information to predict the current financial position of the business or project its growth. It’s also difficult to procure audit options.
The single entry system is the most basic type of accounting. Unlike the double entry system, the single entry method does not need a trained professional for it to be done. With it, the bookkeeper only needs to record transactions in a one sided manner.
This means only the effect on a single element is recorded for every transaction. For example, only the effects on the cash account are recorded for all the transactions conducted by the business. It is way easier than the double entry. However, it carries many more disadvantages than the latter.
The single entry system dates back as far as accounting itself. Scientists have traced its origins way back in the ancient civilizations. Because of this, not much is known about the origin of it. However, it was the oldest method of accounting used by traders as early as 2000 BC.
As the “prototype” of the modern day accounting, the single entry lacks many features that can be offered by its modern counterpart. Nevertheless, it still has some advantages which make it a better choice for some smaller businesses.
- Easier to understand and apply for those without a background in accountancy.
- No skilled or trained professional is needed to be hired, making it cheaper to implement for businesses.
- The single entry method is. Hence errors are easier to neglect.
- It does not reflect the true profit and loss of the business.
- Fraud can be done with ease as there are no counterbalancing accounts to compare to.
To wrap things up, the choice between the single entry system and the double entry system lies with the owner of the business. No matter which method you use, remember to consult a professional to avoid making any errors that may adversely affect your business.
Double-Entry Bookkeeping System
Double-Entry Bookkeeping System is the standard method of record-keeping normally used by most businesses, bookkeepers and accountants.
The procedure of the double-entry bookkeeping system is more detailed and complex than the single-entry bookkeeping system. It introduces the concept of debit and credit, which means that for every transaction there is something received (debit) and given up (credit), as such, recorded transaction affects two or more accounts.
The benefit of the double-entry bookkeeping system is that it has a process to ensure accurate and complete recording of business transactions. It is a reliable source of financial information and fair valuation of the condition or performance of a business.
Double-entry bookkeeping systems are used for businesses that routinely have more complex transactions. Companies that collect income through accounts receivable and receive merchandise and inventory on credit are better-suited for this method. This system posts single transactions as an income or expense item then create a second entry to trace the transaction to a corresponding account. For example, if you receive income from a customer, the revenue is posted as income and also traced to the customer’s account. In the event you are audited or need to know where income and expense payments generated, you’ll have a paper trail to find the information quickly. This system uses debits and credits, which is the accountant’s language of increases and decreases to each account affected by your transactions.
Larger, more complex businesses typically use a double-entry system. Small businesses with more complex financial transactions will also benefit from this interface.
Basically, the double-entry system works by first posting single transactions as either an income or expense item. Then, it creates a second sub-entry that traces the transaction to the correct account. It enables you to track five transactions at once: expenses, revenues, equities, assets, and liabilities.
It can also use debits and credits to identify increases and decreases within each account. It operates under the two-fold effect, which states that for every value received (debit), there must be a value given up (credit). The ability to determine what’s affected by a given business transaction is invaluable for keeping track of current financial records, making predictions for the future, and accurately monitoring assets and liabilities.
Although smaller businesses can adopt the double-entry system if they wish, it’s a necessity for any business making more than $5 million in gross sales or more than $1 million in gross receipts for inventory sales to adopt the double-entry system. The single-entry system simply can’t handle the complexities of such a large company.
Many business owners prefer the double-entry system because it’s easier to understand your financial statements. Every single transaction is recorded, and it’s clear how it affects the corresponding account.
It gives a clear picture of the financial state of any business. You can easily compare one period to another and identify errors, growth patterns, loss patterns, and other essential details. Companies can take a holistic view of their projected financial potential and prepare accordingly.
In most ways, the double-entry system is superior; however, it is a difficult system to undertake without experience. Startup owners trying to keep costs low may be unable to tackle the system on their own, necessitating the hiring of an accounting professional. In all, more time and money is needed to maintain this system.
Essentially, a virtual bookkeeper is an online agent who handles your books. Virtual bookkeeping services are common for those who see both the single-entry and double-entry systems as complex and difficult to manage.
A virtual bookkeeper is a great alternative to an in-house bookkeeper or accountant because of the expense; they cost a fraction of what an on-site employee would cost a small business, but they’re just as effective.
Virtual bookkeepers will handle any accounting-related items you wish, but they’re most commonly used for invoices, payroll ledgers, and expense receipts. They’ll apply the single or double-entry system of bookkeeping for you.
Typically, virtual bookkeepers will request the use of a certain type of accounting software. For example, they might request that you purchase QuickBooks so that you can keep track of all your receipts and transactions there. They will have access to your account and track, organize, and reconcile your accounts for you. This makes it easier for everyone.
If that system doesn’t work, you can devise another option with your virtual bookkeeper. They’ll work with your unique needs to develop an accounting system that removes the burden from you while putting all your files in perfect order.
The most notable advantage of using a virtual bookkeeper is the cost savings, but there are others. It’s extremely flexible—your bookkeeper can work whenever it’s convenient. You’ll also have access to knowledge regarding federal regulations and the latest tools. Plus, these bookkeepers often offer other account-related services, such as tax preparation.
There is some risk with data security, since you may be sharing sensitive information over the internet. There is some vulnerability to these accounts and chances for miscommunication. However, if you’re diligently seeking secure communication and share all requested information with your bookkeeper, it can be an excellent method for managing your books.
If the whole idea of single-entry and double-entry bookkeeping methods makes you queasy, you might benefit from virtual bookkeeping services. A virtual bookkeeper eliminates the need for expensive CPA fees or an in-house bookkeeping employee. Most virtual bookkeepers accept your sales invoices, expense receipts and payroll ledgers electronically. The bookkeeper posts your transactions to appropriate journals and ledgers, and emails you a copy of your reports. Virtual bookkeepers are typically CPAs or degreed accountants who tend to have lower fees than private CPA firms.
Many small-business owners use bookkeeping software to keep track of financial activities. Programs such as Quickbooks and Sage — formerly Peachtree — use the double-entry bookkeeping system, but you won’t necessarily need to be well versed in the method to use the software. These programs are relatively user-friendly and prompt you to enter information to complete and post your transactions. Various versions of the software exist, ranging from basic to professional capacities, and you can purchase the software in desktop, online or cloud versions.
Because bookkeeping systems are often difficult to understand and operate for the typical bookkeeper, the market has put out hundreds of computerized bookkeeping systems. These structures use the single-entry or double-entry methods and make it simple for you to enter transactions accordingly.
There’s bookkeeping software designed for both small and large businesses. Small businesses can simply keep track of all accounts and transactions with easy-to-use interfaces. There’s no need for customized services, as a basic accounting software system is enough.
Large businesses will likely need the assistance of a bookkeeper, but the computerized software can make it easier to stay on the same page. They will also likely need a customized system that will match their unique needs as no business is the same.
The best part about computerized systems is automation. It can efficiently record receivables and payables based on real-time transactions. It speeds up all transaction processes and improves accuracy.
It is expensive, and you may need assistance at the beginning to set it up. It’s also not foolproof, as many would believe it to be. Financial data can be stolen or manipulated, impacting the business’s bottom line. Still, it’s an efficient option for any business in need of flexible, affordable services.