Types of Bookkeeping
The financial management of a small business relies heavily on accurate bookkeeping.
The procedure entails organising and keeping accounting and financial papers such as ledgers, income tax records, financial statements, journals, and a great deal more.
In accordance with a common definition, “it involves systematic recording and organising of financial transactions in an organisation,” accounting “entails systematic recording and organising of financial transactions in an organisation.”
The upkeep of either the financial transactions or the payroll is not as straightforward as it could first appear.
Whether a company is large or little, it is imperative that they have a trained professional maintaining the duty.
These backend procedures require more of your attention than the fundamental concerns of your company.
You will have a deeper understanding of the significance of accurate bookkeeping to the success of a firm by reading the next section.
One of these two methods was utilised in the practice of traditional bookkeeping.
Manually calculating corporate records and presenting financial statements in accordance with federal requirements required the use of these technologies by the company’s accountants and bookkeepers.
In this day and age of digital technology, the two primary techniques are still in use; however, it is much simpler to accomplish bookkeeping activities for your firm using a computer as opposed to doing them by hand.
Bookkeeping is a task that is performed by the owners of many businesses, however, some choose to outsource it to specialists located elsewhere.
What is Bookkeeping?
Bookkeeping is the process of recording, on a daily basis, the monetary transactions that occur within an organisation.
Companies are able to track all of the information in their books, which enables them to make important decisions regarding their operations, investments, and financing when they have proper bookkeeping.
Bookkeepers are individuals who are responsible for managing all of a company’s financial data.
Companies would not be aware of their current financial condition or the transactions that take place within the organisation if bookkeepers were not present to record and maintain track of these things.
Bookkeeping that is accurate is also essential for external users, such as investors, financial institutions, or the government.
These are individuals or organisations that require access to reliable information in order to make more informed decisions regarding their investments or lending practices.
To put it more succinctly, the entire economy is dependent on bookkeeping that is accurate and trustworthy for both internal and external users.
Companies that habitually deal in more complex transactions typically utilise bookkeeping systems that include two entries for each transaction. This strategy works best for businesses that generate revenue through accounts receivable and that acquire items and inventory on credit.
This system logs individual transactions as an item of income or expense, and then it generates a second entry to link each transaction to the appropriate account.
For instance, if you make money off of a client, that revenue gets recorded as income and is also linked to the client’s account.
You will have a paper trail to refer to in the event that you are subject to an audit or if it becomes necessary for you to determine the origin of payments made for expenses and income.
This method makes use of debits and credits, which are terms used in accounting to describe increases and decreases made to various accounts as a result of transactions made by a user.
History of The Double Entry System
In his book “Of Trading and the Perfect Trader,” Benedetto Cotrugli made reference to the double-entry system for the very first time. The book written by Cotrugli was able to provide a more in-depth explanation of some of the essential ideas that are utilised in contemporary bookkeeping.
In the year 1494, Luca Pacioli, who would later become regarded as the “Father of Modern Day Accounting,” elaborated on Cotrugli’s work to develop the fundamental framework for the bookkeeping system that is in use today.
Comparing the Benefits and Drawbacks of Using the Double Entry Method
Even though it is the method of choice, double-entry bookkeeping is not a foolproof approach.
There are some situations in which the individual entry is prefered more than the others. The following is a list of some of the benefits and drawbacks associated with using the double-entry method:
- Because of this, the organisation is able to generate and comprehend financial statements in a more effective manner.
- The company is able to keep a record of every transaction that takes place as well as the impact that transaction has on each and every component.
- Because it uses the trial balance, it is much simpler to keep an eye on whether or not the books are accurate.
- It facilitates the process of contrasting one time period with another.
- A business is able to more accurately assess its profit and loss by applying the matching principle, which provides for more granular reporting.
- It is more difficult to comprehend for those just starting out.
- When compared to a single-entry system, the expense of maintaining a double-entry system is more expensive.
- The process of recording each transaction takes significantly more time.
For companies that don’t deal with a lot of sophisticated or intricate transactions, a single-entry bookkeeping system is a good option.
This method keeps track of cash sales as well as expenses for the firm that are paid at the time they are incurred.
This approach is not typically utilised by companies that have accounts receivable, accounts payable, or a significant number of capital transactions.
When using this method of bookkeeping, entries don’t link transactions to their appropriate accounts, which might make it more difficult to track where revenues and expenses are going.
The cash sales log, the cash disbursements journal, and your bank statements make up the core of the single-entry system.
When a customer makes a purchase, a notation is made in the journal that tracks sales, and when an expense is settled, a notation is made in the journal that tracks payments and reimbursements. The entries in your diary should be in agreement with the transactions on your bank account.
History of the Single Entry System
The history of accounting can be traced back to the use of the single entry system. Researchers have discovered that it may be traced all the way back to the earliest known civilizations. Because of this, very little information is known about where it first came from. However, it is the technique of accounting that has been around the longest and was used by merchants as early as 2000 BC.
Advantages and Disadvantages of the Double Entry Method
The single entry, which is sometimes referred to as the “prototype” of modern-day accounting, is lacking in many elements that its contemporary equivalent is able to provide. Despite this, it nevertheless possesses a number of benefits, some of which make it the superior option for certain kinds of smaller enterprises.
- Those who do not come from an accounting background will find it simpler to comprehend and use this method.
- Because businesses do not need to hire a competent or trained specialist, the implementation of this solution is more cost-effective for them.
- Faults can more easily be overlooked while using the single entry technique.
- It does not accurately reflect the profit and loss of the company as it actually operates.
- Because there are no counterbalancing accounts that may be compared to, committing fraud is simple and straightforward.
Bookkeeping software is used by many owners of small businesses in order to keep tabs on their companies’ financial activity. Quickbooks and Sage, which was originally known as Peachtree, are two examples of programmes that employ the double-entry bookkeeping technique.
However, in order to use these programmes, you do not necessarily need to have a strong understanding of the process.
You will be prompted to enter information in order to finish and post your transactions using these tools, which are not overly complicated to use.
There are several variants of the software available for purchase, with capacities ranging from fundamental to professional. These variants can be downloaded to a local computer, accessed online, or stored in the cloud.
There are hundreds of computerised bookkeeping systems available on the market today.
This is because bookkeeping systems are often quite complicated, making it difficult for your average book-keeper to learn how to use them and do it effectively.
The process of entering transactions in accordance with the chosen method is simplified by these structures, which use either the single-entry or double-entry ways to record financial transactions.
There is accounting software available that can be customised to meet the needs of either a small business or a large corporation.
Small businesses are given the opportunity to simply monitor all of their accounts and transactions if the interfaces that they utilise are straightforward and easy to understand. The only thing that is necessary is a simple accounting software programme; there is no demand for specialised services to be given.
Even while it is likely that larger businesses may want the services of a book-keeper, it may be simpler to ensure that everyone is working from the same page by utilising computerised software. Due to the fact that no two businesses are the same, it is quite likely that they will also desire a customised software solution that can be customised to match the requirements that are unique to their organisation.
Automation is the feature of computerised systems that provides the most value. It is able to record real-time transactions accurately and efficiently, including both receivables and payables. All of the transactional operations are sped up and their correctness is improved.
It is pricey, and there is a possibility that you will require assistance in the beginning in order to set it up. Additionally, contrary to the widespread belief, it is not completely failsafe. Theft or manipulation of a company’s financial data can have a negative effect on the bottom line of the company. Nevertheless, it is an effective choice for any company that is looking for adaptable services at a reasonable price.
If the thought of maintaining your books using single-entry or double-entry systems makes you uneasy, you could find that using virtual accounting services is beneficial. The need for either pricey CPA fees or an in-house bookkeeping professional is eradicated by the utilisation of a virtual bookkeeper.
The vast majority of virtual bookkeepers will accept electronic versions of your sales invoices, expenditure receipts, and payroll ledgers. Your bookkeeper will send you a copy of your reports through email after they have posted your transactions to the appropriate journals and ledgers.
A virtual bookkeeper is essentially an internet agent that handles your books and is responsible for keeping them up to date. People who believe that either the single-entry or double-entry accounting systems are too complicated or difficult to handle frequently use bookkeeping services that are conducted online.
They are just as productive as an on-site staff would be, but they cost a small business only a fraction of what it would cost to employ someone full-time at the location. Because of the lower expenses involved, hiring a virtual book-keeper is a fantastic alternative to employing an in-house book-keeper or accountant.
Invoices, payroll ledgers, and cost receipts are the areas in which virtual bookkeepers are utilised the most commonly; nonetheless, they are able to carry out any accounting-related work that you may require of them.
They will keep your books for you using either the single-entry or double-entry method of bookkeeping, depending on whatever method of bookkeeping is prefered.
The majority of the time, virtual bookkeepers will insist that a specific brand and version of accounting software be utilised by their clients. For instance, they might suggest that you invest in QuickBooks so that you can compile an accurate record of all of your acquisitions and related receipts within the programme.
They will organise, manage, and reconcile your accounts on your behalf while having access to your accounts at all times while they are performing these tasks. As a direct result of this, everyone’s life are made much easier.
You and your virtual bookkeeper can think of another approach to use in the case that the first one does not work.
They will create, in accordance with the particular specifications that you have provided, an accounting system that will free you from the burden of maintaining your files while also preserving the pristine order in which they are kept.
The most obvious advantage of utilising the services of a virtual book-keeper is the reduction in expenses; however, there are a number of other advantages as well.
It offers a great lot of flexibility because your book-keeper can work whenever it is most convenient for them. In addition to this, you will be provided with access to the newest tools and information regarding federal regulations.
Additionally, these bookkeepers typically offer supplementary services associated to accounts, such as the preparation of tax returns, as part of their overall business model.
Because you could be transferring sensitive information via the internet, there is a chance that the confidentiality of your data could be violated.
When it comes to these accounts, there is a certain degree of risk exposure, in addition to the possibility of misunderstandings occuring.
However, it has the potential to be a successful method for managing your accounts provided you make a concerted effort to keep communication confidential and provide your book-keeper with all of the information that they want from you.
Why Is Bookkeeping Important?
A reliable measurement of an organization’s success can be obtained through accurate bookkeeping.
In addition to this, it gives information on general strategic decisions and acts as a benchmark for its goals regarding revenue and income.
To summarise, once a company is up and operating, it is absolutely necessary to devote more time and resources to the maintenance of accurate records.
Because of the high costs involved, many smaller businesses choose not to employ accountants on a full-time basis.
Rather than doing their own bookkeeping, most small businesses opt to hire a bookkeeper or contract the work out to a professional agency.
One issue that should be brought to your attention in this regard is the fact that many people who have the intention of beginning a new business often ignore the significance of certain matters, such as the necessity of maintaining detailed records of every single penny that is spent.
Improved Finance Management & Analysis
It is much simpler to follow up with and remind clients who are paying their invoices late if you keep a complete report on customer invoicing.
If you have a positive cash flow, you will be able to manage the day-to-day operations of your firm effectively and won’t have to worry about a negative working capital gap.
Meet Tax Obligations
Every company has to fulfil their tax requirements on an annual basis.
At the end of the year, your accountant should have little trouble finding the information they need in your company report.
In the report that your bookkeeper prepares for you, all of the following categories—net profit, income, costs, assets, and liabilities—should be included: tax. Your accountant will not be able to accurately arrange for tax payments or file corporate tax return forms until this step has been completed.
Designing Budget & Business Planning Becomes Easier
If you have an accurate understanding of your company’s financial standing, you will be able to organise your business properly.
In addition to this, you will have a crystal clear understanding of whether you should invest in the expansion of your firm or simply concentrate on improving the cash flow situation.
Safe in the Event of Auditing
Audits are something that no company wants to undergo.
But if, despite your best efforts, you are selected for an audit, the methods of accurate bookkeeping that you use will, at least, help you complete the process more quickly.
In addition, if you provide the appropriate records, you will not be subject to any restrictions or penalties.
Bookkeepers are capable of performing a diverse variety of tasks, from basic data entry to advising on the organisational structure of a company.
They hail from a diverse range of backgrounds as well.
The following are some examples of different types of bookkeepers that are essential to the operation of businesses in today’s world:
Unofficial ‘kitchen table’ bookkeeper
This could be the small business owner, the owner’s spouse or partner, or another member of the owner’s family.
It’s also possible that an employee with another function in the company is the one who winds up handling the company’s accounting responsibilities.
They are assisting the accountant with the fundamental activities of data entry, bank reconciliation, invoicing, and payment processing, as well as filing the paperwork. They most likely learned on their own.
This is a bookkeeping service run by a single individual.
They may have started out as a bookkeeper working from their kitchen table and loved it, or they may have left a large company.
Now that they’ve gotten the word out about their bookkeeping services, a number of their friends, coworkers, and other people have referred clients to them so that they can begin their own bookkeeping firm. They probably have some training under their belt as well as certification.
There are firms that specialise in both accounting and bookkeeping, just like there are accounting firms. They frequently provide pre-made service packages for sale, which can range from simple bookkeeping all the way up to advice on business strategy.
Department in the accountancy firm
Some accounting firms have a bookkeeping section that is responsible for maintaining the most recent information on your accounts and generating monthly reports. These individuals are also sometimes referred to as accounting technicians.
These bookkeepers are employed in a company and are responsible for a wide variety of bookkeeping tasks. They frequently report directly to the owner (or management), and in order to fulfil all of the company’s accounting requirements, they might collaborate with an outside accountant.
Bookkeepers that work remotely provide their services by utilising online accounting software and conducting the majority of their meetings through video conferencing.
They are able to maintain competitive pricing because they conduct business in this manner.
They may operate as a lone proprietorship, be an employee of a practice, or provide their services from a location overseas as an outsourced service.
Bookkeepers are typically friendly and outgoing individuals.
They take pleasure in simplifying complex topics such as finance and taxation so that any owner of a company may grasp these ideas. They are also intriguing people to look into. In this series of articles about accountants and bookkeepers, we will introduce you to some of these professionals.
The Accrual vs Cash Basis of Accounting
First things first: in order for businesses to correctly execute bookkeeping, they need to determine which basis of accounting they will adhere to.
The cash basis of accounting and the accrual basis of accounting are the two primary approaches to financial reporting from which businesses can select one.
The timing of when a business registers a sale (which represents money coming into the organisation) vs when it records a purchase (which represents money leaving the firm) is what differentiates these two methods of accounting.
Methods of Bookkeeping
After going over the two distinct kinds of bookkeeping systems, the next step is to go over the two distinct approaches to bookkeeping, which are manual and computerised, respectively.
Manual bookkeeping refers to the paper-based and more conventional method of keeping financial records.
Journal books, ledger books, and worksheets are examples of the types of manual and paper books of accounts that are utilised in the process of manually recording and handwriting business transactions.
This type of bookkeeping is still utilised by a large number of organisations, particularly smaller ones that handle fewer complex transactions. Many people choose to keep their books manually since it is less expensive and requires less upkeep. On the other hand, the process of recording is more laborious than using a computer for bookkeeping.
The use of computerised bookkeeping is a contemporary and forward-thinking approach to the tracking of commercial transactions. The task of keeping accurate books has been simplified, sped up, and made more simple thanks to the widespread adoption of accounting and bookkeeping software.
It is important to keep in mind that the fundamental ideas and concepts underlying the conventional method of bookkeeping are nonetheless utilised in and adhered to by computerised bookkeeping.
It did nothing more than doing rid of the tiresome responsibilities associated with manual bookkeeping, which resulted in a significant increase in the speed with which corporate transactions could be recorded and reported.
Some smaller firms choose not to utilise computerised bookkeeping because it is more expensive than using the manual approach and because the technical training that is required to use computerised bookkeeping is something that they do not want to go through.
Nevertheless, computerised systems are used by the vast majority of enterprises because they are convenient, reliable, and efficient.
To sum everything up, the decision regarding whether to use a single entry system or a double-entry system ultimately rests with the proprietor of the company.
No matter which approach you take, make it a point to seek the advice of an expert so that you can eliminate the risk of making mistakes that could have a negative impact on your company.