What Are The Basics Of Bookkeeping?
If you don’t understand the numerous types of “accounts” your bookkeeper uses to handle your funds, measuring the success (or failure) of your efforts as a business owner will be worthless.
The practice of recording and tracking a company’s financial transactions is known as bookkeeping. Bookkeepers aggregate this information into regular reports that show how the company is doing. They may undertake other duties in addition to invoicing, paying bills, completing tax returns, monitoring important performance metrics, and providing strategic recommendations.
Bookkeeping is the process of keeping track of all of a company’s financial transactions. Every financial transaction that occurs during the course of business operations is recorded, classified, and organized by bookkeepers. Accounting is distinct from bookkeeping. The accounting process generates end-of-year accounting statements and accounts using the bookkeeper’s books.
Small businesses may prefer a simple bookkeeping system that records each financial transaction in the same manner as a chequebook. Businesses with more intricate financial processes often employ double-entry accounting.
Developing excellent products and services, establishing efficient teams, and gaining clients’ trust are skills that millions of small business owners and startup entrepreneurs have mastered. Many of them, though, would almost certainly fail basic accounting.
If you don’t understand the numerous types of “accounts” your bookkeeper uses to organize your cash, measuring the success (or failure) of your efforts as a business owner will be worthless.
Digital marketing abilities, for example, are insufficient if your business has a clear financial picture and is experiencing cash flow problems.
You wouldn’t go to the doctor to get your legs checked. You demand a comprehensive investigation! It’s the same with the financial parts of your business. You must not just be aware of your bank account balance, but also of all aspects of your company’s finances. It not only assists you in making sound decisions now and future plans for your firm, but it also saves time, according to small-business writer Joshua Adamson-Pickett. It assists you in preventing fraud and preparing for government audits.
What is bookkeeping?
Bookkeeping is a rapidly expanding field that is demanding, fascinating, tough, and, most importantly, rewarding. It’s all about comprehending how a company operates and then supplying precise data that allow the company to know exactly how well it’s doing. It offers excellent professional prospects to men and women of all ages and backgrounds.
Simply, bookkeeping is the process of recording financial transactions in a business. A bookkeeper must record any transaction that has monetary repercussions. Sounds straightforward.
The introduction of bookkeeping-specific jargon and the principles that govern proper bookkeeping operations, on the other hand, might be daunting for the newbie.
From the time a firm begins to the time it shuts, bookkeeping is the process of tracking every financial transaction. Each financial transaction is documented based on supporting paperwork, depending on the type of accounting system utilized by the company. A receipt, an invoice, a purchase order, or another sort of financial record proving the transaction occurred could be used as evidence.
A bookkeeper’s job today is to not only keep accurate business records but also to advise business owners on technological solutions that improve the efficiency of business processes and equip them with the knowledge they need to build their company.
The bookkeeping transactions can be written down in a journal or entered into a spreadsheet application like Microsoft Excel. Most businesses today keep records that show their financial activities using specialized bookkeeping computer applications. To record financial transactions, bookkeepers can utilize either single-entry or double-entry bookkeeping. Bookkeepers must be familiar with the company’s chart of accounts and how to balance the books using debits and credits.
Methods of bookkeeping
Your company must pick which approach it will use before beginning bookkeeping. Consider the number of daily transactions and revenue generated by your company before making your decision. A complicated bookkeeping approach meant for enterprises may bring unneeded hassles if you are a small firm. Large organizations, on the other hand, will require more robust bookkeeping methods.
The goal of bookkeeping is to ensure that financial transactions are accurate, chronological, current, and comprehensive. The primary goal of keeping records is to show the company’s accurate financial status in terms of revenues and expenses.
With that in mind, let’s break down these strategies so you can choose the best one for your company.
Because it follows no principles or norms, the single entry system of bookkeeping entails merely documenting one side of the transaction, as the name implies. It is primarily used by small businesses with few transactions.
Because it merely keeps track of cash receipts and payments, purchases and sales, this bookkeeping method is deemed incomplete and unreliable.
Single-entry accounting is a straightforward procedure that entails recording only one transaction in your records. To track incoming revenue and outgoing expenses, these transactions are frequently recorded in a cash book. The single-entry system does not require specialized accounting training. Tiny private enterprises and sole proprietorships that do not buy or sell on credit, own little to no tangible assets, and retain small amounts of inventory will benefit from the single-entry technique.
Every transaction affects two accounts in this system, which is based on the duality principle. Each debit input to one account corresponds to a credit entry in another account, and vice versa.
Two-entry accounting is more dependable. Every transaction affects at least two accounts, which are recorded as debits and credits, respectively. Your cash account will be debited $10 and your sales account will be credited $10 after you make a $10 purchase. Under the double-entry system, the total credits must always equal the total debits. If this happens, your books will be “balanced.”
Each financial transaction must be entered twice in the double-entry bookkeeping system.
By recording a comparable credit entry for each debit entry, the double entry method provides checks and balances.
The double-entry bookkeeping system is not based on currency. When a debt is incurred or money is earned, transactions are recorded.
Using the double-entry system for bookkeeping makes more sense if your organization is large, public, or buys and sells on credit. Businesses generally prefer the double-entry method because it leaves less room for error. It effectively ‘double-checks’ your records because each transaction is recorded as two matching but offsetting accounts.
Cash-based or accrual-based
When cash moves into or out of a business, cash accounting is used to reflect the transactions on the financial statements. Regardless of when money changes hands, accrual accounting recognizes income when it is earned and expenses when they are incurred.
The next stage is to decide whether to keep your books on a cash or accrual basis. When your company recognizes revenue and expenses, this decision will be made.
When your business is cash-based, you recognize revenue when you get cash. When expenses are paid for, they are recorded. To put it another way, any time money enters or exits your accounts, it is recorded in the books. This means that credit purchases or sales will not appear on your books until the cash is exchanged.
The most significant distinction between accrual and cash basis accounting is the timing of revenue and expense recognition. The cash method recognizes revenue and expenses immediately, whereas the accrual method focuses on anticipated revenue and expenses.
Revenue is recognized when it is earned in the accrual method. Expenses are also documented when they are incurred, frequently in conjunction with revenues. For the transaction to be documented, no actual cash must enter or exit. You can immediately mark your sales and credit purchases.
With single-entry or double-entry bookkeeping, both a cash and accrual basis can be used. The single-entry system is, nevertheless, the cornerstone for cash-based bookkeeping in general. Single entries are used to record transactions, which are either cash coming in or cash going out. With the double-entry system, the accrual foundation functions well.
How to record entries in bookkeeping
An adjustment journal entry is frequently made prior to producing financial reports and statements to change the current company’s accounting records to an accrual accounting record for reporting purposes. The Diploma in Accounting will teach you how to complete financial reports and statements. Alternatively, if you are not ready to enroll in the diploma of accounting, you should try doing another bookkeeping course, such as the certificate-iv-in-bookkeeping and accounting.
Balance sheets, income statements, and cash flow statements are financial papers that assist you analyze and evaluate your company’s performance. For these reports to appropriately portray your firm, you must have properly recorded records of your transactions. It’s also beneficial to keep these records as updated as possible while reconciling your accounts.
To record transactions, source papers such as purchase and sales orders, bills, invoices, and cash register tapes are employed. Once you have these documents, you can record the transactions using journals, ledgers, and the trial balance. You may only need a cash register if you run a small business. After that, the information can be combined and translated into financial statements.
A cash register, often known as a till or automated money handling system, is a mechanical or electronic instrument used at a point of sale to register and calculate transactions. It’s typically linked to a drawer and used to store cash and other valuables. A modern cash register is generally connected to a printer, which can print receipts for record keeping.
A cash register is an electronic device that records and calculates transactions. Cash registers are typically used to track cash flow in stores. The cashier collects the money for the sale and gives the consumer a balance. In the register, both the collected cash and the sum returned are recorded as single-entry cash accounts. Transaction receipts are also stored in cash registers, making it easy to record them in your sales diary.
Cash registers are common in all types of companies. Because they use the single-entry, cash-based form of bookkeeping, they aren’t usually the primary means of recording transactions. This makes them ideal for small organizations, but they’re too basic for larger companies.
A journal is a detailed account that captures all of a company’s financial transactions for future account reconciliation and data transfer to other formal accounting records like the general ledger. A journal records the date of a transaction, which accounts were affected, and the amounts in a double-entry accounting system.
The book of original entry is the name of the journal. It is the initial place where a firm records its transactions chronologically. A journal can be physical (in the form of a book or diary) or digital (in the form of an app) (stored as spreadsheets, or data in accounting software). It details the date and amount of each transaction, as well as the accounts credited or debited. Despite the fact that the journal is not normally checked for balance at the end of the fiscal year, each journal entry has an impact on the ledger. Because the ledger must be balanced, as we’ll see, keeping an accurate notebook is an useful habit to develop. For double-entry bookkeeping, this form is useful.
A ledger is a book of accounts that contains the categorised and summarized information from the journals as debits and credits. It’s also known as the second entry book. The information needed to create financial statements is kept in the ledger.
The ledger stores the information needed to construct financial statements. All assets, liabilities, equity, revenues, and expenses are included. The chart of accounts is a list of all of the accounts. The ledger represents each active account on the list.The second-entry book is another name for it. After transactions are entered in a journal, they are separated into separate accounts and then entered into the ledger. The following is the order in which assets, liabilities, equity, income, and costs are transcribed: assets, liabilities, equity, income, and expenses. Like the diary, the ledger might be physical or digital spreadsheets.
The ledger includes a chart of accounts, which is a list of all the names and numbers of accounts in the ledger. In most cases, the chart follows the same account sequence as the transcribed entries.
Because ledgers, unlike journals, are audited, they must always be balanced at the conclusion of the fiscal year. A debit balance occurs when the total debits exceed the total credits. A credit balance exists when the total credits exceed the total debits. In double-entry bookkeeping, the ledger is crucial since each transaction affects at least two sub-ledger accounts.
A trial balance is a financial statement that displays all of the general ledger’s current closing balances. The trial balance is the first step in closing the books at the end of an accounting month.
A trial balance is a bookkeeping spreadsheet that totals all ledger balances into equal debit and credit account columns. A trial balance is normally created at the end of each reporting period. The primary goal of a trial balance is to ensure that the entries in a company’s accounting system are mathematically correct.
The ledger entries are collated and summarized to provide the trial balance. The trial balance is a check to see if your accounts are in order. It lists the accounts in the following order: assets, liabilities, equity, income, and expenses, along with the account balances at the end.
A trial balance is usually created by an accountant to determine where your business stands and how well your finances are balanced. The data can then be compared to ledgers and journals. On the trial balance, imbalances between debits and credits are easy to see. However, it is not always error-free. Any miscalculated or mistranscribed journal entry in the ledger can result in an incorrect trial balance. Instead of waiting until the end of the fiscal year for the trial balance, look for errors early and fix them on the ledger.
Financial statements are written documents that describe a company’s operations and financial performance. The balance sheet is a snapshot of an organization’s assets, liabilities, and stockholders’ equity.
The next, and maybe most crucial, stage in bookkeeping is to create financial statements. These statements are created by combining information from the entries you’ve made on a daily basis. They give you a long-term view of your company’s performance, highlighting where you need to improve. The cash flow statement, balance sheet, and income statement are the three primary financial reports that any organization should know and understand.
The cash flow statement
What is the meaning of a cash flow statement? A cash flow statement is a financial statement that summarizes all cash inflows a firm gets from ongoing activities as well as external investment sources. It also includes all cash outflows for business and investing operations throughout a certain time period.
The cash flow statement does precisely what it says. It’s a financial report that keeps track of your company’s cash flow. It lets you (and potential investors) to see how well your business manages debt and expenses. You can assess if you’re producing enough money to run a long-term, lucrative business by combining this information.
The balance sheet
A balance sheet is a financial statement that shows the assets, liabilities, and shareholder equity of a corporation at a certain point in time. Balance sheets serve as the foundation for calculating investor returns and assessing a company’s financial structure. In a nutshell, a balance sheet is a financial statement that shows what a corporation owns, owes, and how much money shareholders have invested. To undertake basic analysis or calculate financial ratios, balance sheets can be combined with other essential financial documents.
The balance sheet shows the assets, liabilities, and shareholder equity of a company at any particular time. In simple terms, it shows you what your company owns, owes, and how much money shareholders have invested.
The balance sheet, on the other hand, is merely a snapshot of a company’s financial situation at a certain point in time. It must also be compared to balance sheets from previous periods. The balance sheet uses statistics like the current ratio, asset turnover ratio, inventory turnover ratio, and debt-to-equity ratio to help you understand your company’s liquidity and financial structure.
The income statement
The income statement, often known as the profit and loss statement, focuses on a company’s earnings and expenses over time. A standard income statement is divided into two sections. The top half of the graph shows operating income, while the bottom half shows expenditures.
These are tracked throughout time in the statement, such as the last quarter of the fiscal year. It demonstrates how your company’s net sales are converted into net earnings, which result in profit or loss. The income statement is not concerned with revenues or monetary transactions.
The process of discovering consistency between the transactions in your bank account and the transactions in your bookkeeping records is known as bank reconciliation. Reconciling your bank accounts is a crucial step in bookkeeping because it is the last step in detecting discrepancies in your books after everything else has been noted.
When it comes to your money, bank reconciliation ensures that nothing is missing.
You Should Follow These Simple But Important Bookkeeping Practices
Bookkeeping can be intimidating to a newbie, but it doesn’t have to be. Follow these simple but essential bookkeeping procedures to get off on the right foot.
- Don’t Wait Until the Last Minute: When generating reminders, keep dates and deadlines in mind so you don’t have to do the books the night before. Do it sooner rather than later to avoid mistakes and save time seeking important information.
- Maintain Orderly Records: Cluttered records with numerous scraps of paper will make doing the books a misery, with critical information strewn about. Organize them so you know exactly what to look for and don’t waste time.
- Store Receipts: Storing receipts in software means you’ll finally have the paperless office you’ve always wanted. Everything is in one place, and if there is ever an investigation, all spending information will be available as attachments within your software or app. As a result, you’ll always be obedient.
- Keep your business and personal finances separate: Separating your business and personal finances will help you finalize your books faster. As a result, you won’t have to dig through personal data to access financial data for your firm, and vice versa.
Practical Advice for Learning Bookkeeping at Home
You don’t have to start with the cheapest bookkeeper if you’re a complete beginner. You worked hard for your money, so the last thing you want to do is hand over a significant chunk to the taxman, followed by another significant portion to a bookkeeper for work you could handle yourself.
Here are some helpful hints for learning bookkeeping at home to get you started:
- Get to Know Bookkeeping Terms and Phrases: Remember the glossary we told you to save? This is a wonderful opportunity to review the terms and phrases. It will help you understand what to expect and what terms in bookkeeping entail.
- Do your homework: Look for resources online using Google and find some useful blogs that are updated on a regular basis to keep you informed.
- Make the Most of Tutorials: Head over to ATO for some further assistance with bookkeeping. They do, believe it or not, provide some free resources, like webinars, tutorials, and even seminars.
- Use a Bookkeeping Program: The best method to learn is to practice on your own time with an easy-to-use and comprehend bookkeeping app. There are no formal credentials or degrees. Simply opt for one with the features you’ll need rather than those you’ll probably never use.
All of these are a great place to start for any beginner. However, as simple as it might seem on paper, it’s important you recognise when the beast becomes too big. When this is the case, you should know to pick the right time to hand things over to a professional.
Now that you have plenty of helpful information to get started as a beginner, it’s probably the perfect time to make the process even simpler by using your very own checklist…
What Do You Need to Get Your Business Started with Bookkeeping?
When it comes to bookkeeping, one of the first considerations you must make is whether to utilize a cash or accrual accounting system. You might wish to stick with cash accounting if you’re running a tiny, one-person firm from home or even a larger consulting practice from a one-person office.
You record your transaction when cash changes hands if you utilize cash accounting. Even if the money doesn’t change hands until later, accrual accounting records purchases and sales promptly. Cash accounting is sometimes used to establish a business and then switched to accrual accounting as it grew.
If you want to extend credit to your customers or request credit from your suppliers, you’ll need to employ an accrual accounting system.
As a new business owner, you must also select whether to utilize single-entry or double-entry bookkeeping. Single-entry bookkeeping is similar to holding a checkbook. You keep track of transactions when you pay bills and transfer money into your business account. It only works if your business is tiny and your transaction volume is minimal.
A double-entry bookkeeping system is required if your firm is larger and more complex. Each transaction requires at least two entries. There is at least one debit to one account and at least one credit to another account. The key to double-entry accounting is this.
When companies set up bookkeeping for their organizations, they must also set up their computerized accounting systems. The majority of businesses utilize accounting software to keep track of their accounting journal and bookkeeping entries. A simple spreadsheet, such as Microsoft Excel, may be used by very tiny businesses. To keep track of their accounting journals, larger companies use more sophisticated software.
Finally, the company must establish its chart of accounts. As the firm grows and changes, the chart of accounts may change.
Bookkeeping is the process of keeping track of all of a company’s financial transactions. Bookkeepers aggregate this information into regular reports that show how the company is doing. It not only assists you in making sound decisions now and future plans for your firm, but it also saves time. Bookkeeping is the process of recording financial transactions in a business. To record financial transactions, bookkeepers can utilize either single-entry or double-entry bookkeeping.
The goal of bookkeeping is to ensure that financial transactions are accurate, chronological, current, and comprehensive. Every transaction affects at least two accounts, which are recorded as debits and credits. Under the double-entry system, the total credits must always equal the total debits. When your company recognizes revenue and expenses, this will be made using accrual or cash-based accounting. When your business is cash-based, you recognize revenue when you get cash.
When expenses are paid for, they are recorded. With single-entry or double-entry bookkeeping, both a cash and accrual basis can be used. Balance sheets, income statements, and cash flow statements are important financial documents. A cash register is an electronic device that records and calculates transactions. It’s typically linked to a drawer and used to store cash and other valuables.
Cash registers are common in all types of companies, but they aren’t the primary means of recording transactions. After transactions are entered in a journal, they are separated into separate accounts and then entered into the ledger. Ledger stores the information needed to construct financial statements. In double-entry bookkeeping, the ledger is crucial since each transaction affects at least two sub-ledger accounts. A balance sheet is a snapshot of an organization’s assets, liabilities, and stockholders’ equity.
The cash flow statement is a financial report that keeps track of your company’s cash flow. Balance sheets are the foundation for calculating investor returns and assessing a company’s financial structure. The balance sheet shows the assets, liabilities, and shareholder equity of a company at any particular time. The income statement is concerned with a company’s earnings and expenses over time. Bank reconciliation ensures that nothing is missing from your books when it comes to your money.
You don’t have to start with the cheapest bookkeeper if you’re a complete beginner. Separating your business and personal finances will help you finalize your books faster. Storing receipts in software means you’ll finally have the paperless office you’ve always wanted. Whether to use a cash or accrual accounting system is another important consideration. Single-entry bookkeeping is similar to holding a checkbook – you keep track of transactions when you pay bills. Double-entry accounting is required if your firm is larger and more complex.