What Are The Basics Of Bookkeeping?
Your ability to measure the success (or failure) of your efforts as a business owner will be rendered meaningless if you do not have a solid understanding of the many sorts of “accounts” that your book-keeper utilises to manage your finances.
Bookkeeping is the process of recording and keeping track of all of the financial transactions that occur within an organisation. Bookkeepers compile all of this information into periodic reports that illustrate how well the business is doing. Invoicing, paying bills, preparing tax returns, monitoring crucial performance metrics, and offering strategic recommendations are just some of the other responsibilities that they may take on in addition to those tasks.
The practise of keeping track of all of a company’s financial transactions is referred to as “bookkeeping.” Bookkeepers are responsible for recording, categorising, and organising every single monetary transaction that takes place throughout the course of normal business operations. Bookkeeping and accounting are two entirely different things. The records kept by the book-keeper are used as input for the generation of end-of-year accounting statements and accounts by the accounting process.
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.
The practise of keeping accurate records of a company’s financial activities requires that accounting be performed from the moment an organisation opens its doors until it finally closes them. Depending on the type of accounting system that is utilised by the organisation, each and every monetary transaction is documented based on the corresponding supporting paperwork. As evidence, you might use a receipt, an invoice, a purchase order, or some other type of financial record that demonstrates the transaction actually took place.
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 transactions involving the bookkeeping can either be written down in a diary or typed into a spreadsheet tool such as Microsoft Excel. The majority of firms operating in the modern world use specialist software designed for bookkeeping purposes in order to maintain records that detail their financial activity. Bookkeepers have the option of utilising either single-entry or double-entry bookkeeping when it comes to the process of recording financial transactions. Bookkeepers are expected to be knowledgeable with the company’s chart of accounts and have an understanding of how to balance the books utilising debits and credits.
Methods of bookkeeping
Before beginning the bookkeeping process, your business needs to decide which method it will follow. Before you make a selection, it is important to take into account the number of daily transactions and revenue generated by your organisation. A difficult method of bookkeeping that is designed for companies may bring extra hassles to a small firm because of its complexity. On the other hand, bookkeeping systems that are more resilient are going to be required for large enterprises.
The purpose of keeping accurate books is to ensure that all financial transactions are recorded in the correct chronological order, are up to date, and contain all relevant information. Providing an accurate picture of the current financial position of the organisation in terms of its revenues and expenses is the major objective of maintaining accurate records.
In light of this, let’s examine each of these approaches more closely so that you may select the one that is most suitable for your business.
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.
This form of bookkeeping is considered to be unreliable and incomplete due to the fact that all it does is keep track of cash receipts and payments, as well as purchases and sales.
The method of accounting known as single-entry accounting is a simple process that requires entering just one transaction in your books at a time. These transactions are typically recorded in a cash book so that one can keep track of the money coming in and going out of the business. The single-entry approach does not necessitate any specific accounting expertise on your part to use it. The single-entry method is beneficial to very tiny private businesses and sole proprietorships that do not buy or sell on credit, hold very few or no tangible assets, and keep only a limited amount of inventory on hand.
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.
Accounting with two entries is considered to be more reliable. Every transaction has an impact on at least two accounts, which are recorded as either debits or credits, depending on the nature of the transaction. After you make a purchase of $10, the amount of that transaction will be deducted from your cash account, and the amount will be credited to your sales account. In a double-entry accounting system, the sum of the credits and the total of the debits must always be equal. In this scenario, your financial records will be considered “balanced.”
In a bookkeeping method known as double-entry, each individual monetary transaction needs to be recorded twice.
The double entry approach provides checks and balances since it requires the recording of an equal and comparable credit entry for each debit entry.
The double-entry bookkeeping system does not rely on a particular currency for its foundation. Transactions are recorded whenever there is a change in financial status, such as when money is earned or owed.
If your company is large, public, or buys and sells on credit, then the double-entry system of bookkeeping makes the most sense for your accounting needs. The double-entry method is often prefered by businesses since it reduces the likelihood of making a mistake. Because each transaction is recorded as two matching but offsetting accounts, it functions as a “double check” on your records.
Accrual-based versus cash-based
Cash accounting is the method that is used to record the transactions that occur with a company’s cash, whether the cash is moving in or out of the company. The accrual method of accounting records income at the time it is earned and expenses at the time they are incurred, regardless of when the money actually changes hands.
The following step is to determine whether you will keep your books on a cash or accrual basis for accounting purposes. This decision will be made when your organisation first starts recording its revenues and expenditures.
If your company operates on a cash basis, then you will record revenue whenever you get cash. Expenses are only reported once payment has been made for them. To put it another way, whenever money is added to or removed from your accounts, the transaction is recorded in the books. This indicates that any sales or purchases made on credit will not show up on your books until the corresponding cash has been transacted.
The time of when income and expenses are recognised is the most important aspect that differentiates cash basis accounting from accrual basis accounting. The cash method of accounting recognises income and expenses as soon as they occur, whereas the accrual approach places more of an emphasis on the revenue and expenses that have already been incurred.
When using the accrual technique, revenue is only recorded when it is actually earned. When expenses are incurred, they are also documented; this process is typically carried out in conjunction with the revenue collection process. In order for the transaction to be recorded, there can be no actual currency entering or leaving the premises at any point. You are able to immediately mark your sales and transactions made with credit.
Both a cash basis and an accrual basis are valid options for bookkeeping, regardless of whether the entries are single or double. Nevertheless, the single-entry approach is the foundation of cash-based bookkeeping in its entirety. Transactions, which may be thought of as either cash coming in or cash going out, are usually recorded using a single entry. The accrual basis operates effectively with the use of the double-entry accounting system.
How to enter data in an accounting system
It is common practise, prior to the production of financial reports and statements, to make an adjustment journal entry in order to convert the existing company’s accounting records to an accrual accounting record. This is done for the purposes of reporting. You will learn how to compile financial reports and statements as part of the Accounting Diploma programme that you enrol in. You might also consider enrolling in another bookkeeping course, such as the certificate-IV-in-bookkeeping and accounting programme, if you are not yet prepared to start the accounting diploma programme.
There are several financial documents, such as balance sheets, income statements, and cash flow statements, that can assist you in analysing and evaluating the operation of your company. You really need to have correctly maintained records of all of your transactions in order for these reports to accurately depict your company. While you are working to reconcile your accounts, it is also to your advantage to keep these records as up to date as possible.
The use of source papers including purchase and sales orders, bills, invoices, and cash register tapes are utilised in the process of transaction recording. As soon as you have these documents in hand, you will be able to record the transactions utilising notebooks, ledgers, and the trial balance. If you run a very tiny business, you might be able to get by with just a cash register. After that, the data can be put together and interpreted as financial statements.
A cash register is a device that can be either mechanical or electronic, and it is used at points of sale to register and calculate transactions. A cash register is also commonly known as a till or an automated money handling system. Cash and other valuables are often stored in this compartment, which is connected to a drawer. The majority of the time, a modern cash register will be connected to a printer, allowing it to print receipts for the purpose of record keeping.
A cash register is a device that uses electronic recording and calculation to keep track of transactions. In most retail establishments, cash flow is monitored with the help of cash registers. The consumer is given their balance at the same time that the cashier collects the money for the sale. The cash that was collected as well as the money that was given back are both noted in the register as single-entry cash accounts. In addition, receipts for transactions are kept in cash registers, which makes it simple to enter the receipts in a sales journal.
The use of cash registers is widespread across all sorts of businesses. Due to the fact that they employ the cash-based, single-entry method of bookkeeping, they are not typically utilised as the primary means of documenting transactions. Because of this, they are best suited for use by smaller enterprises, while their functionality is insufficient for use by larger businesses.
When it comes to formal accounting records, such as the general ledger, a journal is a detailed account that documents all of a company’s financial transactions for the purpose of future account reconciliation and the transfer of data to other formal accounting records. In a double-entry accounting system, the details of a transaction, including the date, the accounts that were impacted, and the amounts, are recorded in a journal.
The name of the journal is referred to as the book of original entry. It is the first location in a company’s accounting system where the company enters its transactions in chronological order. A journal can exist in the real world (in the form of a book or diary) or in the virtual world (in the form of an app) (stored as spreadsheets, or data in accounting software). It provides information regarding the date, the amount, and the accounts that were either credited or debited as a result of each transaction. Each entry in the journal has an effect on the ledger, despite the fact that it is not customary practise to perform a balance check on the journal at the conclusion of the financial year. As we will see in the following section, maintaining an accurate notebook is a useful habit to adopt because the ledger needs to be balanced. This form can be handy when performing double-entry bookkeeping.
The information that has been categorised and summarised from the journals is recorded in a ledger, which is a book of accounts that contains debits and credits. In some circles, it is also referred to as the second entry book. The ledger is where all of the information that is required to compile financial statements is kept.
The ledger is where all of the information that is required to put together financial statements is stored. Everything is factored in, including assets, liabilities, equity, revenues, and expenses. A list of all of the accounts is contained within the chart of accounts. The ledger contains entries for all of the accounts that are currently in use. It is also sometimes referred to as the second-entry book. Following the recording of transactions in a journal, those transactions are subsequently split up into their respective accounts before being added to a ledger. The assets, liabilities, equity, income, and expenses are transcribed in the following order: assets, liabilities, equity, income, and expenses. In the same vein as the diary, the ledger may take the form of physical or electronic spreadsheets.
A chart of accounts, which is a list of all the names and numbers of accounts in the ledger, is included in the ledger as part of the ledger. The majority of the time, the chart will provide the accounts in the same order as the entries that were transcribed.
In contrast to journals, ledgers are subject to audits, which means that they must constantly be brought back into balance at the end of each fiscal year. When the overall amount of debits is greater than the total amount of credits, this results in a debit balance. When the entire credits meet or surpass the total debits, there is said to be a credit balance. Due to the fact that each transaction impacts at least two sub-ledger accounts, the ledger is an essential component of double-entry bookkeeping.
A financial statement known as a trial balance reflects all of the general ledger’s current closing balances at the time of the statement’s creation. Whenever an accounting month comes to a close, the first thing that needs to be done is to create a trial balance.
A trial balance is a spreadsheet used in bookkeeping that compiles the totals of all ledger balances into account columns that are equally divided between debit and credit. At the end of each reporting period, a trial balance is often prepared as standard practise. The fundamental objective of a trial balance is to verify that the entries made in the accounting system of a corporation are accurate from a mathematical perspective.
In order to get the trial balance, the entries in the ledger are compiled and then summarised. A check that determines whether or not your finances are in order is called a trial balance. The accounts are presented in the following order: assets, liabilities, equity, income, and costs, with the account balances listed at the very end of the document.
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.
The financial statements of a corporation are written records that describe the operations of the organisation as well as its financial performance. A snapshot of an organization’s assets, liabilities, and stockholders’ equity can be found on the balance sheet.
Creating financial statements is the next step in bookkeeping, and it’s possible that it’s the most important step. The information contained in these statements is derived from the entries that you have made on a daily basis and is combined. They provide you with a long-term perspective on the performance of your firm and identify the areas in which you need to make improvements. There are three basic financial reports that every organisation ought to be familiar with and able to comprehend. These are the cash flow statement, the balance sheet, and the income statement.
The statement of cash flows
What does it mean for a company to have a cash flow statement? A cash flow statement is a type of financial statement that describes all cash inflows that an organisation receives, including cash inflows from current activities as well as cash inflows from external investment sources. Additionally included are any and all cash outflows produced by company and investment activities over the course of a specific time period.
The cash flow statement is an accurate representation of its purpose. A cash flow report is a type of financial report that monitors the flow of cash through your organisation. It reveals to you (as well as possible investors) how successfully your company handles its obligations and expenditures. By collecting all of this information, you will be able to determine whether or not you are making enough money to maintain a sustainable and successful business.
The profit and loss statement
A balance sheet is a specific kind of financial statement that provides a summary of an organization’s assets, liabilities, and shareholders’ equity as of a specific point in time. Balance sheets are the primary source of information that is utilised when assessing investor returns and analysing the financial structure of a company. Balance sheets also play an important role in reporting to investors. In a word, a balance sheet is a financial report that displays the assets and liabilities of a company, in addition to the amount of money that has been provided by shareholders. It also indicates the total amount of money that the firm has available to pay its debts. When doing fundamental analysis or calculating financial ratios, it is possible to combine multiple important financial records, including balance sheets, into a single document for easier analysis and calculation.
At any given point in time, a company’s assets, liabilities, and shareholder equity are all itemised and displayed on the balance sheet. In layman’s words, it will show you what your firm owes money for, what it owns, and how much money shareholders have invested in the company.
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 monitored at various points in time throughout the statement, such as during the most recent quarter of the fiscal year. It illustrates the process through which your company’s nett sales are transformed into nett earnings, which in turn determines the company’s overall profit or loss. The statement of income does not take into account revenues or other monetary transactions.
Bank reconciliation refers to the process of determining whether or not there are discrepancies between the transactions recorded in your bookkeeping records and the transactions recorded in your bank account. The process of reconciling your bank accounts is an essential part of bookkeeping since it is the final step in determining whether or not there are inconsistencies in your records after all other information has been recorded.
The process of reconciling your bank accounts verifies that all of your financial transactions are complete and accurate.
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 creating reminders, make sure to keep important dates and deadlines in mind. This will prevent you from needing to finish up the books the night before. Do it as soon as possible rather than putting it off to save time looking for crucial information and to prevent making mistakes.
- Maintain Orderly Records: It will be a nightmare to complete the books if the records are disorganised and there are several scraps of paper since vital information will be dispersed all over the place. Put some order into them so that you may save yourself time and know exactly what to look for.
- Store Receipts: The elimination of paper from your office will bring about the paperless environment you’ve dreamed of when you store receipts in software. Everything is in one location, and if there is ever an investigation, all information regarding expenditure will be available as attachments within your software or app. Everything is centralised. Because of this, you won’t ever disobey me again.
- Keep your business and personal finances separate: If you keep your personal and corporate finances separate, you will be able to complete your books more quickly. Because of this, you won’t have to sift through any personal data in order to get to the financial data for your company, and the same goes for the other way around.
Practical Tips for Home Bookkeeping Education
If you are just starting out, you don’t need to rush out and hire the least expensive accountant you can find. You put in a lot of effort to earn your money, and the last thing you want to do is fork over a sizeable amount of it to the government in the form of taxes, followed by another sizeable portion to a book-keeper for job that you are capable of handling on your own.
To get you started with your bookkeeping education at home, here are some pointers that can be helpful:
- Get to Know Bookkeeping Terms and Phrases: Do you remember that we advised you to make a copy of the glossary? This presents an excellent opportunity to go back and study the various terminology and phrases. This will assist you understand what to expect as well as the meaning of various phrases used in bookkeeping.
- Do your homework: You may search the internet for beneficial information using Google, and you can also look for informative blogs that are updated on a regular basis to keep you up to date.
- Make the Most of Tutorials: If you need any more help with your bookkeeping, you should check out the ATO. Believe it or not, they do offer some free resources, such as webinars, tutorials, and even seminars to their customers.
- 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 wonderful places for someone who is just beginning their journey to begin with. However, despite how straightforward it may appear on paper, it is essential that you are able to determine when the problem has become unmanageable. When something like this happens, you need to be able to recognise when it’s the perfect time to call in an expert to help you out.
Now that you have access to a wealth of useful material that will assist you in getting started as a novice, it is likely time for you to make the process even more manageable by making use of 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 purpose of keeping accurate books is to ensure that all financial transactions are recorded in the correct chronological order, are up to date, and contain all relevant information. At a minimum, two accounts are impacted by every transaction, and the resulting debits and credits are recorded accordingly. In a double-entry accounting system, the sum of the credits and the total of the debits must always be equal. Either accrual accounting or cash-based accounting will be utilised in the process of revenue and expense recognition within your firm. If your company operates on a cash basis, then you will record revenue whenever you get cash.
Expenses are only reported once payment has been made for them. Both a cash basis and an accrual basis are valid options for bookkeeping, regardless of whether the entries are single or double. There are a number of essential financial papers, including balance sheets, income statements, and cash flow statements. A cash register is a device that uses electronic recording and calculation to keep track of transactions. Cash and other valuables are often stored in this compartment, which is connected to a drawer.
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.
If you are just starting out, you don’t need to rush out and hire the least expensive accountant you can find. If you keep your personal and corporate finances separate, you will be able to complete your books more quickly. The elimination of paper from your office will bring about the paperless environment you’ve dreamed of when you store receipts in software. Another essential decision to make is whether or not to keep accounting records using a cash or accrual basis. The process of maintaining a single-entry bookkeeping system is analogous to keeping track of transactions while using a chequebook to pay bills. If your company is larger and more sophisticated, then you are compelled to use double-entry accounting.