Tax

What Are The Types Of Bookkeeping?

It’s crucial to understand the many types of bookkeeping systems before deciding which one to employ to keep track of business activities. You can choose which form of bookkeeping system is best for the business or client you represent by examining the many types of bookkeeping systems.

Millions of small business owners and startup entrepreneurs have mastered developing exceptional products and services, forming effective teams, and gaining customers’ trust. However, many of them would most likely fail basic accounting.

Measuring the success (or failure) of your efforts as a business owner will be pointless if you don’t grasp the various types of “accounts” your bookkeeper utilises to handle your funds.

Digital marketing skills, for example, aren’t enough if you don’t have a clear financial picture of your company and run into cash flow issues.

You wouldn’t see the doctor to have your legs examined. Instead, you want a thorough examination! It’s the same with your company’s financial aspects. You need to know your bank account balance, but you also need to know everything about your company’s finances.

It helps you make trustworthy decisions today and plans for your company down the road, but it also saves time.

It helps you avoid fraud and prepares you for government audits.

If you require help with your bookkeeping, you can give us a call on (03) 8568 3606 or email us on [email protected].

Accountants and bookkeepers rely on established processes to complete everyday chores efficiently and effectively.

For example, thanks to a reliable bookkeeping system, they can calculate company books automatically or manually and meet federal standards.

Likewise, accounting technology such as automation, bookkeeping software, and other software relies on one of several systems for monitoring accounting-related files and expenses.

Understanding how these systems work and whether they fit in with your current business style is key to selecting the best bookkeeping system for your company.

If you wish to manually compute your finances using these techniques or utilise electronic software to do your books, you should learn everything about your possibilities. The following are some of the most common bookkeeping systems and how they operate:

Bookkeeping is required for all businesses, whether small, medium, or large. It is the process of keeping track of financial transactions in a company. As a result, bookkeeping is limited to the practice of keeping records. However, it is also a method of organising transactions and detecting, measuring, and recording a company’s economic changes.

What is Bookkeeping?

The daily recording of a company’s financial transactions is known as bookkeeping. Companies may track all information on their books to make crucial operating, investment, and financing choices with proper bookkeeping.

Individuals that manage all financial data for businesses are known as bookkeepers. Companies would not be aware of their current financial situation or internal transactions if bookkeepers were not employed.

External users, such as investors, financial institutions, and the government, require accurate bookkeeping to make better investment and lending decisions. Simply, precise and trustworthy bookkeeping is essential for both internal and external users.

Importance of Bookkeeping

Companies can use accurate bookkeeping to assess their success. It also gives data on general strategic decisions as well as a baseline for revenue and profit targets. In short, once a company is up and operating, it is vital to devote more time and resources to preserving accurate records.

Due to the high cost of full-time accountants, many small businesses do not hire them. Instead, small businesses engage a bookkeeper or hire a professional agency to do the task. One thing to bear in mind is that many people who want to start a new business forget the necessity of things like keeping track of every penny spent.

Why Is Bookkeeping Important?

Improved Finance Management & Analysis

Bookkeeping done correctly provides businesses with a credible measurement of their performance. In addition to this, it gives information on general strategic decisions and serves as a benchmark for its goals regarding revenue and income. To summarise, after a company is up and going, devoting additional time and resources to the upkeep of accurate records is absolutely necessary.

Because of the high expense, many smaller businesses do not actually employ accountants on a full-time basis to work for them. Instead, most small businesses will hire a bookkeeper or contract the work out to a company that specialises in accounting. One issue that should be brought to your attention in this context is the fact that many people who have the intention of beginning a new business often fail to see the significance of certain matters, such as the necessity of maintaining detailed records of each and every penny that is spent.

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.

Additionally, you will have a crystal clear picture of whether you should invest in the expansion of your firm or concentrate on resolving the cash flow issues that have been plaguing you.

Safe in the Event of Auditing

invoice-bill-paid-payment-financial-account-concept

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.

You will also be able to avoid fines and other consequences if you provide the appropriate records.

Types of Bookkeeping Services

Single-Entry System

A single entry system, as its name suggests, involves making only one entry into the accounting records for each and every transaction that occurs within a corporation. Generally speaking, a single accounting system is preferable for use with smaller organisations that bring in a lower amount of money.

In general, the single-entry accounting method does not keep records of either assets or liabilities. This is because there is only one entry for each transaction. There will be records of cash disbursements as well as cash receipts, which refer to the cash that is flowing into and leaving your organisation respectively.

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.

Advantages 

  • Ideal for entrepreneurs or startup businesses (service-based businesses).
  • Simple and less expensive to maintain.
  • Easy to understand, and manage, & no professional required.
  • Calculating profit and loss for a defined period is easier.

Disadvantages 

  • There is no information that is correct on the genuine profit or loss for any period defined.
  • Easily prone to fraudulent activity and errors in entry.
  • There is no recordkeeping of assets and liabilities.
  • Fewer details are available to help forecast the company’s current and future financial status.
  • It is difficult to obtain an auditor’s assessment of the current financial results that are accessible.
  • The bookkeeping method known as single entry demands the creation of a single entry for each individual activity or transaction involving money.
  • A corporation might use the basic bookkeeping system known as single-entry bookkeeping to record daily receipts or prepare a daily or weekly report of cash flow. Both of these tasks are possible with this method.

The most fundamental method of bookkeeping is known as the single-entry system. The difference between the double-entry technique and the single-entry approach is that the latter does not require the assistance of an experienced specialist. Because of it, the bookkeeper need simply record transactions in a single-sided fashion.

This indicates that the consequence of each transaction is only recorded with regard to a particular element at a time. For all of the transactions that are carried out by the company, for instance, the only effects that are recorded are those that have an impact on the cash account. It is much simpler to use than the double-entry system. On the other hand, in comparison to the latter, it has a significantly larger number of drawbacks.

The history of accounting can be traced back to the use of the single entry system. Researchers in the field of science has located its beginnings in long-vanished ancient civilisations. 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.

The single-entry bookkeeping system is one of the most prevalent choices for usage in tiny firms that have very few or no transactions at all. The term “simple,” “practical,” and “casual” are frequently used to describe this method of recording. In most cases, the only records that are kept are those pertaining to cash outflows, cash inflows, sales, and purchases. Memorandums and notes are the sole forms in which the remaining accounting records, including those pertaining to inventory, equipment, capital, and so on, are ever documented.

The books or records that are kept in a bookkeeping system with a single entry include a daily summary of cash receipts as well as a monthly summary of cash receipts and disbursements, which, respectively, reflect the revenue and the expenses.

In contrast to the double-entry bookkeeping system, in which a single transaction can affect both of an organisation’s accounts, the single-entry bookkeeping system restricts each transaction to just one account at a time. For instance, a cash sale is solely documented as an increase in cash receipts or deposits; there is no matching sales account recorded for the transaction.

When compared to the double-entry bookkeeping system, the simplicity of the single-entry system makes it more prone to error and incompleteness. This is because it lacks a detailed recording system, which is present in the double-entry system. Even while it is an appropriate technique of record-keeping for small and basic enterprises in terms of taxes, it may not provide an accurate valuation of the important financial facts pertaining to a company.

The Double Entry System

The Double-Entry Bookkeeping System is the conventional form of record-keeping that is generally utilised by the vast majority of companies, bookkeepers, and accountants.

The process of maintaining books using a double-entry system is significantly more involved and intricate than keeping books using a single-entry system. It presents the idea of debit and credit, which indicates that for every transaction, there is something received (a debit) and something given up (a credit), and as a result, every recorded transaction affects two or more accounts.

The fact that the double-entry bookkeeping system includes a procedure to guarantee the precise and comprehensive recording of business transactions is one of the many advantages offered by this method of accounting. It is a trustworthy source of financial information and a reasonable evaluation of the state or performance of a company.

The double-entry approach will serve as the foundation for our discussion on bookkeeping; further information about this system will be presented to you in the next parts.

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. If you were to get revenue from a customer, for instance, the revenue would be recorded as income and also tracked back to the customer’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.

The straightforward accounting equation “Assets = Liabilities + Capital” is utilised by the double-entry method of bookkeeping. The “two-fold effect” is one of the fundamental ideas that guide the operation of the double-entry system. The two-fold impact argues that there must be a value given up in exchange for every value that is taken into account (a debit) (credit).

An accountant needs to have the knowledge and skills necessary to evaluate which aspects of a business operation are impacted by a particular transaction, as well as the effect or effects that operation has on those aspects.

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.

The double-entry method, though preferred, is not a perfect system. There are instances that the single entry is preferred more than them. Listed below are some of the advantages and disadvantages of the double-entry method:

Advantages:

  • 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 corporation can identify the correct profit and loss of the company in greater detail using the matching concept. This allows for greater accuracy.

Disadvantages:

  • 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. Bookkeeping Software

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 due to the fact that bookkeeping systems are typically complex and challenging for the average bookkeeper to learn and run. These structures use either the single-entry or double-entry approaches, and they simplify the process of entering transactions in accordance with the chosen method.

tax-words-calculator-stacked-coins-invoice-bill-paper-time-tax-filling

There is accounting software available that is tailored to both small and large enterprises alike. Interfaces that are simple to use make it possible for small firms to monitor all of their accounts and transactions. A fundamental accounting software package is all that is required; there is no requirement for customised services.

Although it is likely that larger firms may want the services of a bookkeeper, using computer software can make it simpler to ensure that everyone is working from the same page. Because no two companies are the same, it is quite likely that they will want a bespoke software solution that is tailored to their specific requirements.

The automation provided by computerised systems is the most beneficial aspect of these systems. 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.

Virtual Bookkeeping

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.

The rates charged by virtual bookkeepers, who are often certified public accountants or accountants with degrees, are typically lower than those charged by private CPA firms.

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 methods are too difficult to maintain frequently make use of the virtual bookkeeping services that are available.

They cost a fraction of what an on-site person would cost a small firm, yet they are just as effective as an on-site employee would be. A virtual bookkeeper is a fantastic option to hiring an in-house bookkeeper or accountant because of the costs.

Invoices, payroll ledgers, and expense receipts are the areas in which virtual bookkeepers are utilised most frequently, but they are able to execute any accounting-related task that you may need. They will keep your books for you using either the single-entry or double-entry technique of bookkeeping.

In most cases, virtual bookkeepers will stipulate that a particular brand and version of accounting software be used.

For instance, they might recommend that you buy QuickBooks so that you can record all of your purchases and receipts in the software. They will be able to keep an eye on, organise, and reconcile your accounts on your behalf and will have access to your account. Everyone’s lives are simplified as a result of this.

In the event that method is unsuccessful, you and your virtual bookkeeper can come up with an alternative solution.

They will devise, in collaboration with your specific requirements, an accounting system that will relieve you of the effort of keeping your files in order while simultaneously placing everything in pristine order.

The most obvious benefit of employing the services of a virtual bookkeeper is the reduction in expenses, but there are also additional benefits. Your bookkeeper can work whenever it is most convenient for them, so it offers a great deal of flexibility.

In addition to this, you will have access to the most recent tools and information on federal rules. Additionally, these bookkeepers frequently provide additional services connected to accounts, such as the preparation of tax returns.

Because you can be communicating sensitive information via the internet, there is a possibility that the data security could be compromised. There is a degree of exposure to risk with these accounts, as well as the potential for misunderstandings.

However, if you make a concerted effort to keep communication private and provide your bookkeeper with all of the information that they request, it has the potential to be an effective technique for managing your accounts.

Summary

Bookkeeping is required for all businesses, whether small, medium, or large. It is the process of keeping track of financial transactions in a company. There are many types of bookkeeping systems and you need to understand them all to choose the best one for your business. Individuals that manage all financial data for businesses are known as bookkeepers. Bookkeeping done correctly provides businesses with a credible measurement of their performance.

It also gives data on general strategic decisions and serves as a benchmark for its goals regarding revenue and income. The upkeep of accurate records is absolutely necessary once a company is up and going. In the report that your bookkeeper prepares for you, net profit, income, costs, assets, and liabilities should be included. Your accountant will not be able to accurately arrange for tax payments or file corporate tax return forms until this step has been completed. The methods of accurate bookkeeping that you use will help you complete the process more quickly.

A corporation might use the basic bookkeeping system known as single-entry bookkeeping to record daily receipts or prepare a daily or weekly report of cash flow. It is much simpler to use than the double-entry system and does not require the assistance of a professional.

The history of accounting can be traced back to the use of the single entry system. This method of record-keeping was used by merchants as early as 2000 BC. Compared to the double-entry bookkeeping system, the single-entry system lacks a detailed recording system.

The process of maintaining books using a double-entry system is significantly more involved and intricate.

This method of accounting 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. In 1494, Benedetto Cotrugli made reference to the double-entry system for the very first time.

Luca Pacioli would later become regarded as the “Father of Modern Day Accounting”. There are several variants of bookkeeping software available for purchase.

Hundreds of computerised bookkeeping systems are available on the market today.

Simple to use interfaces make it possible for small firms to monitor all of their accounts and transactions. A basic accounting software package is all that is required; there is no requirement for customised services.

A virtual bookkeeper is a fantastic option to hiring an in-house bookkeeper or accountant. They are able to keep an eye on, organise, and reconcile your accounts on your behalf.

Virtual bookkeepers use either the single-entry or double-entry technique of bookkeeping. In the event that method is unsuccessful, you and your virtual bookkeeper can come up with an alternative solution.

There is a degree of exposure to risk with these accounts, as well as the potential for misunderstandings. However, if you make a concerted effort to keep communication private, it has the potential to be effective.

Scroll to Top

Learn how we've helped businesses just like yours