What is Bookkeeping and Why is it Important? How to Set It up for Business?
Bookkeeping is probably the first and most crucial phase in the accounting process. A bookkeeper collects all financial data for a company – from daily transactions to the wages given to the employees. They collate this data into easy-to-read reports that can be analysed later for multiple financial purposes.
Bookkeeping assists a company in preparing a budget and tax returns, organising the company and its administration, and much more. Read on to know the meaning of bookkeeping in detail and how it helps you streamline your finances.
What is Bookkeeping?
The process of tracking and documenting all of a company’s daily financial transactions is a simple definition of bookkeeping. Businesses can keep a record of all the information regarding their financial books and make important decisions about their operations, investments and financing with accurate bookkeeping.
Bookkeepers are individuals who manage all financial data and transactions of a company. Investors, financial institutions, and governments require accurate bookkeeping to make more informed investment and business decisions. They help businesses and enterprises be aware of their current financial situations, while aiding completion of due diligence and tax audits.
Importance of Bookkeeping
Here is a brief look at the importance of bookkeeping:
- Proper bookkeeping gives a business an accurate estimate of its financial performance.
- It also offers data for broad strategic and financial decisions and helps establish benchmarks for future sales and revenue.
- Bookkeeping assists in keeping track of transactions, receipts, sales, purchases, and all other daily expenses.
- It regularly summarises the income, payments, and other money-related entries.
- It gives data for financial reports that help in computing the business’ profit, valuation, and net worth.
Types of Bookkeeping
1. Single-entry Bookkeeping
Single-entry accounting is a direct system where one entry is made for each transaction of incoming and outgoing funds in the cash books. For the single-entry system, no accounting training is required; any individual can do it to keep a record of cash flow.
2. Double-entry Bookkeeping
This type of bookkeeping is considered more reliable than single-entry bookkeeping. It is based on the concept that every transaction involves a minimum of two accounts recorded as a debit or credit transaction. In double-entry bookkeeping, the total credits mandatory equal the total debits, which leads to a ‘balanced cash book’.
Many big companies or enterprises may buy and sell goods/services on credit, so using a double-entry approach for bookkeeping is a more logical option since it leaves less scope for error.
3. Virtual Bookkeeping
Virtual bookkeeping is essentially managing your books by an internet agent who manages them and keeps your entries up to date. Most virtual bookkeepers will accept virtual or e-copies of your sales invoices, transaction receipts, and payroll ledgers. After reporting your transaction to the ledgers and books, your bookkeeper will email you a copy of your reports.
What is the Process of Bookkeeping?
Bookkeepers record the financial transactions that occur over time in the course of business using either a single-entry or double-entry bookkeeping system. In general, bookkeeping entails the following steps:
1. Understanding Business Finances
Before beginning the accounting process for your business, you must first comprehend the transactions incurred by the business and record them in the relevant accounts.
2. Maintenance of Books
When a commercial transaction occurs, original paperwork such as an invoice, receipt, or credit note is important. The entries should have the details from the original paperwork/documents. The information from the original books of entry is then transferred to a ledger or book of accounts that records all debits and credits in corporate activities.
3. Transaction Recording
All business transactions must be recorded in the books of accounts. Once a company’s financial accounts and bookkeeping service system are in place, the transactions can be recorded.
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4. Balancing the Books
The bookkeeper must prepare a comprehensive list of all accounts, known as the adjusted trial balance. They are responsible for ensuring that the debits and credits are equal and changes are made accordingly if there are discrepancies in the final balance. The adjustments are documented as journal entries, and the debits and credits are normally tallied or balanced at the end of a quarter or year. The balances should follow the equation:
Assets = Liabilities + Equity.
5. Financial Report Preparation
After the books have been balanced, it is critical to summarise each account’s cash flow or transactions. Profit and loss statements, balance sheets, and cash flow statements are examples of conventional financial reports generated by bookkeeping.
Differences between Bookkeeping and Accounting
Accounting and bookkeeping may appear to be the same concept. However, bookkeeping is not the same as accounting. The books kept by the bookkeeper are used in the accounting process to create the end-of-year accounting statements. In a sense, bookkeeping is one of the many parts of the accounting process. On the other hand, bookkeeping involves collecting records of expenses and income and posting these transactions to a general ledger.
How to Set Up Bookkeeping for Your Business?
Step 1: Determine Which Bookkeeping System You Require
Once you’ve identified what your specific firm requires from bookkeeping, select a system that satisfies those requirements.
Step 2: Determine How You Will Store Financial Records
You have complete control over how you store your financial transactions. You can either make a handwritten record or store them electronically. Using bookkeeping and accounting software is a great way to ensure all your financial records are in one place.
Step 3: Select a Reliable Bookkeeping Software
A bookkeeping software operates by preserving and making available your financial transactions. Furthermore, this programme is suitable for small enterprises that do not deal in various currencies or complicated financial transactions.
The software keeps track of your spending, profits, and income. It also handles payroll and generates invoices.
Step 4: Create Business Bank Accounts
Separate bank accounts keep records accurate and make tax preparation easier. If your funds are combined with your firm’s, it won’t be easy to ensure that the reports are error-free. This is critical if you hire an accountant to handle your taxes.
Step 5: Determine Your Payment Terms
When creating an accounting system, you must decide how you wish to get paid. When the sales begin to come in, you’ll need a mechanism to receive payments. You can, for example, pick a cash basis or accept credit card payments. Effective invoice payment terms are critical. It determines how quickly you are compensated.
Step 6: Ensure Everything Is Filed
Everything from transactions to receipts, invoices, and records should be filed. Business record management is an essential component of running a successful company. File your business documentation as soon as possible to ensure that everything is in order.
Key Points to Remember About Bookkeeping
Bookkeeping services help keep the data for all financial transactions to ensure there are proper records for each transaction. There are a variety of bookkeeping software available to assist you in recording financial transactions. There are various ways bookkeeping helps your business, including:
- Keeping accounts
- Accounts payable and receivable management
- Payroll processing
- Inventory Management Services
- Processing of invoices
- Business or investment planning
- Preparing for tax audits
Final Word
Your company’s success is driven by accurate bookkeeping. It is a fundamental accounting process without which devising strategies to improve essential areas of your organisation would be practically impossible. However, as crucial as bookkeeping is, installing the wrong bookkeeping system for your business can bring problems. Small businesses may choose a simple bookkeeping system that records each financial transaction in the same way that a chequebook does. Businesses with more sophisticated financial operations typically employ the double-entry bookkeeping process.
FAQs
Ans. The system of double-entry. The double-entry bookkeeping system is the traditional method of record-keeping used by the majority of businesses, bookkeepers, and accountants.
Ans. Bookkeeping is the regular recording of a business’s financial transactions. Companies may track all information on their books using good bookkeeping to make crucial operational, investing, and financing decisions.
Ans. This is a bookkeeping system where revenue and expenses are recorded in the cash books only when a payment is received or an expense has been made.
Ans. In accrual-based bookkeeping revenue and its matching expenses are recognised as soon as they are generated, not when the actual exchange of money happens. For the transaction to be documented, no actual cash must enter or exit.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
