Are you a business owner? If you answered yes, you must be familiar with bookkeeping, which may be a difficult procedure if not done correctly, isn’t it?
Well, leave your concerns behind because it won’t be a challenging process for you anymore as— you have hit the right spot.
Bookkeeping is an important aspect of corporate finances that can have an impact on your company’s growth and profitability.
Furthermore, it is the cornerstone of your accounting and financial processes, and can include everything from basic data entry on a software platform to dealing with certified public accountants. Moreover, the favorite aspect is that you don’t need any previous accounting expertise or a degree to get started.
In today’s article, we’ll learn every aspect of bookkeeping and bookkeeping process and will make easier for you that you understand everything from proper account setup to why it’s crucial to record transactions immediately.
Understanding Bookkeeping
Bookkeeping is the process of documenting and tracking a company’s financial transactions. Bookkeepers aggregate this information into regular reports that show how the business is doing.
In addition to invoicing, paying bills, filing tax returns, evaluating key performance metrics, and offering strategic guidance, they may also handle other activities.
Bookkeeping is required for sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
Bookkeeping’s critical function keeps track of all money coming in and out of a business, as well as the responsibility to pay or the right to collect funds. Every financial transaction must be recorded in your company’s books.
The most typical financial transactions that a bookkeeper handles are:
- Payments for overdue invoices are being recorded
- Employee payroll action is tracked and recorded
- Keeping track of invoices owed to suppliers, contractors, and others
- Invoicing goods or services sold to customers
- Activity tracking and financial report preparation
- Bank financial statements must be reconciled
- Making payments to vendors, contractors, and others
- Paying workers and keeping track of payroll taxes
- Providing data to your accountant or CPA
- Depreciation, bad debt write-offs, and other data entering can be done manually or automatically
History of Bookkeeping
As early as 7000 BC, evidence of financial reporting has been discovered in Mesopotamia, Babylon, Sumer, and Assyria. The keeping of accounting from farm output in ancient Greece and the Roman Empire has been discovered in archives.
The origins of contemporary bookkeeping, however, may be traced back to the 15th century. There are two entries in the history books for who recorded the double-entry system, which is suitable. Some point to Benedetto Cotrugli’s book Of Commerce and the Perfect Merchant, published in 1458.
Luca Pacioli, however, is often regarded as the father of accounting, according to his 1494 work Review of Geometry, Arithmetic, Ratio and Proportion.
Pacioli was an Italian mathematician and Franciscan priest who popularized the double-entry system through the use of various bookkeeping tools like journals and ledgers.
For the next several hundred years, his book was used as a teaching tool for bookkeeping and accounting. In the 1800s, bookkeeping became a recognized profession in the United Kingdom and the United States.
Important Basics of Bookkeeping
Bookkeeping operations have evolved more automated as bookkeeping and accounting technology has advanced. However, this does not negate the importance of correctly setting everything up from the outset.
Following we have discussed some crucial basics associated with bookkeeping for entrepreneurs. Let’s learn:
1. Accounting Software Set Up
Integrating business bank accounts, conducting any necessary data entry, and reconciling transactions are all part of the setup process for bookkeeping or accounting software.
Monitoring for discrepancies, learning about your software, and searching for methods to streamline certain elements of your accounting operations are all component of the method.
2. Selecting an Entry System
The bookkeeping operations can be written down in a journal or entered into a spreadsheet application like Microsoft Excel.
Most organizations now use specialized bookkeeping computer systems to store papers that reflect their financial activity. Bookkeepers can use either single-entry or double-entry bookkeeping to record financial transactions.
It is important for your small business that you must pick between single-entry and double-entry accounting for your small business bookkeeping. Let’s learn about them:
- Single-entry bookkeeping
All of your transactions are recorded once under single-entry accounting, either as an expenditure or an income. This strategy is basic and appropriate for small enterprises with little inventory or equipment.
- Double-entry bookkeeping
Double-entry accounting records every transaction twice, as a debit and a credit, to “balance the books” between accounts. It can assist prevent transaction errors, although being more difficult.
Furthermore, your choice of entry system has an impact on how you handle your finances and your bookkeeping activities.
3. Selection an Accounting Approach
You may have noticed options for “cash basis” or “accrual basis” statements if you’ve ever examined your financial statements through your bookkeeping software.
Moreover, you’ve probably heard the terms “cash basis accounting” and “accrual basis accounting” even if you don’t prepare your own financial statements. These terms may have even appeared on your company’s tax return.
Further, you must choose an accounting method for your small business. We have discussed both approaches below and you can select the one that works for you. Let’s check:
- Cash-based Accounting
“Bank balance” accounting is another term for cash basis accounting.
Only transactions that have processed your bank or credit card accounts display on your cash basis accounting records, with a few exemptions for non-cash charges (such as depreciation, which has no implications on your business’s cash flow).
In simple words, when money changes hands, cash-based accounting records the transaction. This technique does not record invoices or outstanding debts for your organization until they have been paid.
- Accrual-based Accounting
Revenue and expenses, on the other hand, are reported as they are incurred in accrual accounting. This is in line with the accounting principles of matching and revenue recognition, which are neglected by cash basis accounting.
In simple words, even if the cash haven’t been exchanged, accrual-based accounting records such invoices and bills. In general, accrual-based accounting is the preferred method, although the choice is ultimately yours.
4. Handling Transactions
Handling transactions is a necessary component of bookkeeping on a daily basis. This involves properly importing and categorizing transactions, reconciling them, and ensuring that they’re recorded in accordance with your entry bookkeeping system and accounting procedure.
5. Managing Accounts Receivable and Payable
Aspects of accounts receivable are also handled by small businesses, ensuring that your company gets paid for its products or services. Estimating the final worth of a project, generating and sending bills, and delivering statements are all examples of this.
Accounts payable is a part of small-business bookkeeping that ensures your company pays payments and invoices on schedule.
6. Establishing Payroll
Some companies use their accounting software to process payroll, while others use separate payroll software. Which software you use will determine how you establish and handle payroll.
7. Connecting with Tax Experts
A small firm must discover potential tax deductions and streamline the tax process as much as feasible. Some accounting software can help you connect with tax professionals.
When it comes to filing business taxes, you’ll almost certainly want to work with one if you don’t engage with one through a service or software.
8. Financial Statements and Records Management
Bookkeeping for small businesses also entails keeping track of crucial accounting papers and the data that goes into financial statements. It includes transactions, assets, income, and expenses.
Moreover, many software solutions allow you to save documents as you go and accelerate the documentation process.
Significance of Bookkeeping for Small Business
While accounting software can make bookkeeping work easier, competent bookkeeping is essential for any small business. Following we have listed few points why bookkeeping is so important:
- Separating your personal and business funds guarantees that you are not personally liable for any business problems or issues
- You can discover crucial mistakes and avert financial problems later by managing reconciliation and transactions
- Monitoring the financial health of a company might provide opportunities to enhance or adjust operations
- By combining tax processes and partnering with tax professionals, it is feasible to save funds by simplifying business finances
- Organizing documents and data makes tasks like qualifying for a business loan or purchasing new equipment much easier
Different Types of Bookkeeping Accounts
For a small-to-medium-sized firm, there are 10 different types of bookkeeping accounts. We have discussed each one of them in the following section below. Let’s learn about them:
Account Receivable
The money due to you by the consumer is known as receivable. This occurs when you sell goods and services but do not immediately collect payment.
You should track “Accounts Receivable” in order to keep track of who owes you what and deliver accurate invoices or bills to clients on time.
Account Payable
This account is for money owed by your company to third parties, such as vendors. Furthermore, accounts payable helps you minimize duplicate payments by providing a clear and simple view of when payments are due.
Loans Payable Account
Has your company taken out a loan to buy assets like real estate, furnishings, automobiles, and equipment?
Well, in that situation, a loan payable account will keep track of payment details as well as monthly loan due dates.
Cash Account
A cash account, as the name implies, is where all of your company’s financial transactions take place. Additionally, you can retain two different cash bookkeeping records.
- Cash disbursements
- Cash receipts
Owners Equity Account
This account keeps track of the money you’ll invest as a business owner. This is also referred to as net assets, and it represents the amount of money left over after any liabilities have been deducted from the assets. Liabilities are simply claims that you owe to lenders and other suppliers.
Retained Earnings Account
This account keeps track of all profits and investments made by your company that have not yet been returned to the owner. The sum of cash that displays as the running total of cash retained since your business began is known as retained earnings.
Payroll Expenses Account
Bookkeeping can assist you in keeping track of your payroll expenses. It will help to stay on top of your tax obligations and avoid missing any deadlines. Moreover, it will also verify that you adhere to all tax regulations.
Purchasing Account
This account keeps track of all raw materials or finished goods purchased by the company. When it comes to estimating the cost of products sold, this account is critical (COGS). Simply remove the cost of the raw product from the sales, and the difference is your profit.
Sales Account
This account, as the name implies, tracks all of your company’s sales revenue. Maintaining and recording correct sales data can assist you comprehend where your company stands right now.
All of these accounts could appear overwhelming at first. However, once you’ve mastered the fundamentals of bookkeeping, you’ll be able to efficiently use the information in these accounts to make smart business decisions.
Inventory Account
Unsold products are recorded in your inventory account. Consider it cash saved in the form of assets or items, and you’ll need to keep meticulous records to keep track of them.
Moreover, it will assist you in performing a physical stock check on a regular basis to ensure that the inventory products match the records on the books.
Top 5 Reasons Why Bookkeeping Matters
Following we have discussed the top five reasons why the bookkeeping matters for your business. Let’s learn:
1. Required for Tax Preparation
To calculate your taxes, you need to know your net profit, and to measure that out, you really have to know your total revenue and costs. And having correct, up-to-date books is the only way to know exactly.
2. Helps to Ensure you Don’t Skip out on any Tax Breaks
The easiest approach to maintain track of tax deductions is to keep an accurate, up-to-date set of books (expenses that you can deduct from your taxable income).
The more information (and accompanying documentation) you can provide to your CPA at tax time, the more genuine deductions you’ll be able to claim, and the larger your tax return will be.
The IRS has very tight recordkeeping requirements if you seek any deductions, so having your documents in order can eliminate a lot of stress if you ever get investigated or audited.
3. Assist to Track your Finances
Putting together and publishing your books The best way to determine the financial condition of your small business is to start with a free month of bookkeeping.
Are sales increasing? Are you paying too much for shipping? Will you have sufficient money to pay your employees next month? Is your cash flow growing or shrinking? The only way to be sure is to start keeping track of your finances.
4. Assists you in Rapidly Detecting Faults
You won’t know if you or your bank made a mistake until you’re buried in paperwork around tax time if you wait till the end of the year to settle or get your financial transactions in order.
Organizing and updating your books on a regular basis can help you catch an erroneous overdraft cost today, instead of six months from now, when it’ll be too late.
5. Required to Get a Loan
You’ll need your books if you need to take funds from somewhere other than your relatives and family.
This further allows you to create financial statements, that are often required in order to obtain a business loan, a bank line of credit, or a seed investment.
Before lending you money, investors and lenders want a detailed picture of your company’s financial situation.
They won’t be able to do so unless they look at revenue, cash flow, assets, and liabilities, which they’ll look for on your financial statements, income statement, and cash flow statements.
3 Primary Methods to Manage Bookkeeping for your Small Business
Following we have listed three primary methods to manage bookkeeping for your small business. Let’s learn:
1. Use Accounting Software Services
If you own a small business, you may be able to handle your bookkeeping with the best accounting software, resulting in cost and time savings. Most importantly, it also enhances the efficiency.
Managing your own bookkeeping, on the other hand, implies you’re in responsible of keeping track of your accounts, storing records, and generating appropriate statements.
Furthermore, many bookkeeping operations are simplified when you use accounting software. However, you’ll still need computer abilities to operate and streamline your company’s software.
Make the Use of Accounting Software if—
- If you want a precise image of your business, make sure that you use accounting software to make your work easier and seamless.
- You want to concentrate on your business rather than paperwork. Moreover, you can save more time and effort by keeping track of your transactions and organization by using accounting software instead of jotting everything down and manually reconciling all of your accounting records and ledger.
- You wish to expand your company. Keeping track of various ledgers and maintaining accuracy takes time, so if you want to expand your firm, you’ll require accounting software.
- While accounting software can be scary to people who have no prior experience with bookkeeping or accounting, many software’s are expressly built for the financial novice.
2. Online Bookkeeping Service
Another option to manage bookkeeping for y0ur small business is to– outsource your bookkeeping. You will find various sources through online research. Make sure you check the reviews before going for them.
Furthermore, you can connect totally via email or phone without needing to meet in person with this sort of service. A service’s duties will vary depending on the supplier.
3. Recruit a Bookkeeper
You can also recruit a bookkeeper to work for your company directly. It would help your company on certain aspects.
Bringing on a part-time or full-time specialist provides you access to their experience while also allowing them to have a better understanding of your company’s finances, processes, and accounting software and tools.
It’s crucial to remember, though, that your bookkeeper won’t be the only one working on your company’s accounts. As a result, it’s critical that you comprehend and assign particular obligations to your bookkeeper, as well as collaborate with them.
Steps to Getting Started with Bookkeeping for your Business
To get started with bookkeeping for your business, you’ll need to perform a few things. These procedures are detailed below.
Step 1: Establish Chart of Accounts
The basis of your business is your chart of accounts, which is critical for effective transaction recording. Although, you can purchase any ledger book from office supply shop.
However, if you want efficiency and precise information then you must consider setting up your chart of accounts using accounting software such as Deskera. And, it makes your work considerably easier and effective.
Most software for sole proprietors and small enterprises comes with a preset chart of accounts, so you won’t have to start from scratch.
Remember that you may usually change the chart of accounts to best match your requirements. It’s also a good idea to familiarize yourself with the accounts on your chart of accounts, as this will make entering financial transactions much simpler.
Step 2: Documenting Financial Transactions
Any and all transactions must be documented, either in an accounting software or your ledger book.
Furthermore, this procedure can range from creating a client invoice to setting up automatic payment of your electric bill.
Moreover, one of the advantages of employing software is that all of the debits and credits required in preparing an invoice are handled automatically.
Step 3: Reconciling
Normally, you’d have to wait until your monthly bank statement arrived before comparing the transactions on it to those in your ledger or accounting software. A monthly reconciliation’s purpose is to find any outstanding checks, publish any bank transactions, and add any additional expenditures like account fees.
Furthermore, reconciling gives you an exact cash balance, which is especially useful for small firms with restricted cash flow.
One of the benefits of accounting software is that it automates most of the reconciliation process by simply attaching your bank accounts to your preferred programs. This further simplifies the month-end procedure by allowing for easy daily or weekly reconciliation.
However, if you don’t link your program to your bank, you’ll have to manually reconcile your accounts. It’s critical to continue the process on a regular basis, regardless of how you go about it.
Step 4: Conclude the month and Generating Financial Statements
Once your bank accounts have been reconciled and any changes made in your favorite recording tool, you’ll want to wrap up the month and print financial statements.
If you employ a manual ledger, you’ll have to manually close each account and combine it into the appropriate account types – a time-consuming process that strongly encourages the adoption of accounting software that automates this process.
Many recent products don’t have a set month-end closing procedure; instead, you can set a cutoff date for recording transactions and creating financial statements that appropriately reflect the month’s balances.
Financial reporting is an important aspect of the bookkeeping process. Moreover, it gives you an accurate image of your company’s financial health to discuss with your CPA or accountant.
The following are the three basic financial statements:
- Income Statement: Income statements are particularly valuable for small firms since they show net income over a given time period.
- Balance Sheet: A balance sheet reveals your company’s assets, liabilities, and equity as of a specific date.
- Cash-flow statement: Cash-flow statements illustrate the amount of money coming in and leaving out over a period of time.
Ways to Find Bookkeeping for your Small Business
You will find various options for finding professional bookkeepers if you wish to outsource your small-business bookkeeping. Check the following ways to find bookkeeping for your small business:
Online Research
You can also conduct an internet search for specialists or bookkeeping services.
Moreover, you can browse through your accounting software’s network of professional bookkeeping professionals to uncover dependable solutions. You can also look for pros in professional bookkeeping networks, accounting blogs, or industry forums.
Referrals
Consider seeking advice from a friend or family member. Check with your certified public accountant, business lawyer, or tax advisor to see if they can recommend a bookkeeper or accounting service.
Likewise, you may seek out suggestions for bookkeeping services from other small business owners. Almost everyone in your small-business community will be able to guide you in the correct way for the best bookkeeping assistance.
Our Recommendation: Deskera
Deskera Books is an easy-to-use Invoicing, Accounting, and Inventory Software for small business owners. Deskera Books automates practically all parts of accounting including— invoicing, expenses, billing, and payments—allowing you to focus on operating your business smoothly and efficiently.
4 Negative Consequences for Not Keeping Current with Bookkeeping
You could get into serious problems if you don’t have a bookkeeper or aren’t keeping track of your finances yourself.
Some business owners rely on their business credit cards or cheque books to pay invoices, make purchases, and receive cash without keeping track of their transactions.
Although, it’s not a good idea to throw receipts in a bin and try to grab up on the books later. At the very least, your books must be updated once a week. If you don’t keep up with these bookkeeping fundamentals, you could face the following problems:
1. Financing will not be Approved
You should be able to establish your company’s health in order to obtain a business line of credit. This includes delivering your financial statements, income tax returns, and records to the lenders.
It will further showcase your monthly revenue, expenses, and net income. Without these critical comments, approval is improbable.
2. High Chances of Mistakes and Errors
In business, mistakes happen, and the sooner you realize them, the easier it is to correct them. For example; you may have undercharged a customer, or they may have underpaid you or your bank may have double billed you or failed to properly credit a deposit.
Eventually, if you aren’t keeping up with your records and bank reconciliations, it may be too late to correct errors once you detect them.
3. Tax-related Issues
You’ll have to pay federal and state income taxes, self-employment or employment taxes, and maybe sales and use taxes if you operate a business.
Furthermore, income tax returns are due monthly, quarterly, or annually, depending on your income, whereas payroll taxes are due more regularly.
Moreover, if you violate a laws or deadline, you will incur fines and penalties.
4. Low Efficiency if not Planned Properly
You won’t know how well your firm is performing, what sectors are most profitable, or how to effectively plan without precise and current financial information. Results are reported on a monthly basis to keep you on course.
Undoubtedly, you won’t know if you’re making a profit or how you could improve if you let your bookkeeping mount up. Whenever it comes to managing business transactions, preparation reduces stress.
The burden of piled-up financial reports is eliminated with automated bookkeeping. Your small firm will be able to manage and analyze crucial financial data more effectively than competitors by standardizing reports and setting expectations.
Article by Deskera
