Bookkeeping refers to the process of recording all financial transactions made by a business. Bookkeepers are responsible for keeping a basic record of expenditures and receipts by the company. For small companies, bookkeeping can be relatively simple. But the larger a company gets, the more complex the bookkeeping system can get. If you don’t know where to start, our guide to bookkeeping will help cover all the bases.
What is Bookkeeping?
Bookkeeping refers to how companies keep track of their financial transactions, from the opening to closing of the firm. The type of documentation each company uses is dependent on the type of accounting system used by the business. Documentation can be in the form of receipts, invoices, purchase orders or any other similar types of financial record.
Bookkeeping transactions can also be recorded by hand or on online documents such as Microsoft Excel. As a bookkeeper, one has to understand how the firm charts its accounts and how to use debits and credits to balance the books. At the end of the day, the bookkeeping process should reveal the financial results of the firm at the end of the financial year for income tax purposes and help the firm’s accountant prepare financial statements.
Bookkeeping VS Accounting
Before we get into bookkeeping, it is important to understand that bookkeeping and accounting are not the same things. Bookkeeping precedes accounting. A bookkeeper records, classifies and organises transactions according to the firm’s chart of account.
At the end of a certain time period, the accountant takes this information from the bookkeeper and analyzes, interprets and reports these financial records for the business firm. The accountant also prepares the year-end financial statement and the proper accounts for the firm.
Accounts you should know
There are five bookkeeping accounts that you need to familiarise yourself with:
- Assets: Everything that holds value in your business is considered an asset. This is inclusive of cash in your bank accounts, your accounts receivable, balance, as well as inventory, computers and furniture
- Liabilities: Debts that your business owes are considered liabilities, such as accounts payable balance and loans.
- Revenue/income: Any earnings by your business through the sale of products or services.
- Expenses: Anything that requires the spending of money from your company, including things such as your electric bill and employee salaries.
- Equity: Business assets minus business liabilities equals equity, which reflects your financial interest in the business.
How to start bookkeeping
Bookkeeping can be quite a hassle, but getting it done right from the beginning saves you trouble in the long run. Plus, it’s fairly easy to set up too. To get started, here are some tips that you should follow:
- Start bookkeeping from the moment you start your business. Waiting till you get your first substantial paycheck can result in several mishaps being overlooked in the meantime.
- Keep personal and company finances separate. Open a business bank account for your company as soon as your business is launched. This helps to prevent you from accidentally depositing your personal income into your business income, or paying for personal expenses with your company’s money. This can make it hard to bookkeep and pay income taxes in the future.
- Delegate someone to be responsible for bookkeeping in your company. Get someone who has focus and a good eye for numbers. This is important as bookkeeping is a process that builds a foundation for all subsequent accounting and reporting. If several people are taking care of your books, make sure that each of them knows what they are doing. If you’re keen to appoint us to prepare your accounts, click here.
- Record bookkeeping activity in a timetable, especially if you are doing it yourself. Schedule in time every week to enter your data and keep track of your financial standing. Try to do it at the same time every week to create a good habit and prevent yourself from getting overwhelmed.
- Talk to a tax consultant or familiarise yourself with tax obligations. You should know what you have to pay for and when. Mark these dates in your schedule so that you’ll be prepared for them.
- Choose a bookkeeping format. Be it paper or digital spreadsheets, you will find out what is suitable for you. If you are on a tight budget, free software like Google Sheets would be ideal for you.
- Choose between cash or accrual for your accounting system. Cash means that you write down transactions only when money changes hands and actual payment is made. With this system, you know how much money you can access at the moment. Accrual accounting means that you record revenue and expenses when they’re earned, even if actual payment happens much later. This gives you a bigger picture of your finances and allows for planning
- Decide between single-entry or double-entry bookkeeping. Double-entry starts with a journal, then a ledger, trial balance and then financial statements. It is considered more precise. On the other hand, single-entry bookkeeping records income and expenses in a cash register.
- Set up a chart of accounts. It displays all your assets, liabilities, income, and expenses neatly. It helps assemble all your transactions in one place.
- After you’ve set up your chart of accounts, identify your tracking categories. Think about how your business is structured and KPIs, then decide what to pay attention to.
- Collect all your source documents, such as receipts and invoices
- Write down your transactions. Transfer them from source documents to your spreadsheets, accounting journal or cash book. Be sure to indicate things such as transaction date, what was paid or received, transaction amount, and whether it was income or expense.
- At the end of the week or month, transfer the main points to your general ledger and repeat until everything has been entered and organised properly.
Bookkeeping for beginners
The larger your company grows, the greater the need for a system that will help you make the bookkeeping process more efficient. If bookkeeping is proving to be too much of a hassle for you, reach out to us at Margin Wheeler where we’ll get all these done for you. This way, you’ll be left with peace of mind to focus on the growth of your business instead.