You’ve probably heard the word “bookkeeping” used multiple times in relation to business and finance.
To give you a gist, bookkeeping is essential for every business, regardless of the company’s transactions, industry, nature and size.
Whenever you are commencing a business, maintaining proper records is essential. So, to help you understand the concept of bookkeeping, this post covers everything about it.
What is Bookkeeping?
Bookkeeping is a comprehensive process of recording a company’s financial transactions into organized accounts every day. It can also include diverse recording methodologies and techniques used by businesses.
Bookkeeping is an integral part of the accounting process for various reasons. You can generate correct financial reports that measure business performance by keeping the transaction records up to date.
Moreover, when you have kept detailed records through bookkeeping, it will be helpful during tax audits.
Importance of Bookkeeping
In most circumstances, those intending to come up with a business generally overlook the need for bookkeeping for various reasons, including expenses. And then, several small companies don’t hire full-time accountants to work either.
Instead, they typically hire a bookkeeper or outsource this task to a professional bookkeeping firm. Correct bookkeeping offers companies a reliable measure of their performance.
Not just that, it also offers information to come up with general strategic decisions. It acts as a benchmark for the income and revenue objectives. All in all, once you have an up and running business, investing extra money and time to maintain records properly is essential.
Records the Transactions’Transactions’ SourceBookkeeping is a source of all a firm’s transactions as it records everything from payment notes, invoices, receipts, and more. It helps track records, sales, purchases, receipts, and payments of every transaction made by and from the business.
The financial statements or other business reports are summarised from the books of accounts. Hence, every business needs to have it in place.
- Assists in Decision Making
A proper and correct bookkeeping process offers firms a precise measure of performance. It also provides information for making fundamental strategic decisions and a foundation for its revenue and income goals.
Bookkeeping is a dependable source for firms to evaluate their financial performance. One of the primary reasons for bookkeeping is maintaining all the business’s financial records that display the financial position of each account or head of expenditure and income.
- Provides Information to Create Financial Statements
Bookkeeping completely summarises the income, expenditures and other ledger records frequently. Since bookkeeping keeps a record of and tracks all transactions, it turns the commencing point of accounting. In case the bookkeeping of a firm isn’t proper, the company’s accounting will not be exact.
Bookkeeping offers information to come up with financial reports that mention certain information about the business on how much profits have been generated at a specific time.
Types of Bookkeeping
There are two different types of bookkeeping systems. A business entity is free to select any of these types. However, some companies also use a combination of both types, to each their own.
- Single-Entry Bookkeeping
The single-entry system is a foundational system that helps either generate daily or weekly reports or record daily cash flow receipts. Under this system, a bookkeeper must record one entry for every financial activity or transaction.
Such a single-entry bookkeeping system comprises recording just one side of the activity or transaction. When it comes to maintenance, it handles the following data:
- Sales
- Payments
- Cash receipts
- Purchases
Primarily, the single-entry system of bookkeeping is used by small businesses that are involved in minimal transactions daily.
- Double-Entry System of Bookkeeping
The double-entry bookkeeping system mainly records a double entry for every financial transaction or activity. This system offers checks and balances as it records the conforming credit entry for each debit entry.
This is not a cash-based system; transactions get entered when debt is incurred, or revenue is earned. Moreover, this bookkeeping method is based upon the duality concept, meaning every financial transaction impacts two accounts.
Hence, every debit entry to an account has a matching credit entry in another account and vice versa. This system is adopted universally and regarded as appropriate for recording financial or business transactions.
Difference Between Bookkeeping and Accounting
The bookkeeping and accounting careers are somewhat similar. Often, both of them have to work side by side. Also, both of them need a variety of same attributes and skills. But there are several differences between bookkeeping and accounting regarding work and objectives.
Here are some points highlighting the difference between both:
- Bookkeepers generally record the daily financial transactions of a company. By contrast, accountants concentrate more on the bigger picture.
- Bookkeepers have to stay involved in a lot of details and should give their keen attention to everything. Meanwhile, accountants use the inputs of bookkeepers to analyze and review financial information and create financial statements frequently. They also conduct audits and foresee future business requirements.
- Bookkeepers should be good with numbers and have significant attentiveness toward details. One should be able to shift their focus quickly and catch hidden, tiny mistakes in invoices or budgets. As an accountant, one must have sharp, logical skills and should possess problem-solving capabilities.
- While the job of a bookkeeper is to ensure small pieces are fitting into place properly, an accountant has to use those pieces to come up with broader and significant conclusions.
Wrapping Up
By now, it is clear that every business should be on the ball as far as bookkeeping is concerned. In such a scenario, the size of the company doesn’t matter. At the end of the day, the way you keep your bookkeeping records plays an integral part. So, if you are thinking of handling the daily accounts of a company, make sure you are abreast with everything related to this concept.
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