The process of bookkeeping involves recording, categorizing, and organizing all financial transactions that business partakes in or they come about as a result of any activity that business initiates. When you record a business transaction, there has to be tangible evidence, a valid document in the form of a purchase order, or a receipt in order to validate the authenticity of the values involved in the transaction.
There’s a slight difference between a bookkeeper and an accountant. A bookkeeper is responsible for recording any financial transactions that happen in the business enterprise, while an accountant has to analyze the books and prepare the accounting statements for the end of the financial period.
There are generally two bookkeeping methods: general journal entry or using a spreadsheet program like Microsoft Excel. Small business enterprises with simple business transactions tend to adopt a single-entry bookkeeping system. While corporations with highly complex financial transactions adopt a double-entry bookkeeping system.
If you’re running the books, you should have a basic understanding of debits and credits along with financial accounting. You also need to maintain a proper record of payment invoices of the suppliers, receipts from key accounts, and adjusting entries.
Modern-day bookkeeping has evolved a lot from that, however. With the advent of programs like Quickbooks and the availability of outsourcing bookkeeping service providers, it’s become inherently easy for any business to get their bookkeeping done without any issues.
Basic Concepts Of Accounting And Bookkeeping For Beginners
Bookkeeping is an integral part of business enterprise as it’s where the process of recording financial transactions begins. As a bookkeeper, you need to adhere to the company’s chart of accounts (COA) and record every financial transaction in the debit and credit columns of the accounting journal.
The recorded entries on the journal are summarized at the end of the financial year. However, some business enterprises conclude it bi-annually or on a quarterly basis while most small business enterprises make them annually.
The report is then handed over to the company’s accountant to review, analyze, and prepare the financial report of the business enterprise. The accountant is also responsible for preparing financial statements that comply with the Financial Accounting Standards Board (FASB).
A Little Background Of Bookkeeping
At first, bookkeeping used to be handwritten into journals. That was a typical practice for small business enterprises. Then came the advent of special journals where entries were recorded date-wise in the general ledger accounts.
The journals include cash receipt journals, cash payment journals, purchases journals, and sales journals. The values of those accounts were used to prepare financial statements.
Since every transaction was recorded manually, entries prone to have errors. Thus a trial balance was prepared in case there’s any mistake made recording the entries. A trial balance contains every account’s names and balances and was recorded in the debit and credit columns respectively.
The total of each accounts’ debit and credit side is calculated. If the sum of both columns is the same, then it means there are no mistakes in recording the entries. However, if there’s even a slight variation between the columns, then you have to run through the whole entries again until finding and rectifying the erroneous recorded entry.
Then comes the accountant’s role to adjust entries followed by preparing the financial statements. Finally, to prepare the accounts for the next financial year, the accountant clears all the account balances with closing entries. The bottom-line income or loss was transferred into the entrepreneur’s capital account or the stockholder.
Essentials Of Bookkeeping For Your Business
When it comes to establishing a bookkeeping system for your business, you need to decide whether or not to go for a cash or accrual accounting system. If you’re running a small business, the optimal choice is to go for cash-based accounting.
When using cash accounting, you’re required to record every transaction involving cash. In accrual accounting, you’ve to record sales and purchases of merchandise right away, regardless of whether or not cash is involved in the business transaction.
Generally, business enterprises start off by adopting cash accounting but shift towards accrual accounting as soon as their business starts expanding.
If your business enterprise is based on credit sales and purchases, you should better adopt an accrual accounting system. Furthermore, you also have to determine whether you’ll use a single-entry or double-entry bookkeeping system. Single-entry bookkeeping works like a checkbook register where you document transactions as you make deposits or make payments. It works best if you’re running a small business enterprise with minimal transactions.
On the contrary, if you’re running a large business enterprise or a corporation, you should establish a double-entry bookkeeping system. In this system, not less than two entries are made for each transaction taken place. That means at least one entry should be recorded for both debit and credit columns respectively. It’s the core principle of the double-entry accounting system.
Today, many corporations utilize computerized accounting systems to manage their major bookkeeping tasks. Small business enterprises adopt basic spreadsheet programs. While major business enterprises either adopt more advanced bookkeeping software records or hire professional bookkeeping services to manage their accounts.
Learning The Basics Of Assets, Liabilities, And Equity To Balance The Books
As a bookkeeper, you should have a thorough grasp of the basic concepts of accounting. This includes the three major end term accounts i.e. balance sheet: assets, liabilities, and equity.
Assets are owned by the business enterprise either in the form of current or fixed assets. Current assets include cash, accounts receivable, and inventory while fixed assets consist of land or office equipment.
There are two types of how a balance sheet is presented: vertical format and horizontal format. Generally, the balance sheet is presented in the horizontal format. The assets accounts are presented on the balance sheet’s left side in order of their liquidity, thus starting with cash.
Then inventory, account receivables, and fixed assets are mentioned. These assets are also called tangible assets since they can be seen and used. There are also intangible assets like goodwill of the company mentioned at the end of the balance sheet.
The company owes liabilities to banks and suppliers in the form of loans, mortgages, or any other liability recorded in the books. Liabilities also have two types: current liabilities and long-term abilities and both of them are mentioned on the right side of the balance sheet.
Current liabilities generally include accounts payable and accruals. Accounts payable are what the company needs to pay to its banks and suppliers in due time. Accruals involve payment of taxes, including payroll tax, sales tax,
Medicare tax, state, federal social security on behalf of the employees paid at quarter intervals. While long-term liabilities mature at least over the period of one-year like payable bonds, capital leases, mortgage loans, deferred income taxes among others.
Equity is referred to as the ownership of assets or investment made either by the owner or stockholders in the company. As a bookkeeper, you need to ensure that the books are balanced at the financial year-end.
Therefore, it’s highly crucial for a bookkeeper to record every transaction into the balance sheet accounts accurately. To make the books balanced in the balance sheet, you need to apply the formula of accounting equations.
Assets = Liabilities + Equity
The equation represents that total assets should always be equal to the sum of liabilities and equities. The double-entry accounting system is based on this equation. It means that the ownership of the company’s assets are either in the form of liabilities which the owner or shareholder is owed to banks or suppliers and remaining is what is owned by the owner or shareholder. Learn more about the Payment Protection Program.
Bookkeeping Of Income Statement: Costs, Expenses, And Revenue
There are three core components of making an income statement: sales, costs of goods sold, and expenses. As a bookkeeper, you’re responsible for recording each financial transaction in journal entries that come under these three categories.
Revenue is the income a business earns from selling its products or services. It’s also called sales in the income statement as it includes sales discounts, returned merchandise from customers, and operating expenses of generating that income. It’s calculated by the number of units sold at a particular price.
Costs of Goods Sold
Costs of goods sold are the investment made to purchase, manufacture, and sell the finished goods or services to the customers. The Purchases accounts refer to the merchandise purchased to sell. It’s calculated by deducting inventory at year-end from inventory at the start of the financial year.
Expenses are all the financial resources or costs incurred to operate the entire business regardless of being used to produce or sell. In essence, expenses are meant to be made to yield revenue.
According to the accrual accounting system, expenses are always recognized and mentioned in the books whether or not they’re paid.
If you’re bookkeeping for your business, you should know the basics of accounting and must be able to record each financial transaction into their respective accounts.
For instance, if a business purchases merchandise, then in the double-entry system of bookkeeping, merchandise would be recorded in the debit side of the Purchases account, and paid cash would be recorded in the credit side of the asset account of Cash.
Bookkeeping is undoubtedly essential but it’s a chore if it’s still done manually by the business owner itself.
This is where technology can help. Specialized software programs like Quickbooks can streamline all your bookkeeping efforts by providing you with an automated account to record all your transactions.
Another, even better method to do your bookkeeping is to outsource it to specialized bookkeeping services as they can efficiently track all of your data and record it without errors for your books. They are also highly affordable as compared to doing this in-house.