Bookkeeping is the process of tracking your company’s income and expenses. It informs you of your cash flow situation as well as the general health of your firm. It’s critical to stay on top of your bookkeeping so you don’t have any surprises regarding account balances and costs. This article has been put together to assist you in grasping the fundamentals of small business bookkeeping.
Why Is Bookkeeping Important for Small Businesses?
Bookkeeping is an essential duty that any business owner must perform. It is significant because:
- It organizes information: Bookkeeping organizes financial data for simple comprehension and analysis.
- The IRS requires you to track certain information: You’ll need correct information regarding your gross receipts, purchases, costs, assets, travel and entertainment expenses, and employment taxes when filing your taxes.
- It is helpful for budgeting: Knowing your cash flow allows you to devote resources to new product releases and projects to help your company develop.
- It allows for better decision-making: When your books are in order, you have an accurate picture of your company’s health. This enables you to make more informed judgments about operations and growth.
- It aids profit tracking: You want your company to be as profitable as possible. Bookkeeping allows you to keep track of your growth and revenues.
Accounting vs. Bookkeeping
There are significant differences between bookkeeping and accounting, which sometimes need to be more understood. Bookkeeping is fundamentally about recording financial data, whereas accounting is about understanding financial data. Accounting can only exist with proper bookkeeping. There would only be data to evaluate if bookkeeping existed.
In general, bookkeepers assist in collecting and organizing data and may be certified for your company. On the other hand, accountants typically have an accounting degree and may even be state-certified CPAs. Most bookkeepers maintain the general ledger and accounts, whereas accountants are responsible for creating and interpreting more complex financial statements.
Key Components of Bookkeeping
Whether you handle your bookkeeping or hire someone, some things are critical to keeping the accounts in order. Some of these elements are performed more frequently than others to keep the books current. Other aspects are executed at specific times to fulfill a business task.
Bookkeepers use journal entries to record debits and credits. Every financial transaction should be registered as a line item in the general ledger, which keeps track of everything in one spot. The account number to which the debit or credit is applied is recorded in the public ledger. The best accounting software automates a large portion of the process in journal entries for recurring debits and credits to assist in eliminating data entry errors.
If it is not done during the transaction, the bookkeeper will produce and send invoices for funds that the company must collect. The bookkeeper inputs pertinent information such as the date, price, quantity, and sales tax (if applicable). When this is done in accounting software, an invoice is generated, and a journal entry is issued, debiting the cash or accounts receivable account and crediting the sales account.
Preparing Basic Financial Statements
Because accountants and business owners use the information obtained in bookkeeping, it is the foundation for all financial statements produced. Most accounting software allows you to run standard financial statements, including an income and expense statement, balance sheet, and cash flow statement, automatically. Business owners or accountants can then use these statements to gain insight into the company’s financial health.
After each pay month, the bookkeeper will collect employee payroll details, such as hours worked and rates. The entire salary is then calculated using the applicable taxes and withholdings. Paychecks have been completed and distributed. The primary journal entry in accounting software for total payroll is a debit to the compensation account and a cash credit.
The cash method and the accrual method are the two accounting methods available. You should choose a system that will assist you in managing your company’s finances.
The first accounting approach is the cash-based accounting method. When money is exchanged, this approach records the financial transaction. This means that an invoice is recorded once it is paid. Similarly, you only record unpaid debts once you pay them. This strategy provides an accurate picture of your assets and debts at any given time.
The accrual-based accounting method is another form of accounting approach. This system keeps track of invoices and bills, even if they haven’t yet been paid. This strategy is highly recommended because it provides information on the company’s financial status based on known incoming and outgoing funds. You utilize the data to determine growth because the funds are accounted for in the bookkeeping.
Check out our post on cash vs. accrual accounting for additional information.
Bookkeeping Software and Tools
There is excellent news for business owners that want to streamline their accounting. You can use an online bookkeeping service to avoid dealing with data entry. These services offer a cost-effective method for business owners to handle day-to-day bookkeeping so that they can focus on what they do best: running the business. Accounting software simplifies the procedure for business owners that don’t mind conducting data entry. You no longer have to worry about inputting data twice into two accounts. It is done for you by the software.
How to Manage Bookkeeping in 4 Easy Steps
When handling bookkeeping, you should follow the 4 steps below to ensure the books are up-to-date and accurate. Remember that each transaction is assigned to a specific account before being reported to the general ledger. Posting debits and credits to the correct accounts improves the accuracy of reporting. Examine the four methods below to handle your bookkeeping.
Assign Transactions to Individual Accounts
Examine the item in question to see which account it belongs to. When money is received from a sale, for example, it is credited to the sales revenue account. Ensuring transactions are appropriately assigned to accounts gives you the most accurate picture of your organization. It allows you to get the most helpful information from your bookkeeping software.
Perform Journal Entries to Debit and Credit Accounts
When completing manual bookkeeping, debits are on the left side of the ledger, and credits are on the right. Debits and credits should always equal each other to keep the books balanced.
Post Entries to Ledger Account
After you’ve assigned the entries to the appropriate accounts, you can publish them to the general ledger to get a bird’ birds-eye perspective of your present cash situation. Most accounting software handles this for you, so you don’t have to worry about it.
At the end of each accounting period, adjust entries are made.
Take the opportunity after the accounting month to make modifications to your entries. Adjustments improve the accuracy of your books. For example, you may have estimated specific invoices, which were later confirmed with a certain number. Correct the entries so that the data is correct.
Not sure if you’re up to the task? Consider hiring one of the best bookkeeping services to make bookkeeping a snap.
You must understand your company’s financial health as a business owner. It all begins with having up-to-date and accurate books. Bookkeeping organizes all of the data so that you can retrieve the information you need to make hiring, marketing, and growth decisions.